Scott Reynolds Nelson: Lessons From America’s First Fiscal Cliff

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.

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....