Walter Coffey's Blog, page 192

Andrew Jackson and the National Debt

In his annual message to Congress in December 1834, President Andrew Jackson reported that the United States would be debt-free as of January 1, 1835. This marked the first and only time that the U.S. or any other major nation in history has been free from debt. Jackson declared, “Let us commemorate the payment of the public debt as an event that gives us increased power as a nation and reflects luster on our Federal Union.”

The Founders on Debt

When Jackson first ran for president in 1824, he denounced the debt as a “national curse.” He vowed to “pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend to its views, and ultimately destroy the liberty of our country.”

Jackson adhered to the prevailing view of the nation’s founders that incurring a national debt and passing it on to future generations condemned those generations to involuntary servitude. When debts are passed on to children that neither voted for nor approved of them, it is a blatant example of taxation without representation.

Thomas Jefferson considered excessive debt immoral, and he advocated paying off debts within a generation (i.e., 20 to 40 years at the time). Following in Jefferson’s footsteps, Andrew Jackson sought to pay off the national debt during his presidency (1829-1837). But in so doing, he created countless enemies and became one of the most polarizing presidents in American history.

Paying Down the Debt

To pay down the debt, reducing government spending was required. To this end, Jackson generally opposed bills that allocated taxpayer money for “internal improvements” (often called “pork barrel spending” today) such as road construction and river and harbor development. While much of Jackson’s opposition was politically motivated (he vetoed a road construction bill because it would have benefited Kentucky, the home state of hated rival Henry Clay), he did much to reduce government spending and make it possible to pay off the national debt.

An increase in government revenue was also required to pay down the national debt. To this end, Jackson enforced the tariff laws that many southern states viewed as excessive and even confiscatory. When South Carolina refused to collect federal tariff duties in 1832, Jackson was outraged. He proposed to mobilize a federal army and lead it himself into South Carolina to collect the revenue. Ultimately, cooler heads prevailed when a modified tariff law was enacted and South Carolina agreed to abide by it. The necessity of collecting the tariff was vital in paying down the national debt.

Keeping Down the Debt

In an effort to keep the national debt paid off, Jackson vetoed the re-charter of the Second Bank of the United States, then withdrew federal assets from the Bank and distributed them to state banks. This effectively killed central banking in the U.S. While this was more by politics than principle (most state banks receiving federal deposits were operated by Jackson’s supporters), it helped veer the country away from the destructive central banking system that had created the boom-and-bust cycles in the economy.

Unfortunately, placing federal deposits into state banks had unintended consequences. The state banks began overextending themselves by granting loans that exceeded the specie (i.e., gold or silver) on hand. Loans not backed by specie led to an overabundance of paper money that caused prices to rise and land sales to boom. To combat this, Jackson persuaded Congress to pass the Specie Circular Act of 1836, which required land purchases to be made in gold or silver specie.

The Specie Circular halted the land boom, which pleased Jackson and supporters of “hard” (i.e., gold or silver) money over “soft” (i.e., paper) money. But it ultimately led to a financial panic when loans were called and borrowers did not have sufficient specie to cover them. This sparked the Panic of 1837, which occurred almost immediately after Jackson left office.

Creating Enemies

Andrew Jackson’s policies naturally generated many enemies, political or otherwise. When he killed the Second Bank of the United States, Jackson was excoriated by the Whigs in Congress who had supported the Bank. As a result, the Whig-controlled Senate censured Jackson for assuming power not conferred upon him by the Constitution. This was the first and only time that a president was ever censured by Congress; it was removed by a more sympathetic Congress in 1837.

Jackson was also the first presidential victim of an assassination attempt. In January 1835, Jackson was fired upon by a disgruntled, unemployed house painter in the Capitol Rotunda. The two dueling pistols misfired, and Jackson attacked the man with his cane until aides restrained him. Blaming Jackson for his inability to find a job, the assailant later claimed that if Jackson was dead, “money would be more plenty.” The man was institutionalized as insane and never tried for attempting to assassinate the president.

Freedom from Debt was Short Lived

Two years after the national debt was paid off, the Panic of 1837 struck. This was the worst economic crisis in American history, spawning a six-year depression. The national debt increased tenfold within the depression’s first year, as revenue fell by more than half. The U.S. has not been free from debt since.

