The Dread Federal Surplus (April 1989 | Volume: 40, Issue: 3)

The Dread Federal Surplus

AH article image

Authors: Bernard A. Weisberger

Historic Era: Era 6: The Development of the Industrial United States (1870-1900)

Historic Theme:

Subject:

April 1989 | Volume 40, Issue 3

In January, when the 101st Congress of the United States assembled to begin a third century of constitutional government, The New York Times noted: “The dominant issue in the months ahead ….will almost surely be how to reduce the federal deficit, whether through taxes, budget cuts or some combination of the two.”

A hundred years earlier, in December 1889, the 51st Congress gathered to begin a second century under the Constitution. The Republican majority was under fierce pressure to resolve a vexatious problem that had occupied the country for nearly a decade. There was simply too much money in the Treasury. The only answer was to spend it.

Nothing could better illustrate the operation of what Shakespeare calls “the whirligig of time” than a brief trip to the fiscal Looking Glass Land of a hundred years ago, when politicians wrestled with the problem—quite unbelievable to us—of how to cut taxes and increase expenditures and not lose popularity in doing so. The surplus had been accumulating steadily throughout the 1880s. During that period, the Treasury had taken in, on the average, $100 million more than it spent each year—which was in the neighborhood of $265 million.

The extra money was a surprising political headache. The reason was that the country was growing robustly in almost every economic category and needed a large volume of money in circulation to carry on its business—larger than the nation’s gold-standard monetary policy was then able to furnish. A shortage of circulating medium meant tight credit, low prices and wages, and a real threat to the pace of growth. So, it made no economic sense for the federal government to collect millions of dollars in excess of its needs and lock them away in the vaults of what some called the Treasury Octopus. In 1887 the Democratic President, Grover Cleveland, angrily defined such a policy as “indefensible extortion and a culpable betrayal of American fairness and justice.”

 

The answer seemed obvious enough: Collect less. But unfortunately, the chief engine of that “indefensible extortion” was a stiff protective tariff. It alone accounted for some 50 to 60 percent of total federal revenue. And it was almost politically impossible to cut it.

True, there were plenty of free-trade advocates who pointed out the deficiencies in the tariff—chiefly that it raised the cost of living unconscionably. High duties increased the price of imports, which, in a rapidly expanding nation, were still needed in great volume. Moreover, tariffs gave domestic producers a sheltered market in which they could jack up the costs of basic necessities like clothing and canned goods for working families.

But free traders were in the minority. American laborers were largely convinced that without the tariff the country would drown in inexpensive goods produced by foreign “cheap labor,” to whose abysmal wage levels they would be reduced to stay competitive. Farmers in large numbers also believed that the tariff protected American living standards. And