America's Fiscal Constitution (23 page)

Prairie populists and urban reformers applauded Cleveland’s efforts to reduce wasteful spending, but the president had not addressed their concerns over growing industrial monopolies and declining farm income. The president did not believe he could raise the price of farm commodities or prohibit the sale of one business to another, but he sensed he had to do something.

Cleveland’s search for a new Democratic program culminated in an extraordinary message to Congress in December 1887. Ordinarily the
annual presidential message surveyed a broad range of federal policies, but Cleveland decided to focus entirely on a single, transformative issue. The Democratic president intended to spur a tax revolt.

He began with a simple fact: “The amount of money annually exacted, through the operation of present laws, from the industries and necessities of the people largely exceeds the sum necessary to meet the expenses of the Government.” The president then branded excess tax revenues as “extortion and a culpable betrayal of American fairness and justice.”
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Import taxes, he argued, also imposed a cost on consumers greater than the revenues collected. Cleveland demanded that Congress cut import taxes.

Out of a total US workforce of 17,392,099 people, Cleveland noted that only 2,623,089 were employed in manufacturing industries that “claimed to be benefited by a high tariff.” The federal government would continue to need some import tax revenue to pay federal expenses, including the repayment of all debt, so the president denied that his proposed tax cut was simply a cry for “so-called free trade.”
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Twenty-first-century observers may find it hard to understand America’s nineteenth-century attachment to import taxes and disdain for “so-called free trade.” American officials viewed the use of trade barriers in the same manner as did the leadership of developing nations such as Japan and Korea after World War II. They believed that emerging domestic industries needed help to overcome the initial advantage of leading foreign competitors.

In reality, by the 1880s the federal government applied high import taxes to a steadily decreasing share of total imports. Taxes on sugar, molasses, wool products, and silk produced most revenues. Silk was taxed as a luxury, since the United States had no domestic industry to protect. The strongest economic pressure for import fees came from owners of Louisiana’s sugar plantations, the refined Sugar Trust, and wool growers. However, import taxes—“tariffs”—had become a powerful symbol for federal commitment to industrial development.
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In the 1880s Republican leadership on tax issues had shifted from Senator Justin Morrill to his younger colleague, Senator Nelson Aldrich of Rhode Island. Aldrich seemed to know the purpose and effect of import duties on each of the more than four thousand categories of goods. He used that knowledge to build coalitions. More significantly, Aldrich understood that import taxes were an important symbolic commitment to domestic industrial growth.

The Senate blocked Cleveland’s 1887 attempt to reduce import taxes. Democrats would need a strong public mandate in the 1888 election in order to overcome Aldrich’s control of the Senate. It initially appeared that Cleveland would run against the old Republican warhorse John Sherman. Mark Hanna, an Ohio industrialist and political tactician, mounted an energetic national campaign on behalf of the aging statesman. The New York political machine once again blocked Sherman’s nomination, and Republican delegates, as in 1876 and 1880, instead nominated another “dark horse” former Civil War general, Senator Benjamin Harrison of Indiana.

Aldrich’s industrial allies spent unprecedented sums on behalf of Republican candidates in the fall campaign, especially in the swing states of Pennsylvania and New York. Though the proud and stubborn Cleveland considered campaigning to be beneath the dignity of a sitting president, he won the popular vote. Cleveland’s Democratic enemies in Tammany Hall helped Harrison secure a narrow victory in New York and an Electoral College majority.

Before leaving the White House, Cleveland expressed the frustration of reformers: “The communism of combined wealth and capital . . . is not less dangerous than the communism of oppressed poverty and toil.”
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T
HE
L
AST
S
TAND OF THE
O
RIGINAL
R
EPUBLICANS

The eventful congressional session of 1889–1890 spawned a nickname: the Billion Dollar Congress. As in 2001, Republicans controlled the White House and both houses of Congress for the first time in many years and used that power to increase federal spending. The Congress that met in 1889–1890 marked the final passing of the leadership torch from Sherman’s generation of Civil War Republicans to business-oriented pragmatists like Aldrich.

Aldrich considered politics to be a form of competition among varied economic interests. Though prairie populists cast their political agenda in the language of Christian virtue, Aldrich viewed them as an interest group trying to raise their income through inflation, artificially low rail rates, and a shift of federal taxation from imports to incomes. Aldrich and his allies aligned the Republican Party with industrial growth, a principal engine of future prosperity. Aldrich’s ideology and leadership were well suited for a Senate containing many millionaires, a fact that Senator George Hearst of
California viewed as proof that senators were “the survivors of the fittest.” Aldrich kept his word, compromised when necessary, and worked closely with another shrewd and powerful leader, House Speaker Thomas Reed of Maine.

Sherman was unwilling to yield to Aldrich on one issue. The aging Ohioan who had entered Congress in 1855 in order to break the power of slaveholders thought that his colleagues should challenge the power of monopolists who were consolidating their hold on American industry. The Senate’s best lawyers questioned whether Congress could write a law preserving competition. They asked how Congress could prohibit an owner of stock from selling to the highest bidder or avoid penalizing gains obtained through greater efficiency.

Despite those questions, in 1889 Sherman introduced a bill challenging the legality of the trust combinations. Populist Democrats like Senator John Reagan of Texas, a former Confederate cabinet member, applauded Sherman’s courage.
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After being rewritten by two other pre–Civil War Republicans, George Hoar of Massachusetts and George Edmunds of Vermont, the Sherman Antitrust Act passed Congress in 1890. It still serves as the foundation of federal laws that preserve competition. Sherman, Hoar, and Edmunds tried but failed to enact federal legislation protecting the voting rights of African Americans. A voting rights bill passed the House before being killed in the Senate. It would take more than seventy years for the next voting rights bill to come to the Senate floor.