Jackson had attempted to pursue the founders’ vision of creating a nation free from debt or centralized finance which would give the people more control of the fruits of their labor. However Jackson’s conversion to hard money and decentralized banking ended the false boom and led to the painful economic correction in the form of the Panic of 1837. This prompted many to blame Jackson’s policies for the depression and turn back to central banking and easy credit, thus ensuring that America would join the rest of the major countries of the world in carrying a hefty national debt.

The Civil War This Week: Feb 11-17, 1863

Wednesday, February 11

Confederate Envoy James Mason

In Great Britain, Confederate envoy James Mason addressed a Lord Mayor’s banquet in London to push for British assistance.

Thursday, February 12

On the Red River, the Federal gunboat Queen of the West destroyed Confederate wagons and supplies. On the White River in Arkansas, U.S.S. Conestoga captured two Confederate steamers. In the West Indies, the commerce raider C.S.S. Florida captured a clipper and cargo valued at $2 million.

Skirmishing occurred in Virginia and North Carolina.

Friday, February 13

On the Mississippi River, the Federal gunboat Indianola under Lieutenant Commander George Brown passed the Confederate batteries at Vicksburg with two barges unharmed.

Skirmishing occurred in Virginia, North Carolina, Tennessee, and Mississippi.

Saturday, February 14

After veering down the Red River, the Federal gunboat Queen of the West destroyed a Confederate army train and captured New Era No. 5 before running aground. The crew escaped by floating to the Federal steamer De Soto on cotton bales.

Skirmishing occurred in Mississippi and Arkansas.

Sunday, February 15

Skirmishing occurred in Tennessee and Arkansas.

Monday, February 16

In Mississippi, skirmishing occurred as General Ulysses S. Grant tried moving gunboats and troops down Yazoo Pass. Confederate opposition prevented Grant from reaching Vicksburg.

Tuesday, February 17

The Federal gunboat Indianola was posted at the mouth of the Red River on the Mississippi below Vicksburg to confront nearby Confederate vessels.

General Ulysses S. Grant rescinded the military order closing down the Chicago Times for allegedly publishing “disloyal statements.” In response to Federal General William S. Rosecrans’s complaints about Confederate raids on his camp in Tennessee, President Abraham Lincoln suggested that he conduct counter-raids. In Virginia, heavy snow covered the Federal and Confederate armies.

Civil War Spotlight: The National Banking Act

In February 1863, President Abraham Lincoln signed a bill into law that established a national bank charter system and encouraged development of a uniform national currency. This answered Lincoln’s call for currency reform, as currency and coins were becoming scarce in the North.

By this year, the Lincoln administration was struggling to pay for the war, and Congress refused to allow any further printing of paper money. This law was supported by financiers as a means to not only pay for the war, but also to further centralize the economy. Under this act, the national money supply would be created through bankers buying federal bonds and selling them to customers in exchange for charters in the national banking system and a portion of the $300 million in national banknotes printed by the Treasury.

Critics argued that this law was an unconstitutional federal takeover of banks. Supporters viewed this as a necessary wartime measure, even though the Republican Party platform had actually advocated nationalized banking before the war. This marked the beginning of the end of decentralized banking in the U.S., which had arguably generated the most stable economy in U.S. history. The new banking system appealed to private bankers and speculators, who profited as much as industrialists during the war.

The “Great Society” That Wasn’t

In a campaign speech at the University of Michigan in May 1964, President Lyndon B. Johnson railed against poverty in America. The U.S. was already a “rich society,” he said, and now it had the chance to move “upward to the Great Society.”

President Lyndon B. Johnson

Johnson’s “Great Society” domestic program promised to end poverty and provide equality for all Americans. But Johnson’s program only created a massive welfare state that has further divided the nation and helped sink America into nearly insurmountable debt.

When Johnson was elected president by an overwhelming majority in 1964, he saw this as a mandate to push his ambitious domestic agenda through Congress. And with a Congress dominated by like-minded progressive Democrats, Johnson had little trouble persuading its members to approve his initiatives.

An unprecedented number of bills were enacted that allocated taxpayer money for pork barrel projects, education improvement, mass transit expansion, anti-poverty measures, and civil rights protections. Referring to the recent death of President John F. Kennedy, Johnson explained that he and his fellow Democrats were simply continuing what Kennedy would have wanted. And Johnson’s notorious ability to pressure and bully congressmen into supporting him made his agenda nearly unstoppable.

