Schuyler Colfax – The Intelligent Collector Magazine

It’s that time of year again … thinking about taxes

An editorial cartoon by Winsor McCay, circa 1925, protesting Congress “milking” income taxes while ignoring business taxes, sold for $10,800 at a November 2018 Heritage auction.

By Jim O’Neal

U.S. Rep. Schuyler Colfax of Indiana described the issue this way: “The most odious tax we can levy is going to be a tax on land. I cannot go home and tell my constituents that I voted for a bill that would allow a man, a millionaire, who has put his entire property into stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax!” Colfax (1823-1885), who would later become one of only two men (with John Nance Garner) to be both speaker of the house and vice president, had a different proposal: Put a tax on stocks, bonds, mortgages and interest. A de facto income tax.

There was ample precedent for an income tax. England imposed one in 1799 and various states – which relied primarily on estate taxes – had begun taxing income in the 1840s. By 1850, some states had income taxes with high exemptions and low rates that graduated based on the wealth of the taxpayer. They didn’t raise much revenue, but were viewed as a way of taxing any wealth that escaped common real estate taxes. Colfax prevailed and the Ways and Means Committee dropped the property tax and replaced it with “direct taxation upon personal income or wealth.”

The only issues remaining were the constitutional restrictions on direct taxes, except in proportion to population (i.e. different tax rates for different states). The solution was simple. Call the new taxes something other than a direct tax and “impose the burden on the people equally in proportion to their ability to pay.” An amendment was adopted to impose a 3 percent tax on income over $600 a year and a luxury tax on alcohol and luxury goods.

The Senate went one step further with a 5 percent tax on income over $1,000. Eventually, they compromised on 3 percent for income over $800. At last, said The New York Herald, millionaires would contribute a fair proportion of their wealth to the support of the national government. Inequality would soon be a relic of the past and every man would pay according to his ability!

The time was early 1862 and Secretary of the Treasury Salmon Portland Chase realized he had grossly underestimated the cost of the Civil War. After the embarrassment at Bull Run and a reassessment of Gen. George McClellan’s preference to train his troops rather than engage the South in battle, a new estimate of the first year’s cost was a staggering $530 million. Chase doubted that merely labeling the new income tax an “indirect tax” was constitutional. More importantly, Congress had neglected to establish any means for collecting or enforcement of the new tax. The decision was made to view the tax legislation as simply a recommendation and everyone conveniently ignored it.

However, this left the Treasury with an urgent need to start borrowing money to fund the war effort and the challenge was growing more daunting each day. Treasury funds were facing a virtual depletion in a matter of weeks and American banks were adamant that the Union raise taxes rather than expect more loans. Without new revenues, the Union was in peril and the urgency was significant. President Lincoln found it convenient to cede authority to Chase and plead ignorance whenever the issue of finance was raised.

An earlier gambit in late 1861 to raise $150 million through a consortium of banks had failed when debt instruments were only partially subscribed to and government gold supplies were totally inadequate to cover the mounting financial needs. Trapped without any viable traditional options, Lincoln and Chase broke with longstanding traditions and accepted the idea to simply print the money needed. Congress passed the Legal Tender Act of 1862, turned on the printing presses and cranked out $150 million that the government declared as legal tender for private and public debts. An important proviso of the new “green backs” was that they were not redeemable for gold or silver and not for payment of customs duty or federal bonds and notes.

Most estimates for the cost of the war (1861-65) range from $6.2 billion for the Union and at least $2 billion for the South. These little wars can become very expensive if allowed to continue … a lesson we have learned once again in the Middle East (estimated at $80 billion “tops” … to actual $3 trillion and growing). But if you own a printing press, no problem.

In 1894, Congress tried to introduce an income tax of 2 percent on earnings over $4,000, but the Supreme Court ruled it unconstitutional. Income tax would not become a regular part of everyday life until 1914. However, once it did, the battles over taxes versus government spending (and who should pay) has become de rigueur.

“Don’t tax you. Don’t tax me. Tax that guy behind the tree.”

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is president and CEO of Frito-Lay International [retired] and earlier served as chair and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].

For North, Tariffs and Taxes to Fund War Gave Way to Printing Money

Series 1861 $10 Demand Notes were placed into circulation in 1862 and were among the first of U.S. Federal banknotes ever issued. This sample, graded PMG Very Fine 30 EPQ, sold for $381,875 at an August 2014 Heritage auction.

By Jim O’Neal

A follow-up to my previous post:

The North had a tough time raising money for the war as well. After the defeat at Bull Run, they suffered a new crisis: the collapse of the bond market. Under the Constitution, the U.S. House of Representatives had responsibilities for originating all revenue measures and under pressure from Treasury Secretary Salmon P. Chase started considering legislation to raise taxes. Ways and Means started with tariffs, but a storm of criticism erupted since it would fall on the poor who needed tea, coffee, sugar and whiskey.

