Abraham Lincoln's Fiscal Cliff

By the end of the Civil War, the federal debt ceiling stood at $2.76 billion or 30 percent of the nation's Gross Domestic Product thanks in large measure to Lincoln's economic policies. It's tempting to ask what Lincoln would think about today's federal debt load: $11.42 trillion or 67.7 percent of GDP.
When Abraham Lincoln took office, the nation was nearly debt-free.
Lincoln's economic policies were simple and straightforward. He campaigned for the establishment of a national bank in response to a rolling series of local bank failures. He also urged higher tariffs to help finance the government and expand the country's rail lines —some of the same railroads he had represented as an attorney.
In
The Reckoning, the Florida Railroad connecting Cedar Keys to Fernandina on the East coast was built with federal and state land grants. The rail line began operation just weeks before the start of the fighting. Destroyed during the war, it was later rebuilt.
Lincoln's economic policies helped spark the Civil War. The tariffs, which his administration raised, fell heaviest on the agrarian southern states. The "cotton states" had little in the way of manufacturing capacity and relied on imports and exports to sustain their way of life.
Tariffs rose from an average of 17 percent in 1860 to as high as 48 percent in 1862. But with tariffs at such high levels, and with most southern ports embargoed, trade fell off precipitously. Meanwhile, the cost of waging war rose steadily.
Facing his own fiscal cliff, Lincoln went to the New York banks for a loan only to learn they would charge interest rates of 24 percent or more. With a crisis looming, Lincoln decided the federal government would print $450 million of its own money. (Lincoln was no penny pincher)
Dubbed "greenbacks" because of their appearance, the new bills were not backed by gold — they were fiat money. The greenbacks were used to pay soldiers and other government obligations. Lincoln also imposed the first federal income tax in the nation's history.
Despite these measures, the national debt had climbed from $65 million in 1860 to $2.76 billion in 1866, or to 30 percent of the country's Gross Domestic Product.
Lincoln was not an advocate of big government in the sense that we think about it today. His tariffs and taxes were levied to meet the needs of a wartime federal government and an expanding economy rather than to finance a broad sweeping social agenda.
The "gold standard" for the nation's currency was established soon after the war when greenbacks were recalled from circulation. The first income tax was repealed in 1872 when the nation was on sounder economic footing.
But it is tempting to wonder what Lincoln would think about the size of today's federal government and the current debt level. Our federal debt now stands at more than 67 percent of GDP, or $11.42 trillion. And, that debt load does not include nearly $5 trillion in debt that the US government owes to trust funds to pay for programs such as Social Security. If these obligations are included, federal debts are approximately 100% of gross domestic product.