Having lived in poverty as a child, Johnson sought to use government power to end it once and for all. But Johnson, a career politician with no free market experience, failed to recognize that a government relying on taxpayers for sustenance can neither create wealth nor end poverty. Consequently, his domestic program was a costly failure.

The “War on Poverty”

As part of his “Great Society,” President Johnson declared a “War on Poverty” that included creating a new bureaucracy called the Office of Economic Opportunity and funneling billions of dollars into a multidue of welfare programs. Unfortunately, these programs had the opposite effect that was intended—they kept many people poor who could have otherwise worked their way out of poverty without government assistance.

The amount of taxpayer money spent on welfare programs and aid to individuals between 1965 and 1970 was the largest transfer of wealth in history. But it had no appreciable effect, as the poverty rate did not decrease as intended. This was a staggering and enormously expensive failure that bore terrible consequences.

Programs that had been created to help widows were expanded to pay single mothers not to work. This not only encouraged people not to seek employment, but it led to an explosion of out-of-wedlock births. The black community was especially devastated by these programs. In 1950, 78 percent of black families consisted of a husband and wife in a traditional marriage. By 1979, the number of traditional black families had dropped to 59 percent. Black poor in single-female households have risen over 200 percent.

From 1963 to 1980, the rate of black illegitimacy nearly doubled, from 23 to 48 percent. Black illegitimacy is approaching 70 percent today. The welfare system created and enhanced under the “Great Society” destroyed the family in the inner city and condemned the poor to perpetual government dependence at taxpayers’ expense.

When programs were expanded to include men, this caused unemployment to rise, and with the idleness of unemployment came a rise in crime and drug use. Homicide rates climbed 122 percent between 1963 and 1980. Again the black community was disproportionately harmed, with the number of black men arrested between 1966 and 1970 skyrocketing 866 percent.

The “War on Poverty” undermined a free market that was finally beginning to assimilate blacks into successful positions in society after centuries of slavery and second-class citizenship. And sadly, the program effectively destroyed the black family faster than the most brutal slaveholder could have dreamed.

Along with the new welfare bureaucracies came new welfare bureaucrats who recruited people in the big cities for aid. Suddenly, it was no longer a shame to accept free money, even at taxpayers’ expense. Advocating “welfare rights” demeaned the traditional poor family who chose to work for a living rather than accept free money. The notion that welfare is a “right” has trapped millions in government dependency.

Moreover, the poverty rate had been steadily declining in the 1960s until 1968, when most of the new welfare programs were fully implemented. The poverty rate has not fallen any further since, even though the average household income has steadily risen since then. Today, the federal government spends more money on unconstitutional entitlement programs than its constitutional obligation to national defense.

The welfare programs that were expanded and created in the 1960s presumed that a husband or a father were no longer necessary components to a family. The programs also removed the incentives to either marry or get a steady job, two of the key components needed to climb out of poverty.

Education

Several measures were enacted to improve public education as part of the “Great Society.” The Head-Start program offered meals and other services to preschool children. Job Corps was created to teach job skills to high school dropouts. VISTA (Volunteers in Service to America) was a domestic Peace Corps for poor areas. And billions of dollars were spent to improve inner-city schools, provide scholarships, and force public schools to use native languages with non-English speaking students.

In spite of all these programs, education has not improved in America. A 1977 study revealed that no advantage was gained by schools receiving taxpayer funding. The requirement to teach students in their native languages has reinforced the reluctance of Latino immigrants to learn English, thereby harming their chances to become successful members of society.

Moreover, welfare programs that encouraged people not to work also encouraged them not to seek an education. This has led to a decline in literacy in America, and has prevented many from acquiring the basic skills needed to find meaningful and long-term employment.

Health Care

Part of Johnson’s “Great Society” agenda included the creation of Medicare and Medicaid. Medicare sought to offer affordable hospital care, nursing home care, home nursing services, outpatient diagnostic services, and low-cost insurance to all Americans upon reaching 65. In the first three years of the program, nearly 20 million beneficiaries enrolled, many of whom did not actually need the benefits but simply took them because they were free.