The next option was real estate via “direct taxes,” but Congress objected by noting that wealth in stocks and bonds was excluded, which meant the wealthy could escape paying any taxes quite easily. The more Congress debated the property tax the louder the opposition became. U.S. Rep. Schuyler Colfax from Indiana (a future Republican vice president) said, “I cannot go home and tell my constituents I voted for a bill that would allow a man, a millionaire, who has put his entire property in stock, to be exempt from taxation, while a farmer who lives by his side must pay a tax!” Colfax proposed a tax on stocks, bonds, mortgages and interest on money – and income earned from them. An income tax (inevitably).

U.S. Rep. Thomas Edwards from New Hampshire proposed calling the new tax something other than a direct tax. “Why should we not impose the burdens which are to fall on this country equally, in proportion to their ability to pay them?” An amendment was passed imposing a 3 percent tax on incomes over $600 per year. Someone quoted John Milton in Paradise Lost – he compared the taxpayer to Adam and Eve, driven by necessity “from our untaxed garden, to rely upon the sweat of our brow for support.” An income tax it was.

Secretary Chase was skeptical. He doubted merely labelling the income tax to be indirect would not make it constitutional. More importantly, there were no provisions made for a bureaucratic or enforcement mechanism. The income tax was not collectible. Since it was only a recommendation, he ignored it since he was far too busy with the need to borrow money for the war. As banks were all reluctant to loan a shaky government any money, he turned to a young Philadelphia banker, Jay Cooke, who had a scheme to market the government debt to the public, with Cooke taking a sales commission.

They finally got a consortium of 39 banks to loan $150 million in gold to be paid in three $50 million installments for sale to private individuals. The first $50 million barely sold and the second round failed completely, which killed the scheme. By Dec. 30, 1861, the banks were so stressed they were forced to stop honoring gold payments to their other customers, which was almost tantamount to becoming insolvent.

By the start of 1862, Chase realized he had grossly underestimated the costs of the war. His new estimate for year one was $530 million and the assumed revenues from taxes, tariffs and other schemes were falling short and the Treasury funds were almost depleted. New taxes or loans could not possibly fill the gap in time. With no other alternatives available, Chase and President Lincoln overcame their misgivings and endorsed the idea of simply printing money – $50 million in green paper money that the government would just declare to be valid legal tender, though not redeemable in gold or silver.

Then Congress passed the Legal Tender Act in February 1862, providing for $150 million in currency that became known as greenbacks – the first paper money ever issued by the U.S. government … a practice that continues today as the debt has exceeded $20 trillion and seems to be accelerating. I hope to be around to see how it ends.

Frenetic Times Created Old West Scandals, Hoaxes

A carte-de-visite depicting people gathered at Promontory Point, Utah, for the official ceremony completing the Transcontinental Railroad, sold for $1,750 at a May 2015 auction.

By Jim O’Neal

Undoubtedly, the greatest achievement in America during the 19th century was the completion of the Transcontinental Railroad in 1869. Virtually everyone knows at least part of the story when the two railroad lines were joined on May 10 and Central Pacific President Leland Stanford drove the 14-ounce “Last Spike” (later the Golden Spike) at Promontory Point in Utah. But fewer are aware the spike was dated May 8 – bad weather caused a two-day delay – or that he whiffed and missed it. Still, the telegraph operator sent the message “Done” to both East and West Coasts in the first mass media event in history.

This was a long-overdue project that had been mired in slavery politics when Congress was unable to reach agreement on how to maintain the status quo on new states ready to join the Union. The exception was the Republic of Texas, which was added as the 28th state on Dec. 29, 1845, the same day the annexation took place, bypassing the traditional territorial phase. It also included two unique provisions: Up to four additional states could be created within the territory and Texas did not have to cede its public lands to the federal government.

However, the growth of railroads in the existing states had been astonishing. Starting from a modest base of 762 miles in 1834, 10 years later it had grown to 4,311 track miles and by Jan. 1, 1864, to a staggering 33,860! In the 1850s, an average of 2,160 miles of new track were added every year, more than the rest of the world combined. Horace Greeley, founder of the New-York Tribune, put it in perspective after an overland trip from NYC to SFO. He wrote that a railroad to the Pacific would add more growth and wealth to the nation than acquiring a dozen Cubas!

Eventually, the discovery of gold in California and the rapid growth in population combined to create a booming economy that helped balance West-to-East traffic and improve two-way profitability. It was during the frenetic times after the railroad was completed that two men walked into the Bank of California in downtown San Francisco in early 1872 carrying a canvas bag they wanted to store in the bank’s vault. They claimed to be prospectors and the cashier demanded to inspect the contents.

He found hundreds of diamonds, emeralds, rubies and sapphires of unimaginable value. Bank President William Ralston, who had made a personal fortune mining Nevada’s Comstock Lode, was able to get them to identify themselves and get their version of this remarkable story. Thus began the saga of Philip Arnold and John Slack, who purported to be miners from Kentucky who had stumbled onto a hill where precious stones were protruding and abundantly scattered around the site. Ralston quickly formed a magnificently named company, the San Francisco and New York Mining and Commercial Company, and persuaded blue-chip investors to chip in $80,000 each for a total capitalization of $2 million.