More Republicans in the Billion Dollar Congress supported higher federal spending and taxes than did Democrats. To reduce the surplus, Republicans increased spending on pensions for veterans and their surviving relatives—even while the number of living Civil War veterans declined. By 1890 those pensions amounted to a full third of the federal budget. The Billion Dollar Congress also passed a tax bill—the McKinley Tariff—that raised taxes on some manufactured goods while eliminating the unpopular tax on raw sugar that had previously yielded substantial federal revenue. Only in the 1920s would the Republican Party begin to be widely perceived as an advocate of smaller federal government.

The Billion Dollar Congress outraged prairie populists. In 1890 various Farmers Alliances and the Knights of Labor gathered at a national convention in Ocala, Florida, and framed a platform—the Ocala Demands—that endorsed a graduated income tax, an increase in the money supply, the “rigid and just” regulation of companies involved in public
communications and transportation, and the direct election of US senators.
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The Ocala platform, which many consider to be a precursor to the liberal agenda of the twentieth century, also called for a reduction in taxes and spending only for “necessary expenses of government economically and honestly administered.”
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These ancestral liberals would never have supported the use of debt to finance routine federal expenses.

Members of the Farmers Alliance won control of the legislatures of at least six states in the 1890 election. The election results two years later, in the first election conducted by secret ballot throughout the nation, shocked political pundits. Grover Cleveland trounced President Harrison in both the popular vote and the Electoral College, while Democrats won three-quarters of the seats in the House of Representatives. One out of twelve voters cast ballots for the candidate of a new Populist Party. Democrats won elections in Iowa, which was considered the most Republican state outside of New England. William McKinley, the affable chairman of the House Ways and Means Committee, was defeated in his previously Republican district in Ohio. Sixteen years after some Republicans coined the nickname “Grand Old Party,” the party seemed old but not so grand.

T
HE
D
EPRESSION OF
1893

Democrats did not have long to savor their triumph. Ten days before President Cleveland’s inauguration, the Philadelphia and Reading Railroad—one of the country’s largest—filed for bankruptcy. Banks failed and output declined throughout 1893, signaling the onset of the nation’s second severe depression. The Panic of 1893, the worst downturn since 1837, lasted for almost the entire length of Cleveland’s second term.

Though most politicians looked for domestic explanations for the Panic of 1893, in fact the US economy was buffeted by global trends. Great Britain had experienced a banking crisis. When European demand for gold increased, some US commercial banks suspended gold payments to depositors.

When the Treasury experienced a run on its gold reserves, President Cleveland asked Congress for the authority to incur debt in order to buy gold reserves. Congress refused to do so. The Treasury had stockpiles of silver, and most Democrats and many Republicans thought that the federal government should just issue silver certificates to monetize any debt. This impasse over borrowing authority was more an issue of monetary
policy (the use of new currency or gold) than fiscal policy (the level of spending and taxes). Congress had always prescribed the use, amount, and terms of new debt, a practice that had long served as one of the pillars of the American Fiscal Tradition.

When the Treasury’s gold reserve fell to $50 million in early 1895, Cleveland bypassed Congress, relied on laws passed decades earlier, and exchanged new bonds for gold gathered by a J. P. Morgan consortium.
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The use of debt to fill budget holes during a downturn was consistent with the American Fiscal Tradition, but Congress—including members of the president’s own party—recoiled at the president’s blatant disregard for the traditional practice of specific congressional authorization for new debt. Cleveland deepened the wound by instructing his cabinet to withhold political patronage from members of Congress who opposed his monetary policy. Sherman predicted that the president would “destroy his party” if he failed to compromise with Democratic congressional leaders.
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That prophecy came true in the next election.

Attitudes concerning the use of debt during depressions in the nineteenth century differed from those in the twentieth century. In the Panics of 1837 and 1893 federal leaders were divided on their willingness to monetize debt using short-term notes or currency. By contrast, in 1933—the trough of the Great Depression—the Federal Reserve monetized debt aggressively with dollars used to purchase Treasury obligations. Nineteenth-century federal leaders also rejected using debt to invest in public works to boost employment. During the Panic of 1893 a successful businessman, John Coxey of Ohio, proposed that Congress authorize interest-free bonds to finance $500 million in roads constructed by workers paid $1.50 a day.
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Coxey led an “army” of unemployed workers to Washington to press for congressional action. His proposal, however, ran counter to a deeply held value underlying the American Fiscal Tradition: the desire to protect the nation’s future by minimizing debt. Not until the Hoover administration accelerated public works in 1929 did the nation incur debt during a downturn to provide temporary employment.

The political turmoil of the early 1890s loosened partisan bonds forged in the Civil War. That transition created opportunities for a new generation of Democratic and Republican leaders that included two young lawyers who had moved to the boomtown of Omaha, Nebraska. William Jennings Bryan and Charles Dawes lived on the same block, worked in law
offices in the same small building, and even sued the same rail lines. Both of their fathers had been active in Midwestern politics. Bryan, a Democrat, escaped the routine of a small-town law practice by running for Congress. Dawes, a Republican, felt more comfortable working behind the scenes and—after moving to Chicago in 1893—became active in the reform movement. Bryan and Dawes each made their mark during their respective party’s 1896 national conventions and would later help reshape the economic policies of their parties.

Bryan burst on the national political scene when supporters of a personal income tax chose him to make a closing argument following a long congressional debate in 1894. Congress sought to generate more revenue to reduce the recession-related budget deficit and lower certain import taxes. Since most of the wealthy Americans who would be subject to the tax lived in New York, Massachusetts, and a few adjoining states, congressional support for the income tax broke down principally along regional lines.