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Honest Abe's spending legacy is a cautionary tale


NEIL REYNOLDS

Globe and Mail Update
E-mail Neil Reynolds

January 21, 2009 at 6:00 AM EST

In February, 1861, three weeks before his inauguration, U.S. Republican president-elect Abraham Lincoln assured the troubled country that his first priority as president would be higher tariffs - an economic policy he had championed throughout his political career. In 1832, announcing his candidacy for a seat in the Illinois legislature, Lincoln had said: "I presume you all know who I am. I am humble Abraham Lincoln. My politics are short and sweet, like the old woman's dance. I am in favour of a national bank, the internal improvement system and a high protective tariff."

Honest Abe indeed. For 30 years, he pursued these three policy objectives with remarkable consistency and dedication. As a state legislator and as a congressman, he promoted the internal improvement system, a euphemistic phrase that meant deficit spending to fund extravagant economic stimulus programs. As president, he established a central bank to print paper money not supported by gold (the first easy-money "greenbacks") and raised U.S. protective tariffs to the highest levels in the country's history.

Taken together, these policies changed U.S. history perhaps as much as his Emancipation Proclamation. Charles Dickens certainly thought so, asserting as early as 1861 that Lincoln's high tariffs must be regarded as the fundamental cause of the American Civil War.

In 1860, the United States had one of the lowest tariff schedules in the world (average rate: 17 per cent). In 1861, it raised tariffs twice, the first time to 26 per cent, the second time to 36 per cent. In 1862, it raised tariffs to 48 per cent and levied them on a much broader range of goods (including every single farm crop). They remained in effect until the First World War.

Economists say 80 per cent of the costs imposed by these tariffs fell on the import-dependent southern states. In his inaugural speech, Lincoln explicitly promised these states that he would not invade them - provided they paid all "the duties and imposts" that the federal government levied on them.

Perhaps more instructive of Lincoln's economic instincts, though, was his commitment to the internal improvement system. Railways and canals were the fashionable infrastructure projects of the time - and the great American debate in the years preceding the Civil War was less about slavery than about using public debt to fund the laying of private railway track.

Historically, presidents had strongly opposed this abuse of the public purse as unconstitutional. (Thomas Jefferson and James Monroe both exercised presidential vetoes.) State governments, however, borrowed huge sums of money for grandiose projects - with inevitably unfortunate results.

In 1837, the Illinois legislature authorized the expenditure of $10.4-million (U.S.) to build 1,341 miles of railroad to connect by rail the towns and villages of the state. Lincoln was an enthusiastic proponent.

One historian wrote: "In the log-rolling of this bill through the legislature, Lincoln was one of the worst pork-barrelers."

In the end, only 26 miles of track got laid. The scheme collapsed amid graft and corruption, leaving the state bankrupt. Historians date the introduction of "spoils" - public spending corrupted by corporate graft - to the internal improvement system that squandered hundreds of millions of dollars in Illinois, New York, Pennsylvania and other states.

The essential nature of the internal improvement system was a neo-mercantilism - an alliance of government and industry in which government dispenses public money to private companies, imposes high tariffs to protect them from competition and regards central banks as an indispensable mechanism to ensure never-ending growth through continuous inflation.

Almost two centuries later, the only part of the internal improvement system that the U.S. has emphatically discarded is the commitment to high tariffs (which aren't compatible with globalization).

President Barack Obama has stage-managed his ascent to the presidency by wrapping himself in Abraham Lincoln's monumental mantle. He will find in Lincoln much of great worth to emulate. But he will find much to shun. Lincoln was more than the stone statue that overlooks Washington's National Mall. Much of his economic legacy was perversely destructive - as was much of his executive legacy.

Lincoln suspended habeas corpus and the constitutional right to free speech (closing newspapers and jailing editors), imprisoned thousands of people for treason, censored telegraph communications and operated a secret police force.

Lincoln's conscription law permitted the buying of exemptions from military service for $300, making Union forces significantly mercenary. (In 1863, "draft riots" in New York City left more than 1,000 people killed or wounded.) Lincoln put civilian American citizens on trial in military courts.

In comparison, President George W. Bush was the model of executive restraint in wartime.

In the posthumous postwar years, historians say, Lincoln's inflationary greenbacks helped precipitate the Panic of 1873 - a severe depression that lasted several years. Mr. Obama, please take note.

Lincoln's high tariffs, on the other hand, compelled Sir John A. Macdonald to adopt precisely the same economic policy for Canada. Lincoln designated his strategy as "the America Policy." Macdonald designated his as "the National Policy."

In this sense, Canadians must regard Lincoln as an honorary father of Confederation.

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