by Ray Keating
The Keating Files – May 26, 2020
I’ve long admired Ulysses S. Grant for his perseverance; dedication to his family; accomplishments on the battlefield during the Civil War in defense of the United States (and the Declaration of Independence and U.S. Constitution) and on behalf, ultimately, of freeing the slaves; and some noteworthy achievements as president.
I’ve also long believed that Grant’s reputation suffered at the hands of an assortment of historians who were sympathetic, apologetic, justifiers and/or moral-equivalency peddlers for the Confederacy. Make no mistake, Grant was quite right when he declared, “There are but two parties now: traitors and patriots. And I want hereafter to be ranked with the latter and, I trust, the stronger party.”
The first night’s two hours of the History Channel’s three-night Grant documentary were quite good, and I look forward to the next four hours. (I’ll try to write a review after seeing the full six hours.)
For now, I would like to focus on the presidency and highlight two key accomplishments by President Grant and a Republican Congress after the Civil War. The following is an excerpt from an essay in my new book Behind Enemy Lines: Conservative Communiques from left-Wing New York:
Not only do supply-side economic ideas formally date back to at least the dawn of modern-day economics – for example, with Adam Smith and An Inquiry into the Nature and Causes of the Wealth of Nations (1776), and Jean-Baptiste Say and A Treatise on Political Economy (1803) – but it follows that supply-side economic policies have been around for some time as well.
Briefly consider what happened during and after the U.S. Civil War. As wartime measures, President Abraham Lincoln and Congress decided to abandon hard money – that is, issuing “greenbacks” that were not convertible into gold or silver – and imposed the first income tax in U.S. history. The Civil War income tax went into effect at a flat 3 percent rate in 1862, and was later increased to a progressive rate structure, with a top rate of 10 percent.
Under President Ulysses S. Grant and a Republican Congress after the war, the income tax was reduced to a flat 5 percent tax, and subsequently in an 1870 act, the rate was cut further, and the income tax sentenced to be terminated at the end of 1871. For good measure, Grant and Congress moved the U.S. back towards a gold standard, after the greenbacks had led to inflation during the war. As noted in a 2011 Congressional Research Service report (“Brief History of the Gold Standard in the United States”) on the history of the gold standard:
After the war was over, Congress determined to return to the metallic standard at the same parity that existed before the war. To do this, the market exchange rate of greenbacks for gold had to be brought back to its old level. This was accomplished by slowly removing the greenbacks from circulation. This was an off-and-on effort, with notes removed, held steady, and even returned to circulation. In 1875, it was decided to reduce their number to $300 million. In 1878, however, their number was frozen at about $347 million, where it remained for a century.
Parity between the greenback and gold dollars was achieved in 1879, returning the United States to a metallic standard. The government stood ready to pay its debts in gold, accept greenbacks for customs, and to redeem greenbacks on demand for gold.
The combination of eliminating the income tax and returning the U.S. to sound money – a very supply-side thing to do – resulted in a long period of robust economic growth. Focusing on the monetary aspect, supply-side thinker Lew Lehrman (in his book Money, Gold, and History)explained:
“It is also true that the price level gradually declined during periods of diminished rates of discovery of the monetary metals – causing real wages to rise. Such a period was the late 19th century in the United States, known to some historians as ‘The Great Deflation.’ The average annual decline in the price level during this period was one to two percent. But this fall in the price level was associated with one of America’s greatest periods of economic growth – three to four percent annually. Compared to the Great Depression of 1930-1933 – caused by monopoly central banking, protectionism, trade barriers, and the official reserve currency roles of the dollar and the pound – the monetary deflation of 1870-1900 was but a gentle decline amidst a remarkable economic expansion, productivity and wage growth.”
Indeed, historians, along with many economists, have a difficult time wrestling with the fact that economic growth can occur without inflation, not to mention growth with deflation. It is not unusual, for example, to see deflation confused with economic contraction. But consider the period of the 1870s, with the income tax eliminated, and a shift to sound money. From 1870 to 1880, while the price level declined:
• real annual GNP growth averaged 5.3 percent,
• the number of employed grew by 38 percent,
• farm output expanded by 61 percent,
• and manufacturing production grew by 68 percent.
By the way, federal government spending was 14 percent lower in 1880 compared to 1870, as was federal debt.
I would argue that the foundational steps taken by Grant and Congress on the tax and monetary fronts provided a sound policy foundation that helped bring about unprecedented growth and innovation in our economy that lasted some six decades.
It’s also worth highlighting that Grant worked to achieve a balancing act with Reconstruction, as noted by Joan Waugh, a history professor writing for the Miller Center:
As President, Grant was determined to follow Lincoln's policy of reconciliation with the South rather than one of retribution or appeasement. He also wanted to make sure that the federal government preserved the sacrifices of the war by sustaining a strong Union while at the same time protecting the newly freed slaves and preventing former unreconstructed Confederates from regaining power in the South...
Grant wanted to meet the needs of the newly freed slaves and, at the same time, entice white Southerners into a Republican Party dedicated to creating jobs and solid businesses in the defeated region. However, it proved impossible for him to achieve these two competing goals. When he used federal troops or legislation to defend the rights of blacks, whites assailed him as a tyrant trampling states' rights. Yet it went against his personal and political goals to abandon the freed slaves and the Republican Party in the South. In the end, Grant had little chance to take his good intentions and make them into effective policy.
Indeed, whether he read Adam Smith or not, Grant obviously grasped Smith’s point that he made over two decades before The Wealth of Nations was published: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice...”
Upon his death and for a fair time afterwards, Grant was widely admired. Now, once again in the twenty-first century, Grant deserves to be recognized as one of the greats in American history for his accomplishments on and off the bloody fields of the Civil War.
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Ray Keating is a columnist, economist, podcaster and entrepreneur. You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. Keating also is a novelist. His latest novels are The Traitor: A Pastor Stephen Grant Novel, which is the 12th book in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?
Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcastand the Free Enterprise in Three Minutes Podcast
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