Wednesday, May 26, 2010

Critics Complain About Lincoln's Growth of Government

The critics of Lincoln, are not wrong about all of their accusations. Lincoln did preside over the fastest expansion of federal power in American history until recently. Most of the expansion could be justified by wartime demands, however too much was simply political pork barreling and payoffs to campaign promises.

Right after the troops had been called, the government had no proven method available to them to raise large sums of money quickly. Lincoln's Secretary of the Treasury, Salmon Chase, one of Lincoln's campaign opponents for the 1860 Republican nomination, proved to be the right man in the right office at the right time.

When Chase took over it was quite a challenge. In 1850 the federal government's budget averaged 2% of gross national product, but by the end of the Civil War, it had soared to more than 15%. Simply running the Treasury was overwhelming, the number of clerks increased from 383 in 1861 to more than 2,000 in 1864. Chase's biggest mistake was filling many with party hacks who could be counted on for not much beyond party loyalty.

Raising the needed money to run the war department quickly demanded that Chase develop systems for generating lots of revenue. He wanted to do this while still respecting protecting long term stability while building short term gain. Taxes had to be passed by Congress, then collected, meaning it would be 1862 or later before tax revenues could have much impact. So while Chase asked Congress for a new direct tax on incomes over $300, he also requested new tariffs and expanded land sales that would generate quicker revenues. However even when these taxes came in at the end of 1863, the 2 million they produced was inadequate to the Union's needs, that by the end of 1861 ran $2 million a day. In addition to other short-term bond issues, Congress authorized Chase to raise $250 million through sales of twenty-year bonds paying 7% interest.

Banks were reluctant to buy bonds if they had to pay for them with gold, and in December 1861 the Northern banks suspended specie payments on all notes. Concerned that soldiers would go unpaid, Chase advanced a paper money concept to Congress that allowed the Treasury to issue $100 million in notes that would circulate as "lawful money, and legal tender of all debts, public and private." Enacted as the Legal Tender Act of February 1862, the proposal authorized the issue of more than Chase requested, $450 million in green-colored bills, called greenbacks.

This temporary money gave the nation a wartime circulating currency that also enabled the government to pay its bills. Congress also authorized Chase to borrow another $500 million. Even so, the "five-twenty" bonds, that were redeemable after five years, and fully matured at twenty five, and paying 6% interest, didn't sell as fast as Chase had hoped. He enlisted a personal friend, Philadelphia banker Jay Cooke, to sell them. Cooke received a nice commission, but more important, he held a virtual monopoly on the bond sales. Cooke was a motivated and aggressive promoter, who ran ads in newspapers and aggressively targeted the middle class as well as traditional investors. Packaging the first "war-bond," Cooke appealed to Northerner's patriotism, and sold out every issue. He sold more than $400 million by the end of 1863 alone, netting himself more than $1 million in commissions.

Chase also created another way to accelerate the income stream. He adopted a model that the free-banking laws popular in the North prior to the war, where banks would purchase bonds that they would keep on deposit with the secretary of state as security against over issue of notes. In December 1861 Chase argued to Congress for a national banking system in which banks would receive their charters after purchasing government bonds. Congress passed the National Banking Act of February 1863, which provided for $300 million in national banknotes to be issued by the new network of national banks. However, the law offered no incentive for people to hold national banknotes over private banknotes. In December 1863, fewer than 150 national banks were in operation. In 1864 Congress did what government does when they go into competition with private businesses, by placing a 10% tax on money issued by state banks.

Other than emancipation, no other Civil War legislation had a more far-reaching effect, mostly bad. Congress increased the number of national banks to 1,650 by December 1865, this destroyed the competitive money private system that led to a string of financial upheavals that happened every twenty year until 1913. Competition in money had not only given the United States the most rapidly growing economy in the world, but it had produced many innovations at the state levels, the most important of which was branch banking, this was prohibited for national banks.

The National Bank and Currency Acts established a government monopoly over money, but they also excluded the most efficient and stable form of banking yet to emerge until is partially corrected in the 1920s. However, critics of Lincoln's big-government policies would be on solid ground when it comes to the banking policy of the Civil War.

Yet, while criticizing Lincoln while holding the Confederacy up as a bastion of state rights and individual liberties is mendacious at best. Under the Confederate Treasury Secretary, Christopher Memminger from South Carolina, he took them off the gold standard within days of the South's firing on Fort Sumter. He embraced taxation, borrowing, and fiat money. Even though the Confederate Constitution strictly forbid export tariffs, the CSA also imposed export taxes. The Confederacy had adopted a broad array of taxes by 1863, including direct income taxes and taxes on gold. When the Confederate Congress authorized a second $100 million loan in August 1861, planters were allowed to pay for it in cotton, not gold. However, due to an amazingly short-sighted embargo on shipping cotton to try to force England into the war on their side, they were already overflowing with cotton, making it nearly worthless.

To combat this Memminger copied Chase, and then far surpassed him, in introducing fiat money when the Confederate Congress began issuing Confederate notes in 1861. Starting slowly with only $1 million, wartime soon required the CSA to issue more than $1 billion in Confederate paper money, more than twice as much issued to a much larger Union population in the North. Before long, Confederate money was as worthless as were the Revolutionary-era's continentals and not seen again until Germany's Wiemar Republic's hyper-inflation in the 1920s. A Confederate dollar worth 82 cents in 1862 in gold or silver dropped to only 17 cents in 1865.

In just a few years the Confederacy's needs for goods and services would become so desperate that the government would resort to outright confiscation, and theft of private property. While the North skimmed off the top of private enterprise, the South, lacking a business base to match was forced to put ownership and control of war production in the hands of government.

The Confederacy reached levels of government involvement unmatched until the totalitarian states of the twentieth century. With 7/8ths of all freight moved on the Virginia Central Railroad was for the government's account, 92% of all work done by Augusta Textile factory was government. By the end of the war, all pretense of a free-market had disappeared as President Jefferson Davis confiscated all railroads, steam vessels, telegraph lines, and other operations, impressing their employees into government or military work. As one North Carolinian recalled, government officials were "thick as locusts in Egypt," and he "could not walk without being elbowed off the street by them." Government bureaucrats not only confiscated white and black workers into construction projects for the Confederacy, the Confederacy passed away as a HUGE government.

In 1863 the Confederacy was employing 70 thousand civilian bureaucrats as the government itself ran ordinance bureaus, mills, clothing manufacturing, cotton gins, meat packing plants, salt storage sheds, distilleries, vegetable packing facilities, sucking up all the sustenance out of the private sector.

Across the board, in everything from the treatment of human rights, white and black, to freedom of speech and the press, to market freedoms, scholar Richard Bensel said that the North had a less centralized government and was a much more open society than the South. Six specific comparisons of private property rights between the North and South, including control of railroads, destruction of property, and confiscation, showed the Confederacy to be far more government centered and less market driven. Analyzing dozens of specific laws and points of comparisons, with possibly the suspension of habeas corpus the main exception, Bensel concluded that the North's commitment to liberty in all areas insured its victory.

No comments:

Post a Comment