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 Like Lincoln's odious tax, the British Income Tax was repealed at war's end.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.

References:
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 Brandeis.edu linked above.