Regarding Medicaid, many had clamored for a government system to provide health care to poor people, but the argument that the poor could not otherwise get adequate health care was false. Studies revealed that there was no tangible disparity between the number of doctor visits by affluent people and poor people. And Medicaid caused a dramatic decline in services that doctors had previously offered to the poor for free or reduced cost.

The rise of health care demand created by Medicare and Medicaid without increasing supply (i.e., more doctors and nurses) has led to great rises in overall prices. Government involvement in health care has also led to the growth of third-party payers. This has undermined the natural market mechanisms that would inevitably have lowered costs through competition, encouraged more people to pursue careers in health care, and even increased the quality and consumption of medical services. And federal intrusion into the health care industry is a blatantly unconstitutional disregard for the rights of states to administer their own health care programs for their citizens.

Immigration

The Immigration and Nationality Act abolished the immigration quota system established by the Immigration Acts of 1924, 1929, and 1952. Under this new measure, 290,000 immigrants were allowed in the U.S. each year – 170,000 from Eastern Hemisphere nations and 120,000 from Western Hemisphere nations. No more than 20,000 from any one nation could emigrate per year. No limits were placed on family reunification visas.

This act dramatically reshaped society by shifting immigration sources from industrialized Europe to Asia and impoverished Latin America. As a result, more unskilled laborers than ever before have emigrated to the U.S. over the past 50 years. In addition, the emphasis on family reunification led to unlimited chain immigration. This was a corrective measure designed to atone for past immigration discrimination, and it turned immigration into a civil rights cause. But like most measures enacted to correct past mistakes, it only made the problem worse.

The act was strongly supported by Senator Ted Kennedy of Massachusetts, who stated that “our cities will not be flooded with a million immigrants annually… the present level of immigration remains substantially the same.” However, Kennedy’s prediction has become about 800,000 illegal immigrants flooding into the U.S. annually. This opening of the floodgates has devalued U.S. jobs and citizenship to a drastic degree.

Civil Rights

In accordance with Johnson’s “Great Society,” the Civil Rights and Voting Rights Acts provided government enforcement of the Fourteenth and Fifteenth Amendments of the Constitution. Ironically, a larger percentage of Republicans than Democrats supported these measures in Congress.

Economists have pointed out that the Civil Rights Act did not improve black employment opportunities. In the decade prior to this act’s passage, blacks had more than doubled their representation in professional, technical, and high-level positions. Gains after the act was passed were smaller than gains made prior to the act’s passage. These laws also led to the creation of affirmative action programs that have awarded jobs and educational opportunities to people on the basis of their skin color rather than their merit. This is completely opposite to the ideals espoused by Reverend Martin Luther King, Jr., who dreamed that one day Americans would be judged ”not by the color of their skin but by the content of their character.”

Within a year after passing the Voting Rights Act, black voter registration leaped 28 percent, and black majorities in many districts soon began sending representatives to Congress. These laws did much to end the era of slavery and segregation in America. While this law was one of the few “Great Society” successes, most other programs sadly re-enslaved many to government dependency.

Destructive Results

The “Great Society” created a generation of Americans that has considered it their right to take government handouts at their fellow citizens’ expense. In the 45 years since its inception, the “Great Society” has led to a stagnating poverty rate, a rise in crime and drug usage, a rise in illegitimate births, a rise in illegal immigration, a decline in traditional marriage, and a decline in quality education.

Some have argued that the programs have not worked properly because they have not been funded enough. But they have already cost trillions of dollars with few positive results to show from them. Regardless of Lyndon Johnson’s motivations for unleashing such a harmful domestic initiative, there is no doubt that the “Great Society” has delivered nothing but a welfare state and a weakened, indebted nation.

Interview with Civil War Today

I recently had the privilege to be interviewed by Charles Cummings at American Civil War Today. The interview is now available at Charles’s site, and you can listen by clicking here. The interview is also posted on YouTube here. Thanks to Charles for his time and consideration!

The Civil War This Week: Feb 4-10, 1863

Wednesday, February 4

Confederate President Jefferson Davis wrote to General Robert E. Lee expressing concern about the Federal threats to the coasts of South Carolina and Georgia.

Skirmishing occurred in Tennessee and Arkansas.

Thursday, February 5

Queen Victoria of England

In Great Britain, Queen Victoria informed the British Parliament that Britain had refrained from trying to “induce a cessation of the conflict between the contending parties in the North American States, because it has not yet seemed to Her Majesty that any such overture could be attended with a probability of success.”

