Thursday, July 8, 2010

Lincoln's Political Economy, part One of Three

You can't read this document very well. It's a letter from Salmon P. Chase, a former rival and loyal Cabinet member to Abraham Lincoln, recommending George Boutwell as Commissioner for the first Internal Revenue agency in the United States. It's dated January 3, 1862.
Lincoln advocated, and Congress passed, the Revenue Act of 1861 to help pay for the Civil War, which included an income tax. The law was adjusted in 1862, then cancelled ten years later (about five years late, maybe?).  The income tax we pay now comes from the Sixteenth Amendment, ratified in 1913.

This is from an essay on Lincoln's "Bank War," which discusses other aspects of Lincoln's 1861 push for control.  When banks were not regulated, they issued their own currency and made few or no guarantees to depositors. Local economies were always going bust on bank failures. State-controlled banks may have aided states' rights, but created variable local exchanges. Without a stable and unified currency of its own, the U.S. was dependent on the rates and fortunes of foreign currencies as well. By having our own banking system, we took a large step toward national sovereignty. It took power from the states. It also took power from foreign powers.

In December 1861, President Lincoln's own financial plan was presented by Treasury Secretary Salmon Chase (a free-trade liberal sweating and agonizing in the President's harness), and by Lincoln himself. Its measures included:
·         a nationally regulated private banking system, which would issue cheap credit to build industry;
·         the issuance of government legal-tender paper currency;
·         the sale of low-interest bonds to the general public and to the nationally chartered banks;
·         the increase of tariffs until industry was running at full tilt;
·         government construction of railroads into the middle South, promoting industrialism over the Southern plantation system.

Income Tax
Lincoln didn't dream up income tax. William Pitt the Younger used it to fund the Napoleonic Wars starting in 1798. Like Lincoln's odious tax, the British Income Tax was repealed at war's end. Earlier than that, in 10 A.D., the Han Dynasty instituted one, hastening their end. The rulers fell to the Later Han Dynasty in 23 A.D.

From these examples, I would say that income tax looks like a solution to governments who are preparing for war, and have a burgeoning middle class. The first condition describes Lincoln's and Pitt's instigations, and all three examples satisfy the latter condition. A rising professional, merchant, and skilled tradesman classes look like uncaptured revenue sources, when the traditional tax source has always been land. Most personal taxes are either land taxes or head taxes. Then there are the taxes on property transfers--such as inheritance, luxury taxes, and the dreaded Tea and Stamp Taxes that made the U.S. revolt in the first place.

From this heavy hand, (at the time, 3% flat rate for anyone making the equivalent $19K or more these days) , many libertarians have decided that Lincoln was a "big government" man who would cheerfully be in restraint of trade today.

He was for progressive taxation, a term which means not (increasing numbers of taxes), but rather tailoring the tax bill to the ability to pay. A sales tax, by contrast is a regressive tax, which means it takes a greater percentage of a poor person's expenditures, especially if applied to staple goods.

Would it have been better to run a larger deficit in the budget of the United States? Would the libertarians revile him for that? Could the South have been plundered any harder for War Reparations?  I cannot answer these questions. I merely pose them as the devil's advocate.

Lincoln's 'Heavy Hand'
Lincoln was concerned that he be able to pay his military and supply them. This is from his Annual Message to Congress on December 8, 1863:
The operations of the treasury during the past year have been succesfully conducted. The enactment by Congress of a national banking law has proved a valuable support of the public credit; and the general legislation in relation to loans has fully answered  the expectations of its favorers. Some amendments may be required to perfect existing laws; but no change in their principles or general scope is believed to be needed.
Since these measures have been in operation, all demands on the treasurer, including the pay of the army and navy, have been promptly met and fully satisfied.
This is in stark contrast to the Napoleonic Wars, where the future Duke of Wellington wrote letter after exasperated letter, trying to get his troops their pay from Britain's Parliament and its War Secretary. Since Wellesley/Wellington was in Spain, he did not want his troops plundering the locals--he needed the goodwill of Spain's and Portugal's partisans. Without pay, he was not likely to enforce this discipline.

In fact, the war did cause the government to run a war-time deficit. Lincoln detailed the deficit in his Annual Message to Congress in 1863 and again on December 6, 1864:
"I concur with [the Secretary of the Treasury] that the proportion of moneys required to meet the expenses consequent upon the war derived from taxation should be still further increased . . .
In 1864, the deficit was $1,740,690,489.49, and he thought it might go up another five hundred million. He did note that the bulk of that debt was held by the American people, in part through the use of U.S. government bonds. Apparently Lincoln's administration also brought about the forerunner of the U.S. Savings Bond. Or perhaps, the Liberty Bond.