When word got out, it created a diamond frenzy and even the great jeweler Charles Tiffany jumped in after the two men agreed to show two blindfolded diamond experts the site and they brought back another bag filled with diamonds and verified the area was saturated with precious stones. The two nervous prospectors agreed to sell their share for $300,000 each and a percentage of future profits. Naturally, it was an extremely clever scam that involved them “salting” the mine and concocting the elaborate hoax details.

Then, on Sept. 4, 1872, in the middle of the presidential election, headlines in The New York Sun were screaming THE KING OF FRAUDS… COLOSSAL BRIBERY… HOW SOME MEN GET FORTUNES. But they were talking about the biggest scandal of the 19th century: the Crédit Mobilier scam, which involved railroads, bogus companies, worthless bonds and bribes using stocks involving congressmen and even U.S. Vice President Schuyler Colfax.

It was that kind of year.

Railroads Helped America Claim Position as Most Powerful Nation on Earth

This 1876 “Lightning Express” broadside promoting the first through train service connecting the gold and silver fields of Virginia City, Nev., with San Francisco realized $13,145 at a November 2011 Heritage auction.

By Jim O’Neal

The first American railroad was only 13 miles of track and formally known as the Baltimore & Ohio Railroad. The “B&O Line” was started by a group of Baltimore merchants in 1828 and opened in 1830. At the time, turnpikes, rivers and canals were the primary modes of travel and transport.

By the beginning of the Civil War, railroads had become a major American industry, with numerous companies competing in a broad geographic area over 30,000 miles of track. The first railroad to link the East to the West was completed in 1869.

The Central Pacific Railroad had started in Sacramento and immediately had to confront the Sierra Nevada mountains … 7,000 feet up from the Sacramento Valley to the summit of the Sierras. Then there was the critical issue of labor since the mines were paying premium rates and workers were a scarce commodity.

A controversial decision was made to bring in Chinese laborers. Creative companies sprang up to organize these activities and, ultimately, 12,000 Chinese workers were digging and blasting through the mountains. For $30 a month, they had to feed themselves and live in makeshift camps alongside the tracks. When it snowed, they carved out entire galleries under the snow and lived there for weeks at a time.

The Union Pacific Railroad began in Omaha, Neb., and their laborers were primarily Irish, up to 10,000 at times, although a few Civil War veterans and other migrants were used. Brigham Young, one of the original incorporators of the Union Pacific, was instrumental in steering the railroad through Utah. This provided badly needed jobs for Europeans who had come to join the Latter-day Saints.

When the two railroads finally met, it was in Promontory, Utah, and the Promontory Spike was pounded into the ground on May 10, 1869.

Big projects, big money and big government always seem to include corruption. And so it was with the Transcontinental Railroad. During the 1872 reelection campaign of President Ulysses S. Grant, a major scandal erupted that ground Washington, D.C., to a standstill. Major members of the administration and other ranking politicians were charged with enriching themselves. By then, railroads had become a major force in politics and everyday life. To have the industry linked to wild accusations of bribery and corruption was a significant letdown.

The House of Representatives was forced to start hearings after scandals erupted in newspapers almost daily. They started in closed session, but were soon open as crowds of reporters and spectators overflowed the rooms. It was the center of attraction for the nation’s capital on a daily basis.

Eventually, they caught fewer than 25 politicians who had profited off the railroads, but a larger group was actually linked to the scandal, including cabinet members, Vice President Schuyler Colfax, Vice President-elect Henry Wilson, Speaker of the House James Blaine and Representative James Garfield, the future president. All were tainted with the same scandalous brush, although some were able to mitigate the charges and salvage their reputations.

In spite of the scandals, the nation obviously benefited significantly from railroads, primarily because of their influence on settlement patterns of those who ventured West. The large, empty space that was still generally called “The Great American Desert” flourished.

Wagon-train caravans were largely abandoned and huge areas of land were transformed into productive farms to help feed a growing country. Ranch land developed all the way to the Pacific Ocean. Everyone seemed to benefit with the exception of the Plains Indians, who were exploited as their lands, mineral rights and even their way of life were lost.

The United States was entering the Gilded Age and gearing up to leverage the enormous opportunities waiting in the 20th century. The American worker was the envy of the world as compulsory education created large pools of labor that were literate and competent. They were eager to hone their skills with the new technologies that Edison, Bell, Ford, et al. were churning out. When combined with its natural resources, rule of law and a Constitutional Democracy, America was poised to become the most powerful nation on Earth.

Railroads played an important role in that achievement.

Intelligent Collector blogger JIM O’NEAL is an avid collector and history buff. He is President and CEO of Frito-Lay International [retired] and earlier served as Chairman and CEO of PepsiCo Restaurants International [KFC Pizza Hut and Taco Bell].