In Virginia, General Joseph Hooker began reforming the Federal Army of the Potomac after assuming command. Hooker removed former commander Ambrose Burnside’s system of “grand divisions” and reinstated the army corps system. Hooker also worked to restore troop morale by providing better food, equipment, and camp sanitation.

Skirmishing occurred in Virginia and Arkansas.

Friday, February 6

U.S. Secretary of State William Seward informed the French government that the offer by Emperor Napoleon III to mediate an end to the war had been declined.

In Virginia, a corps from the Federal Army of the Potomac was transfered to Newport News to threaten the Confederate capital of Richmond from the east.

Skirmishing occurred in Virginia and Tennessee.

Saturday, February 7

General Samuel P. Heintzelman assumed command of the recreated Federal Department of Washington.

In South Carolina, three Confederate blockade runners broke through the Federal blockade on Charleston.

Skirmishing occurred in Virginia, North Carolina, and Tennessee.

Sunday, February 8

Circulation of the Chicago Times was temporarily suspended by a military order for publishing “disloyal statements.” General Ulysses S. Grant later rescinded the order.

Skirmishing occurred in Mississippi and Missouri.

Monday, February 9

The Confederate Southwestern Army was extended to include the entire Trans-Mississippi Department.

Skirmishing occurred in Virginia and Tennessee.

Tuesday, February 10

On the Mississippi River, the Federal ship Queen of the West headed toward the Red River.

Skirmishing occurred in Virginia, western Virginia, Mississippi, Louisiana, and Missouri.

Primary source: The Civil War Day by Day by E.B. Long and Barbara Long (New York, NY: Da Capo Press, Inc., 1971)

Nullifying the Fugitive Slave Act

Before the Civil War, northern states defied the federal government by refusing to enforce one of the most repugnant laws ever enacted in U.S. history.

Although the concepts of states’ rights and nullification are historically associated with the South, they were employed by northern states to resist the Fugitive Slave Act of 1850. Under this law, stringent measures were imposed to catch runaway slaves. These included:

Penalizing federal officials that did not enforce the law
Rewarding federal officials that did enforce law
Requiring free citizens to help capture runaway slaves
Fining or imprisoning citizens helping runaways escape
Prohibiting runaways from testifying on their own behalf in court
Denying jury trials to runaways

Special federal commissions, not courts, worked with U.S. marshals to handle runaway cases. Commissioners and marshals who failed to hold captured runaways could be sued, thus compelling them to enforce the law. They received $10 for every runaway delivered to a claimant, but only $5 for cases in which the runaway was freed. This provided a financial incentive to send even free black men and women into slavery.

The law not only jeopardized the liberty of every black citizen, but it also infringed on the freedom of white citizens by forcing them to hunt for runaways against their will.

Northern Outrage

J.W. Loguen, a runaway slave who became a college-educated minister, denounced the Fugitive Slave Act: “The time has come to change the tones of submission into tones of defiance… I don’t respect this law—I don’t fear it—I won’t obey it! It outlaws me, and I outlaw it… I will not live a slave, and if force is employed to re-enslave me, I shall make preparations to meet the crisis as becomes a man…”

Northerners who had previously been ambiguous about slavery were now compelled to witness the institution firsthand. Consequently, former moderates quickly became enraged by the “Man-Stealing Law” and refused to send their fellow men and women into servitude. Resistance to the law was so strong that slaveholders coming north to find runaways were sometimes mobbed or jailed for attempted kidnapping.

Abolitionists used this new resistance by encouraging more slaves to escape via the Underground Railroad, reasoning that if enough slaves escaped to the North, and if enough northerners refused to help catch them, then slavery would eventually die. Thus, the liberties of runaways were protected by abolitionists and noncompliant northerners who were defending their own freedom against an overreaching government.

Defiance and Nullification

In the spirit of southern statesmen such as Thomas Jefferson and John C. Calhoun, northerners worked to prevent the Fugitive Slave Act from being enforced in their states. This “nullification” of federal law was first introduced by the Virginia and Kentucky Resolutions of 1798, in which Jefferson and James Madison declared that states had the right to nullify federal laws they deemed unconstitutional.