The standardized government bond was also an idea from England in part: during the 18th century, the British government standardized the contract and rate of the government bond in order to facilitate the system of government debt. Their act was an improvement over the Dutch model of the previous century (individual contracts, open to corrupt deals and abuse) and the Venetian salt futures bonds of the 12th Century. Lincoln (or perhaps Salmon P. Chase, his SecTreas) modified the idea to fit in with his new national banking system. Thus the nationally-registered private banks allowed him a venue to sell bonds within the state rather than outside of it.

Other Signs Government Interference in Trade during Lincoln's Administration. Coming to this blog soon:
1. Lincoln was for tariffs, briefly described above.
2. The Father of Egyptian Cotton.
Then there is the habeus corpus issue, so I'm thinking two more posts.

Lincoln: Speeches and Writings, 1859-1865. Library of America.
Chaitkin, Anton. (1986) 'Lincoln's Bank War," published in American Almanac, The New Federalist Newspaper, the Economic Intelligence Review. Here's the site.
Wellington: The Years of the Sword by Elizabeth Longworth
Wikipedia on Taxation, History of.
Niall Fergusson, The Cash Nexus, recommended by linked above.


Bob G. said...

This is one fine history missed your calling as an educator!

We have Lincoln's Treasury Secretary to thanl for the words IN GOD WE TRUST being placed on our currency.
(must drive the atheists crazy to this

And why do I NOT find it all surprising that the 16th Amendment was ratified under the presidency of none other than WOODROW WILSON???

Got some good stuff here...keep those hits coming!

Ann T. said...

Dear Bob,
Thank you! I think I have a calling as an educator as well!

I didn't even think about the 'in God we trust' but surely yes! One nice thing about inventing a currency is that you get to design it. This is also somewhat traditional in that many Renaissance ledgers were headed with "In the name of God and profit."

As to Wilson, it crosses my mind that he, too, was preparing for war. According to an article I ready by Niall Ferguson some time ago, the U.S. was more a global trader in the 1890's than it is today. So again, he probably wanted to capture that income for war, even as he was speaking peace.

Wilson, though, is a whole new bag from Lincoln. He had advanced ideas, but he did not have the humble temperament about checking with the people first.

Bob, you know I think we should team-teach somewhere. I talked Napoleon and you Wilson, and that gives the before AND the after.

Thank you!
Ann T.

Bob G. said...

Oh, I don't know if the nation (or even the WWF) is quite READY for such a TAG-TEAM of erudition...LOL!
(I do so love the idea, though)


Ann T. said...

Dear Bob,
ROFL! One heck of a wrasslin' match! Let me work on my upper body strength a little, and I'll get back to you!
What a prospect!

The Observer said...

Ann T:
Yes, a great history lesson!

Every day, I become aware of how little we really know about economics and how economies react to policies. Take for example, the different theories regarding FDR and the ending of the Great Depression.

This is still playing out today, as economists and others debate stimulus vs. austerity and other policy points.

The Observer

Slamdunk said...

Informative and well argued Ann T. I liked Lincoln's first tax being that it was flat--before it was modified to a progressive one in 1862. Maybe this logic will return in the form of a consumption tax someday.

Taxes are not my favorite topic these days since I live in a Northeastern jurisdiction where I have to complete 4 separate income tax filings and then listen to my father in TX laugh and laugh.

Ann T. said...

Dear The Bug, and Dear Bob,
Two of your comments showed up in my moderation box, but not in my gmail.
I approved the comments and they went somewhere!

Sorry, I did get them! But I can't recreate. I was hoping the gmail would show up if I didn't panic--no luck.
Ann T.

Ann T. said...

Dear The Observer,
Thank you for the appreciation! I also love economics, but I must confess that when they get to the calculus, I just skip it--secure in the knowledge that it is there for other people to peruse.

So far, that's working for me!
In this age of global markets, I think we all have to try for a better sense of economics. Of course they have their bunco artists too . . .

Ann T.

Ann T. said...

Dear Slamdunk,
Ha ha ha. I also dislike taxes and remember the old Texas days of only one sheet to fill out.

Reading Lincoln is a far cry from today. Now we assemble audiences to hear portions of our platform that agree with us. Lincoln talked about taxes to soldiers who were on furlough, or just whatever was on his mind at the time. Always beautifully written, but not calculated to his audience the way we do now.

I can't imagine any of those troops on holiday wanted to hear about taxation, can you?

Thanks for writing in! I have you to thank for this pursuit!

Still having fun with it,
Ann T.

Momma Fargo said...

Ann T.,

Thanks so much for the history lesson. This was one of your finest. I am an admirer of Lincoln and this was indeed fascinating history. Thanks again for your genius.

Ann T. said...

Dear Momma Fargo,
Thank you! I am always so glad if my readers get something from my posts. I am also learning from the research and from the comments I get!

So thanks for reading! I have you and many great people stopping by, and I am always grateful.

Ann T.