'Best' President, not the best economist

Written by Robert Dran
(rdran@mscd.edu)

With all the talk of Lincoln and the presidents this last week, it would be nice to focus on how Lincoln influenced the United States. When C-SPAN asked historians to rank the presidents, for the first time, Lincoln was considered the greatest president. With the current comparison of President Barack Obama to Lincoln, it would be appropriate to ask what made Lincoln so great? Was it freeing the slaves or winning the Civil War? In fact, contrary to what pop history told you, the Civil War was primarily an economic war between the industrial North and the agricultural South. Many of Lincoln’s critics point out that few other countries needed a war to get rid of slavery. Mexico did, but like the American Civil War, it was a battle for economic independence rather than slavery. Haiti is probably the best example, as it is the only successful slave revolt in history.

When it comes to looking at a president’s economic policies, it is important to look at the administration as a whole rather than a single individual. I laid blame on both Treasury Secretary Hank Paulson and former President George W. Bush. Lincoln’s Treasury Secretary was a man named Salmon P. Chase. Chase was quite accomplished: he served as both senator and governor of Ohio. He later became chief justice of the Supreme Court. However, Treasury Secretary Chase had three important policies that affect us to this day.

The first was deficit spending.

Before the 1857 depression, the U.S. had a debt of 97 cents per person. By 1865, the debt had ballooned to $75 per person. But considering the U.S. was going through an economic downturn and a war this should sound familiar an increase in deficit spending was a necessary evil. The amount of spending during the Civil War was shocking. By the end of the war, the Navy and war departments were spending $2 million a day. According to John Steele Gordon’s "An Empire of Wealth," before the Civil War, the largest federal budget was $74.2 million in 1858. Since the Civil War, there has never been a federal budget under $236.9 million (that happened in 1878). In fact, in 1865, the government spent $1.3 billion. The United States was the first country to ever spend more than a billion dollars in one year.

Now this begs the question, how did Lincoln and Chase pay for all of this? Which brings about his second and third most influential economic policies.

The first of these was bonds. Bonds are when someone purchases debt and when the bond matures, the purchaser is paid back with interest. Chase was not the first government official to use bonds, but he greatly expanded the number of bonds issued. This is important because at the time only a small group of people in the U.S. had bank accounts and barely 1 percent had any securities at all. After advertising in newspapers, lowering denominations and generally getting the word out, 5 percent of the population owned government bonds. The government was able to raise two-thirds of all its income through bonds, according to Gordon.

Chase’s third change was the dreaded taxes.

Chase instituted the first income tax; it ranged from 3 to 5 percent on people earning incomes over $800 a year, which was not a bad amount for the time. After ramming the income tax through at the beginning of the war, the tax rate increased to 10 percent by war’s end. Chase ironically managed to kill the income tax 10 years later when the Supreme Court ruled it unconstitutional. Today, we have the income tax thanks to the 16th Amendment. This is an unfortunate example of an economic panic causing the government to do an inefficient thing. Chase even recognized this, but failed to stop the tax over the long term. Taxes reduce investment and consumption in the economy. When businesses and individuals spend less, they consume less and therefore create fewer jobs. Creating the income tax system sounded reasonable at the time, but over the long run became a permanent burden on the American economy.

When we look back on Lincoln and Chase it is important to realize their economic accomplishments. Though successful at the time, their policies caused problems over the long run, particularly spending and the income tax. It is hard to argue that if the Union had not won the Civil War, the United States would not have become the great power it is today or freed the slaves. Nevertheless, when the Lincoln/Obama honeymoon is over, historians may have to rethink Lincoln’s economic policies. Though he is one of the greats, being the best president may be a stretch.