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What History Tells Us Will Likely Happen to Those Giant Surpluses

For good or ill, the great 2001 tax cut is an accomplished fact. Congress has chosen to believe the rosy projections of future surpluses piling up in the Treasury for years to come, and has taken the ax to the revenue codes.

It was ever thus. A year-end excess of government collections over government outlays has always been gratifying, and likewise troublesome. And why troublesome? Because"surplus" money kept on the government's books is money taken out of circulation, and nothing makes taxpayers--and voters--unhappier than"buying" more government service than they think they need. The various ways of dealing with this dilemma offer controversial choices. Congress can use the money to finance long-range investments in the national future or to pay off past debts--sensible but not appetizing decisions. The politically more attractive options are to cut or rebate taxes, and/or to undertake large giveaway programs. It is those routes that have almost always been followed when there were surpluses in the past, with the major parties battling over which interest groups got the choicest cuts and handouts. And as it turned out, the decisions were often hurtful to the country. For budgeting on the basis of anticipated surpluses is a high-risk venture, and almost invariably, good times have been followed by crises that turned black ink to red.

Thomas Jefferson took office in 1801 committed to a theory of"wise and frugal government" that he could implement because customs revenues were up thanks to a boom in U.S. commerce during the Napoleonic Wars. Using surpluses of three to eight million dollars between 1801 and 1807 his Jeffersonian Republican Congresses (modern Republicanism dates only from 1854) got the eighty million dollar national debt cut down by half, slashed annual expenses (exclusive of interest) to about five million a year, repealed internal taxes (Jefferson boasted in 1805:"What farmer, what mechanic, what laborer ever sees a tax gatherer of the United States?") and had enough left to buy Louisiana. But Jefferson also squeezed military and naval appropriations down to nothing. His unlucky successor, James Madison, was stuck with the War of 1812. Totally unprepared, the U.S. was defeated on land and sea (with a few single-fight exceptions) and moreover had to borrow money at such ruinous rates that the debt went up to eighty million again just to realize 35 million in hard cash.

That debt was finally paid off, with celebratory flourishes, in 1835, thanks to a swollen stream of revenue from public land sales in the fast-growing West. Jacksonian Democrats in the saddle rushed to devise ways to get rid of an accumulating surplus. One unadopted suggestion from the Secretary of the Treasury was"a temporary investment in some stocks sound and salable," the very idea now being floated for the Social Security trust fund. Instead, the 37 million dollar surplus was"distributed" to the states, but before the transfer was completed, widespread speculation in land--encouraged by an unregulated and decentralized banking system and the 28 million already distributed-had produced a terrific crash. The surpluses of 1835 and 1836 promptly turned into deficits totaling nearly 20 millions in 1837 and 1838.

The depressed economy recovered and produced a string of surpluses from 1850 to 1857, but the approaching Civil War overshadowed questions of public finance. When the war actually came three years later it left the country with a two billion dollar debt in 1865. Then came the golden age of surpluses, as high tariffs plus leftover wartime excise taxes and general prosperity put money in Uncle Sam's purse right through the 1880s. Even as the debt was paid down, the Secretary of the Treasury lamented that his problem was not finding revenue, but how to"turn back into the flow of business the more than enough that has been drawn from the people." Holding on to the money was denounced by President Cleveland as"indefensible extortion," but cutting the tariff--the largest contributor to the inflows--was politically impossible.

So the Congresses of the eighties, both Democratic and Republican, spent freely on subsidies to business (called by one Senator a way to develop"the great resources which the Almighty has placed in our hands ,") on paying off bondholders, on building a modern navy, and especially on pensions to Civil War veterans, the country's most influential voting bloc at the time. The watchword was sounded by the Commissioner of Pensions, a legless veteran, in the phrase:"God help the surplus." And of course, in 1893, another crash and depression put the surplus further beyond God's help. One contributing factor was a program that committed the government to buying large quantities of silver annually, and paying with certificates redeemable in more valuable gold. Unsurprisingly this led to a run on the gold reserves that forced the Treasury to borrow millions from J.P. Morgan in 1894. Annual deficits lasted through the turn of the century.

The final run of consecutive yearly surpluses, again generated by high tariffs and business prosperity, covered the Roaring (and Republican) Twenties. Treasury Secretary Andrew Mellon's pathway to frugal government was through tax cuts, and especially in the excess profits levies and surtaxes of the 1917-18 war years. Congress agreed. Graduated income taxation, still fairly new, was condemned by one Senator as a"vicious principle," and a"legislative adaptation of the communistic doctrine of Karl Marx." The threshold of exemption at the bottom level was also raised to include more low-income taxpayers , but as Mellon said,"Every citizen should have a stake in his country." Some consumption taxes (as on tobacco) were retained, while estate taxes were capped. Government expenditures were cut, though not for the Veterans Bureau and of course for interest payments. Mellon did at least shrink those last by a one-third reduction in the 25 billion dollar World War debt. But 1930 brought the Great Depression, and the beginning of the long, long trail of deficits and rising debt leading to the present moment.

Given this record, it does look as if a more prudent and less political use of the surplus would have made better sense. But with the nation in a state of virtually continuous campaigning, such self-abnegation was hardly to be expected. Once more, hope conquers experience. All that a history-conscious observer can hope for is that the inevitable rainy day, for which there is no inclination to save, does not come soon or last too long.

Note: This is an updated version of an article Mr. Weisberger prepared last year for TomPaine.com.