Lessons From America’s First Fiscal Cliff

Coxey’s Army in Washington, D.C., in an image from the Library of Congress

America faced its first fiscal cliff in 1893. The date should be familiar. It was the start of the Panic of 1893, and it led to the biggest shift ever in the composition of the U.S. Congress. Contemporaries called it the “Avalanche of 1894.”

Then as now, a Republican-sponsored change in tax policy brought about the crisis. Throughout the 1880s the United States had run a budget surplus. Americans paid no income tax, but a tariff on imports paid most of the bills. Nearly 25 percent of this came from a tax on imported sugar. The so-called Sugar Trust, run by Henry O. Havemeyer, had long favored a high tax on refined sugar to protect American sugar refineries against foreign competition.

But in the late 1880s a new California rival, Claus Spreckels, used a little-known treaty with the Kingdom of Hawaii to import raw sugar tax-free from the distant island. This gave Spreckels a huge advantage over East Coast refiners, who imported most of their sugar from Cuba. In 1890, to destroy Spreckels’s advantage, Havemeyer persuaded Congress to eliminate the tariff on imported sugar. With no tax advantage to give him the edge, Spreckels, whose sugar had to be brought from much farther, lost the war for the American market. Unfortunately, the loss of the sugar tariff helped to rapidly drain the U.S. Treasury.

Back in the 1890s the fiscal cliff did not entail drastic budget cuts that would take effect if Congress failed to reduce the deficit; it was an invisible line in the American gold supply that made bankers tear at their hair. Most international bankers agreed that if the value of the U.S. Treasury’s gold supply ever dropped below one hundred million dollars, American debtors would be overstretched and might not be able to pay all their debts in gold.

In May of 1893, they fell off that fiscal cliff when the Treasury’s gold fund dropped below one hundred million. Bond holders around the world dumped American railroad and treasury bonds the next day. America faced its first run on the dollar. That summer 74 railroads operating 30,000 miles of track went into the hands of receivers. Fifteen thousand commercial failures followed, including 600 banks.

The new tax break and the financial downturn had dire consequences abroad. In Hawaii, sugar planters fomented a revolution against Queen Liliuokalani, knowing that if the United States annexed Hawaii, Hawaiian planters would become American planters. They would then receive a sugar subsidy of two cents per pound, and might successfully compete with Cuba again. Calling themselves the Provisional Government of Hawaii, they overthrew the queen and called for immediate annexation. Grover Cleveland, the newly elected Democratic president, rebuffed them, but they would succeed a few years later, in 1898.

As the fiscal crisis became a financial one, violent conflicts bubbled inside the United States as well. In 1894 tens of thousands of unemployed workers, calling themselves “Coxey’s Army,” marched on Washington. In the same year, an American Railroad Union strike shut down train service from Maine to California.

The ruling party was different in the crisis of 1893, but the partisan deadlock was just as palpable. Democrats who controlled the House in 1892 proved unable to repair the damage brought by the tax breaks introduced a few years earlier by Republicans. Congress tried an income tax on those making over $4,000 per year—roughly 2 percent of the American public—but the Supreme Court struck it down. Eventually Congress could only tweak the tariff; it reinstated the tariff on sugar and increased the tax on whisky by 20 cents a gallon.

It was too little, too late. Before the 1894 elections the Republican opposition published a pamphlet called “What the Congress has Done.” All the pages were blank. With revolutions abroad and chaos at home, revulsion against the House of Representatives followed: This was the Avalanche of 1894. The majority Democrats lost 125 seats in that election as the minority Republican Party gained 130 seats. Republicans became the majority party in the House and would remain so for 35 years.

What is the lesson from America’s first fiscal cliff and the first run on the dollar? The fiscal cliff then, as now, was a symbolic test of the Congress’s capacity to balance ends and means. A looming deficit and Congressional deadlock reverberated far beyond the halls of Congress, reaching halfway across the Pacific to Hawaii. The American public reacted strongly to a Congress they deemed ineffective. Of course Congress should not act too hastily. The reinstated sugar tariff caused a slump in Cuba that contributed to a revolution there and a war in which Americans fought and died.

In the horse-and-buggy days of the 1890s, the fiscal cliff was a figurative fiscal boundary that, once crossed, led the world to regard the United States as a nation of deadbeats and plunged the nation into financial chaos. Republicans in power in the House could lose a great deal by stonewalling now while the horses rush to the edge.

Scott Reynolds Nelson teaches history at the College of William and Mary. He is the author of A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters, published by Alfred A. Knopf in September.

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