Unsustainable Federal Spending Gone Bad

Unsustainable federal government spending has already led to an unstable American currency, a devastating depression, and some of the most turbulent civil unrest in United States history.

SAN JOSE, October 3, 2011—The current contentious wrangling over federal spending and national debt limits continues to stimulate political discourse throughout the nation, but it is not unusual that Americans express genuine concern over excessive government spending. What is unusual is that many Americans today are clueless about where the federal  government obtains the money it so recklessly spends.

Especially at this time when the dominant political party is so adamant in spending so much of the taxpayer’s money, American’s should know that unsustainable spending in the past has had disastrous consequences.  One striking precedent of excessive federal spending contributed to one of the most severe economic depressions and some of most turbulent civil unrest in U.S. history.

In an eerie parallel of history, one political party won control of the Presidency and both houses of Congress and felt confident they had a mandate for change.  They used that mandate to aggressively pass whatever legislation the party desired.  Unfortunately, their plan involved manipulating the nation’s money supply and unprecedented federal spending.  Their legislation led to serious inflation and the destabilization of American’s currency, and ultimately a devastating economic depression.

In the election of 1888, Republican Benjamin Harrison, beat President Grover Cleveland by an electoral margin of 233 to 168 despite losing the popular tally by 90,000 votes.  In addition, the Republican Party held a substantial margin of control in the U.S. Senate and took control of the House of Representatives.  Republicans interpreted their victory as a significant mandate and they chose to pursue a course of spending unparalleled in previous administrations. 

Under Cleveland’s previous four years, the nation enjoyed a fairly decent period of economic prosperity.  Cleveland, a fiscal conservative and Democrat (yes, they did exist), felt anxious about his surplus of around $100 million in the U.S. Treasury.  He believed that the money belonged to the people and if it continued to languish in the hands of the administration, Congress would surely find some way to spend it. 

Indeed, Harrison and the Republican Congress had little trouble initiating a spending spree that proved unprecedented up to that time. 

The large surplus was essentially amassed by high tariffs on imported goods.  This became a hot issue during the campaign of 1888.  The Democrats wanted the tariff lowered, while the Republicans wanted tariffs to remain high.  In 1890, the Republican controlled Congress passed the McKinley Tariff Act which raised duties on imports to even higher levels, stimulating retailers to raise their prices.

Higher prices angered millions of voters.  During Harrison’s term, a People’s Party (more commonly known as the Populists) rose to challenge both major political parties.  Additionally, the Democrats challenged the unsustainable spending of the Republicans.  They dubbed it the “Billion Dollar Congress” because for the first time in America’s history, an administration had appropriated over $1 billion a year.

Also in 1890, Republicans passed the Sherman Silver Purchase Act which required the federal government to purchase 4.5 million ounces of silver each month at market prices.  Purchasing so much silver was a scheme to mandate silver coinage to benefit silver mining interests as well as Western farmers who had heavily supported the Republican Party.  

Intended as a means to stimulate inflation, farmers welcomed the law because it devalued the dollar and meant that farm loans were technically repaid with fewer dollars.  On a larger scale, the recent printing of so much paper money by the Federal Reserve is an attempt at something similar.  Reducing the value of the dollar through inflation can technically reduce the dollar value of the loans the U.S. government has to repay to foreign nations. 

High spending eliminated Cleveland’s surplus and the Billion Dollar Congress depleted the gold reserves at a rate of nearly $50 million a year while dumping less valuable silver into the Treasury.  Many historians believe that the Sherman Silver Purchase Act was a fundamental factor in the destabilization of U.S. currency and in the intensification of the depression in the aftermath of Harrison’s term. 

Best laid plans can go awry, and the Republicans’ aggressive tampering with the economy backfired.  Harrison and his party lost by an overwhelming margin in 1892.  Unfortunately, the actions of the Harrison government undermined the economy.  Cleveland and the Democrats faced a momentous job to repair the looming economic crisis.  But like a bad omen, just days before the former president’s second inauguration, the Philadelphia & Reading Railroad went bankrupt.

In May, the Panic of 1893 ripped through the country.  The stock market crashed. More railroads and businesses failed, people panicked and inevitable runs on the banks caused numerous bank failures.  Unemployment rose to staggering levels.  Some historians claim that at the height of this depression, unemployment rose to between 17- 20%, but official records were not kept until during the Great Depression.  This period was scarred by company lockouts, labor strikes, and physical clashes between workers and the government.  One of the most violent strikes was the Pullman Strike of 1894.

Although Cleveland was determined to undo the damage wrought by Harrison, he could only do so much.  Despite bitter and divisive debates, he persuaded Congress to repeal the Sherman Silver Purchase Act.  But by January of 1895, only about $40 million of gold remained.  Cleveland managed to persuade J.P. Morgan and other bankers to purchase government bonds with gold which replenished the supply to over $100 million, but the depression dragged on for four years.

Ironically, after the election of 1892, Harrison went back home to Indiana and Cleveland was left holding a ticking economic bomb.  When he could not “fix” the broken economy, Americans blamed Cleveland.  He was not offered another chance.

One may wonder whether these events could have served as a lesson for future administrations.  But, the follow up question is: Do politicians ever learn from the past?  Well, in this case, possibly.  It may be where the current Democratic leadership got their blueprints for their recent spending addiction.


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Dennis Jamison
Dennis Jamison
Dennis Jamison reinvented his life after working for a multi-billion dollar division of Johnson & Johnson for several years. Now semi-retired, he is an adjunct faculty member  at West Valley College in California.  He also currently writes a column on history and one on American freedom for the Communities at the Washington Times.

 

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