State and local governments openly defied the law:

The legislatures of Maine, Massachusetts, Connecticut, Rhode Island, Michigan, and Wisconsin passed “personal liberty laws” making it nearly impossible to enforce the Fugitive Slave Act in those states.
The Wisconsin Supreme Court declared that the Tenth Amendment protected states from repugnant federal laws like the Fugitive Slave Act, specifically citing the Virginia and Kentucky Resolutions of 1798 as the basis for its opinion.
The Chicago City Council called northern congressmen who supported the act “traitors” like “Benedict Arnold and Judas Iscariot.”
When the U.S. Supreme Court ruled that states could not free federal prisoners convicted of helping runaways, the Wisconsin legislature called “this assumption of jurisdiction by the federal judiciary… an act of undelegated power, void, and of no force…”

In addition to local governments, the people themselves took matters into their own hands:

In Syracuse, New York, a jury effectively nullified the law by acquitting all but one of 26 people who had been arrested for freeing William “Jerry” Henry; he ultimately escaped to Canada.
When Joshua Glover was captured by U.S. marshals in Milwaukee, Wisconsin, the sheriff supported local opinion by freeing Glover and jailing the marshals; Glover also escaped to Canada.
In Pennsylvania, a mob of free blacks killed a slaveholder attempting to capture a runaway.
Military force was needed to disperse a mass meeting after a black man was apprehended in Detroit.
Throughout Ohio, town meetings branded any northern official who helped enforce the law “an enemy of the human race.”

Other cities and states refused to help enforce the law simply because it was too expensive. Returning one runaway to the South cost the city of Boston $5,000. Boston officials never enforced the law again. All of these acts of defiance and nullification were ironically adopted from principles first introduced and later invoked by southerners.

The Law’s Legacy

The unintended consequences of legislation has rarely been greater than with the Fugitive Slave Act. The law enabled northerners to defy federal authority on moral grounds, and people who broke the law by refusing to help catch runaways were hailed as heroes. Thus, this law actually increased the number of abolitionists and further divided North and South.

The law also enabled the federal government to save slavery from extinction when the institution was dying throughout the rest of the world. Had the law not been passed, more slaves would have escaped to freedom via the Underground Railroad, it would have been too expensive to capture runaways, and the economic realities would have eventually destroyed slavery.

Moreover, northerners’ use of defiance and nullification helped embolden the South to secede from the Union a decade later. Americans recognized that they were the ultimate defenders of their own liberty, and as such many believed that the next logical step after defiance and nullification was secession. The Fugitive Slave Act hastened that secession and helped bring on the most terrible war in American history.

Lessons from the Panic of 1873

The U.S. suffered a severe economic depression in 1873. Like today’s recession, the 1873 crisis was mainly caused by unsound banking policies and the overexpansion of government-backed businesses. Did politicians then try the same remedies that are being tried today? No!

The panic’s roots were in the Civil War, which had ended just eight years before. Along with the vast changes in society, culture, and politics that took place during the war came immense changes in banking and finance. These economic changes have produced consequences that led to a depression in the 1870s and are still felt today.

During the war, a nationalized banking system was created, in which state and private banks were required to join the national system or else pay heavy taxes. This system, the forerunner of today’s Federal Reserve, enabled politicians to centralize banking power in Washington. This also allowed Wall Street to exert greater influence on the economy.

A nationalized paper currency was also introduced. Before the war, state banks issued their own currencies and the currency value was guaranteed by the specie (i.e., gold or silver) those banks had on reserve. The new paper money was not backed by specie, which allowed the U.S. Treasury to print as much as was needed to fight the war. However, the massive influx of new money into the economy led to rampant price inflation.

Also during the war, the federal government began granting large amounts of taxpayer money (known today as “pork barrel spending”) to businesses for the first time. Railroads were the main recipients, as rail companies were given land and subsidies to build new rail networks, including an historic transcontinental route. Like most “pork barrel spending,” allocations were based on politics rather than business, which largely resulted in waste, inefficiency, and corruption.

When the Bubble Bursts…

The railroad industry boomed after the war. In fact, government subsidies and land grants made the boom much larger than it should have been. Investors, speculators, and banks hurried to join in by investing hundreds of millions of dollars in the industry, which further increased the false prosperity. Within a decade, railroad supply had far exceeded consumer demand. The bubble caused by the railroad boom was bound to bust.

