How to fight inflation with the lessons of history


Certainly, the American economy has changed a lot since the 1860s. For one thing, it now has a central bank, which has a mandate to keep prices stable. During the pandemic, the Fed under Mr. Powell pushed its powers, which stabilized markets but also fueled inflation. Now, a lot of the focus is on the Fed to unwind those programs and raise rates, to drive prices down.

But fiscal policy is also a factor, as evidenced by growing concern over deficits as President Biden enacts an ambitious and still unfinished spending agenda. During the civil war, the tax policies of the North and the South diverged markedly.

Annual expenditure in the Union reached the staggering figure of 16 times its pre-war budget. Despite the need for funds, there was great fear in Congress of raising taxes because of Americans’ well-known antipathy to taxation.

But Salmon P. Chase, the fiscally conservative Secretary of the Treasury, had a deathly fear of inflation. He recognized that without revenue, the government would have to resort to the printing press. After the southern states seceded, interest rates on the country’s debt soared and foreigners refused to lend.

Thaddeus Stevens, chairman of the House Ways and Means Committee, went further than Mr. Chase imagined by inventing an entirely new tax code. Previously, the Union had financed itself with customs duties on foreign trade, which it raised on several occasions. Along with this, he created a system of “internal taxes”, on everything from personal income to leaf tobacco, alcohol, hogs slaughtered and auctioneers’ fees. Congress also created a new office to collect taxes, a precursor to the Internal Revenue Service, underscoring its commitment to raising revenue that way.

Mr. Stevens had no idea how much revenue the taxes would generate, or even whether people would pay them. (“All on earth and below the land must be taxed,” grumbled an Ohioman.) But in 1865 the Treasury withdrew $300 million from customs and inland taxes, six times its prewar tax revenue.

These revenues helped to moderate the inflation created by the issue of “greenbacks”, bills that circulated like money, to pay for the war. The credit of the country improved and Mr. Chase was able to borrow prodigious sums. Ultimately, inflation in the Union was no higher than during the two world wars of the following century.


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