Winning the War on Debt

Those well-versed in the recent history of U.S. deficits and debt may not be aware—in fact I wasn’t—that the national debt was paid off during the 1830s. Carl Lane has stepped up to educate us all on this remarkable event, which was as brief as it is unlikely ever to recur. Lane, a professor of history at Felician College, seems at first blush to be addressing a narrow topic. His book actually has a broader scope that includes an early history of the nation’s finances, including the Bank of the United States.

The main title of A Nation Wholly Free: The Elimination of the National Debt in the Age of Jackson quotes the words of Missouri Democratic Senator Thomas Hart Benton. The United States had gone on a spending and debt binge in financing the War of 1812 and the level of the debt leapt from $45 million at the beginning of 1812 to over $127 million by 1816. In his 1854 autobiography, Thirty Years’ View, Senator Benton mused about the possibility of not only beginning to pay that debt down but eliminating it:

The war had created the debt, which, added to the balance of that of the Revolution, the purchase of Louisiana, and some other items [exceeded $100,000,000] and the problem was to be solved, whether a national debt could be paid and extinguished in a season of peace, leaving a nation wholly free from that encumbrance; or whether it was to go on increasing, a burthen in itself, and absorbing with its interest and charges an annual portion of the public revenues.

President Monroe first broached the subject of debt extinguishment in his State of the Union of December 1824 with what Lane calls a “stunning and unprecedented announcement”:

A well-founded hope may be entertained that, should no unexpected event occur, the whole of the public debt may be discharged in the course of 10 years, and the Government be left at liberty thereafter to apply such portion of the revenue as may not be necessary for current expenses to such other objects as may be most conducive to the public security and welfare.

Lane then shifts focus to the 1825-1829 administration of John Quincy Adams, who narrowly defeated Andrew Jackson in a close election notwithstanding Jackson’s receiving more popular and electoral votes, as the decision was thrown to the House of Representatives. Adams’ commitment to fulfilling Monroe’s goal of paying the debt off by 1835 was undermined by his tendency, soon to be embodied in the Whig Party, to support spending projects, the famous “internal improvements.” These improvements were primarily for road construction, canal development, and harbor clearance, which the fiscal conservatives of that day, the Jacksonians, considered pork-barrel spending.

Lane does not supply a summary table or other statistical demonstration of what he calls “the failure of the Adams Administration.” In reality, there was some degree of debt reduction under Adams’ presidency: the balance was paid down from just over $80 million down to less than $60 million as Adams was leaving office in 1829. This was apparently accomplished through Congress’ countervailing efforts to keep Adams and his “spendthrift” ways under control. (The entire book includes only one table; it could have used more, to break up the dense debt-and-finance prose.)

Jackson came roaring back to a decisive presidential victory in 1828, at least in part because of issues related to spending and the debt. In his inaugural address, he zeroed in on extinguishment:

Advantage must result from the observance of a strict and faithful economy. This I shall aim at the more anxiously both because it will facilitate the extinguishment of the national debt, the unnecessary duration of which is incompatible with real independence, and because it will counteract that tendency to public and private profligacy which a profuse expenditure of money by the Government is but too apt to engender.

Lane traces the steady descent of the national debt under Jackson, who curtailed the “internal improvements” of Adams’ time. The debt stood at just under $50 million at the time of Jackson’s first State of the Union address. The paying down of the debt that led to the extinguishment was possible during the late 1820s and 1830s for two simple reasons, which are just as true today as they were back then: a lasting peace and a strong economy.

As part of his summary of governmental finances during this period, Lane also recounts the battles over the predecessor to the Federal Reserve as a central bank, the Second Bank of the United States. He highlights the connection between the Bank and debt extinguishment.

The Bank, created in 1816, had not had its charter renewed in 1832 because President Jackson vetoed it. As the sunset of the charter approached in 1836, its key congressional foe, Senator Benton, took up the case against it. That case was quite straightforward: Eliminating the national debt eliminated justification for re-chartering the Bank of the United States. Said Benton,

The Bank is done. The arguments of 1816 will no longer apply. Times have changed and the policy of the Republic changes with the times. The war made the bank, peace will unmake it.

In his 1832 veto message, Jackson had made clear that in his estimation the Bank was unconstitutional, an institution of privilege inconsistent with American democracy, a monopoly that stifled free and fair competition, and no longer necessary given the pending elimination of the debt.

An interesting effect of the debt’s extinguishment was the fight over what precisely to do once there was no longer an accumulated debt balance to pay down. Some argued for the surplus to be allocated to national defense and security—line items that nearly translated into war with France, given the tensions then building with America’s former ally. Strangely enough, as Lane explains, being on a sound fiscal footing also potentially allowed for greater foreign entanglements. It offered, writes Lane,

an opportunity for the United States to participate more fully and effectively in world affairs. It allowed departure from the isolationism recommended by George Washington in his Farewell Address . . . Debt freedom and overflowing federal coffers justified establishing more United States diplomatic missions abroad.

Lane garbles the explanation of what the surplus ended up being spent on, stating that during 1835, “Jackson had already distributed the surplus, not to the states, but to selected state chartered banks—the administration’s so-called ‘pets.’” But it is not clearly explained how these distributions or deposits were ultimately distributed. He later discusses a $9 million distribution that was initiated on January 1, 1837 as Jackson was about to leave office, with each state’s share based on its number of Electoral College votes as a percentage of the total.

Jackson’s rejection of the Second Bank of the United States had some staying power, as no central bank would emerge for another 78 years. On the other hand, debt freedom only lasted two years and 10 months, January 1835 to October 1837. This was barely into the term of Jackson’s successor, Martin van Buren. Lane briefly discusses the Panic of 1837, which weakened the U.S. fiscal position, marking the end of debt freedom.

Overall, Lane’s primary research sources are good throughout the book. He drew on a range of historical and more recent material, and provides a full 30 pages of endnotes for those interested in digging further into the topic.

However, he stumbles in his final chapter. A rambling Epilogue attempts to pull together policy conclusions drawn from the elimination of the debt, and to link that experience to our situation. In stark contrast to the frequent and helpful citations throughout the book, its ending is sparsely documented. It traces the cause of the 2000s housing collapse, “not by preemptive government action as in 1836 but on its own accord,” notwithstanding the dramatic effort by government to balloon homeownership levels beginning in the 1990s.

What follows is a hefty dose of Keynesian orthodoxy in regard to fiscal interventions to solve the financial crisis:

The incoming Obama Administration faced an enormous problem, but had only one real option to address it: to offer additional bailouts and to provide stimulus, especially through construction, to breathe life back into a moribund system. Only the government could command the enormous resources needed to impose sufficient demand on the productive system to get the economy humming again.

Because Lane has done a good job in conveying important episodes in the nation’s financial past, his readers can draw conclusions that, unlike his, flow logically from this well-presented (with the few exceptions noted) and well-documented history.