The bust happened in September 1873. Jay Cooke & Company, one of the largest national banks in the U.S., declared bankruptcy when its heavy railroad overinvestment crashed. In the decentralized banking era before the Civil War, this bank’s failure would not have had such a large impact on fellow banks. However, under the new nationalized banking system, in which most of the nation’s major banks were financially linked, Cooke’s failure caused a chain reaction of bank failures throughout the country.

The banking failures caused a stock market crash, forcing the New York Stock Exchange to close for 10 days. As stocks became worthless, businesses were forced to close down. This led to drastic increases in unemployment and poverty.

Inflation is the Cure?

By the end of 1873, over 5,000 businesses worth over $200 million had failed. Wages were cut by over 25 percent and nearly one million industrial workers lost their jobs. Of the nation’s 364 railroads, 89 declared bankruptcy. This was known as the “Great Depression” for many years until a bigger one happened in the 1930s.

Like today, heated debate ensued in Washington over how to address the crisis. This debate produced the Inflation Bill, under which $18 million in paper money would be printed to stimulate the economy. This was similar to the “stimulus” signed by President Obama in 2009, which pumped nearly $1 trillion into the economy. However in 1873, President Ulysses S. Grant knew what Obama has not yet learned—printing money out of thin air cannot stimulate an economy; it can only spread misery more evenly. Grant vetoed the Inflation Bill.

Grant was harshly criticized for failing to provide help for those most in need. But while inflation may have helped in the short term, it is highly damaging in the long term because it increases the cost of living through higher prices. The veto actually kept the crisis from getting worse. This differs from Obama’s “stimulus,” under which unemployment has actually risen since its enactment.

In 1875, Grant further angered stimulus supporters by signing a bill into law stopping the further printing of paper money and backing the paper money in circulation with gold. Opponents argued that more money needed to circulate to restore prosperity. However, this argument fails to acknowledge that government, which had mismanaged the economy into a depression in the first place, should not be empowered to print and potentially mismanage even more money.

In the 1870s, Grant’s efforts to curb inflation and stabilize the currency with gold were painful but necessary corrections in an economy that had been poisoned by bad investments, excessive paper money with little worth, and crony capitalism between government and business. The pain caused by these corrections reduced the long-term pain, which is primarily why this severe depression lasted only six years.

Lessons for Today

Government-backed railroad expansion, unbridled Wall Street speculation, and the nationalization of finance led to a depression in 1873. Government-backed housing expansion, unbridled Wall Street speculation, and the Fed’s control over interest rates and the money supply led to a crash in 2007 that could very well become a depression.

Today, banking is centralized in the Federal Reserve, which has consistently kept interest rates below market levels to encourage economic growth. However, artificially low interest rates often encourage businesses to borrow too much and save too little.

The Fed has also introduced Quantitative Easing 1 and 2, which were programs to buy toxic assets, bail out favored businesses on the verge of failure, and print more money. The price inflation caused by these schemes has already begun, and could very well get worse in the coming years.

Like the railroads in the 1870s, the housing market boomed in the early 21st century thanks to government-backed companies such as Fannie Mae and Freddie Mac that are required to offer subprime mortgage loans. This led to a housing bubble that burst in 2007, just as the railroad bubble burst in 1873.

Like 1873, the bust of 2007 led to a banking crisis. However, while big banks were forced to either cut back or go under in the 1870s, today’s big banks were bailed out by taxpayers under TARP (Troubled Asset Relief Program) because they were “too big to fail.” Thus, an economic crisis caused by crony capitalism between government and business was addressed by increasing the crony capitalism.

To restore the U.S. economy today, individuals and corporations must do as they did in the 1870s: work harder, spend less, and save more. This applies to government as well—Washington must reduce borrowing and spending, pay down debt with incoming revenue, and eliminate as many programs and departments as possible. If this is not done, then any perceived “recovery” will only be another bubble just waiting to burst once more.

This Week in the Civil War: Jan 28-Feb 3, 1863

Confederate President Jefferson Davis

Wednesday, January 28.  Confederate President Jefferson Davis wrote to General Theophilus H. Holmes, commanding west of the Mississippi River, “The loss of either of the two positions–Vicksburg and Port Hudson–would destroy communication with the Trans-Mississippi Department and inflict upon the Confederacy an injury which I am sure you have not failed to appreciate.”

