Fiscal Cliff Today Is Deja Vu From The 1840s, Which May Hold Clues For Resolution

Thursday, October 25, 2012 02:10
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Fiscal Cliff Today Is Deja Vu From The 1840s, Which May Hold Clues For Resolution

Tags: Congress | economy | Taxes

The fiscal cliff, whose foreboding air grows heavier by the day, carries an ironic sense of déjà-vu.

Congress faced a similar situation in the 1840s. Then, the nation barely avoided calamity.

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After the war of 1812, tariffs were imposed on goods from Europe. States in the south felt unfairly disadvantaged by what they viewed as protectionist policies of the northern states.
 
The rift grew over time so that in 1832, South Carolina attempted to nullify the tariffs. Then president Andrew Jackson threatened force against South Carolina.
 
Then Congress threw the state an olive branch saying that within 10 years, the tariffs would be substantially reduced. Target date was June 30, 1842.
 
Then a financial crisis ensued as a speculative bubble burst in the late 1830s. Ironically, that bubble was tied to real estate and erratic banking policies. Sound familiar?
 
So how did Congress save the US economy then? Not by borrowing. By 1842, one-third of state governments had defaulted on foreign loans and America’s European creditors were outraged.
 
By the end of 1841, it became clear that the tariff reduction promised could not be honored.
 
Congress couldn’t agree on a plan to replace that tariff policy with a more moderate one.
 
Southern states were a bit relieved when the new administration under President James K. Polk lowered some of the tariffs in 1845. Government revenue was also cut and the US had just embarked on a war with Mexico.
 
A combination of lower tax rates and increased military spending plunged the US deep into debt.
 
By this time, Europe had troubles of its own with spreading violence and was more amenable to helping its American neighbor across the pond.
 
The House of Rothschild became the largest investor in the Polk administration’s war bonds. And money flowed once more into American coffers, avoiding the fiscal precipice that was so imminent.
 
With so many similarities between the 1840s, could there be a Rothschild equivalent waiting in our Congressional wings…

 

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