Skirmishing occurred in Louisiana and Tennessee. In St. Louis, a mass meeting approved the Emancipation Proclamation.

Thursday, January 29.  The Confederate Congress authorized the Treasury to borrow $15 million through French financier Emile Erlanger.

President Davis wired General John C. Pemberton, commander of Confederate forces at Vicksburg, “Has anything or can anything be done to obstruct the navigation from Yazoo Pass down?” Davis was concerned about Federal efforts to attack the vital stronghold of Vicksburg, Mississippi from the north.

In the Utah Territory, U.S. forces defeated the Bannock Indians at Bear River or Battle Creek. Skirmishing occurred in Louisiana, and Federal naval forces bombarded Galveston, Texas.

Friday, January 30.  In Mississippi, General Ulysses S. Grant assumed full command of the Vicksburg campaign and began developing plans to attack the fortress.

In South Carolina, the Federal gunboat Isaac Smith was captured by Confederates forces on the Stono River near Charleston. Skirmishing occurred in Virginia.

Saturday, January 31.  Confederate gunboats temporarily broke the blockade of Charleston, South Carolina by damaging Federal steamers. The Confederacy issued an international declaration that the blockade had been lifted, but this proved to be only a temporary disruption.

In Indiana, Federal cavalry intervened to stop resistance to the arrest of alleged military deserters in Morgan County. After shots were fired, the rioters were dispersed or captured, and the deserters were arrested.

Skirmishing occurred in South Carolina and Tennessee.

Sunday, February 1.  On the Georgia coast, Federal naval forces unsuccessfully attacked Fort McAllister, south of Savannah. In North Carolina, a Federal expedition left New Berne for Plymouth.

Monday, February 2.  On the Mississippi River, the Federal ram Queen of the West ran past the Confederate batteries at Vicksburg in an effort to attack enemy vessels. The ram passed without serious damage, despite being struck 12 times.

Skirmishing occurred in Arkansas, Missouri, Tennessee, and Virginia.

Tuesday, February 3.  On the Mississippi, Queen of the West captured three Confederate ships below Vicksburg and seized food, cotton, and prisoners, including ladies.

In Mississippi, Federal forces opened the levee at Yazoo Pass in an effort to reach Vicksburg via the Yazoo River. In Tennessee, Federal forces repulsed an attack by General Nathan Bedford Forrest’s Confederates at Fort Donelson.

In Washington, French Minister to the U.S. M. Mercier met with Secretary of State William Seward and, on behalf of Emperor Napoleon III, offered to mediate an end to the war. Seward later informed the French government that the U.S. declined the offer.

Civil War Spotlight: Hooker Replaces Burnside

U.S. General Joseph Hooker

One of Ambrose Burnside’s most critical subordinates was Major General Joseph Hooker, who called his commander incompetent and the Lincoln administration feeble. Hooker also asserted that the North needed a dictator to win the war. In response, Burnside issued General Order No. 8, charging Hooker with “unjust and unnecessary criticisms… endeavored to create distrust in the minds of officers… (including) reports and statements which were calculated to create incorrect impressions…”

Burnside then returned to Washington and demanded that President Lincoln dismiss Hooker, along with Major Generals William B. Franklin and William F. Smith, otherwise he would resign. Lincoln resolved the dilemma by removing Generals Franklin and Edwin Sumner from command. He also accepted Burnside’s resignation and replaced him with Hooker.

Burnside had reluctantly accepted command of the Army of the Potomac in the first place, and his ineptitude, first at Fredericksburg and then during the “mud march,” sealed his fate. The army was neither surprised nor disappointed by his removal.

However, many were surprised that Hooker had been chosen to command, considering Hooker’s insubordinate comments about his superiors. Lincoln explained that he needed a fighter to lead the army, and Hooker had a reputation as a hard fighter, even though he was also a hard drinker who often praised his own accomplishments. And unlike Burnside, Hooker wanted the post.

When Hooker took command on January 26, Lincoln wrote to him: “I have heard… of your recently saying that both the Army and the Government needed a Dictator. Of course it was not for this, but in spite of it, that I have given you the command. Only those generals who gain successes can set up dictators. What I now ask of you is military success, and I will risk the dictatorship.”