Albert Gallatin

The arrangements being completed, Jefferson called Congress together in October, 1803, for a ratification of the treaty; the commissioners, by virtue of the authority granted them, had already guaranteed the advance by the Barings of ten million livres ($2,000,000). On October 25, 1803, Gallatin made a report to Congress on the state of the finances. It showed a reduction of the public debt in the two and one half years of his management, April 1, 1801, to September 30, 1803, of $12,702,404. The only question to be considered was whether any additional revenues were wanted to provide for the new debt which would result from the purchase of Louisiana.

The sum called for by treaty, fifteen millions, consisted of two items: 1st, $11,250,000 payable to the government of France in a stock bearing an interest of six per cent. payable in Europe, and the principal to be discharged at the Treasury of the United States; 2d, a sum which could not exceed, but might fall short of, $3,750,000, payable in specie at the Treasury of the United States to American citizens having claims of a certain description upon the government of France.

It is interesting here to note Mr. Gallatin's distinction between the place of payment of interest and of principal as a new departure in American finance. The principal and interest of foreign loans had up to that period been paid abroad. But a United States stock was an obligation of a different character and properly payable at home. In the large negotiations which Secretary Chase had in 1862 with the Treasury Note Committee of the Associated Banks,[13] this policy was matter of grave debate. The determined American pride of Mr. Chase prevailed, and both the principal and interest of the loans created were made payable at the Treasury of the United States. These may be small matters in their financial result, but are grave points in national policy.

The only financial legislation necessary to carry out the Louisiana purchase was a provision that $700,000 of the duties on merchandise and tonnage, a sum sufficient to pay the interest on the new debt, be added to the annual permanent appropriation for the sinking fund, making a sum of $8,000,000 in all.

The new debt would, Gallatin said, neither impede nor retard the payment of the principal of the old debt; and the fund would be sufficient, besides paying the interest on both, to discharge the principal of the old debt before the year 1818, and of the new, within one year and a half after that year. In this expectation he relied solely on the maintenance of the revenue at the amount of the year 1802, and in no way depended on its probable increase as a result of neutrality in the European war; nor on any augmentation by reason of increase of population or wealth, nor the effect which the opening of the Mississippi to free navigation might be expected to have on the sales of public lands and the general resources of the country.

In his report of December 9, 1805, Mr. Gallatin reviewed the results of his first four years of service, April 1, 1801, to March 31, 1805.

The Louisiana purchase and the admirable manner of its financial arrangement were important factors in Jefferson's reëlection. Mr. Gallatin was now sure of four years, at least, for the prosecution of his plan of redemption of the public debt. Estimating that with the increase of population at the rate of thirty-five per cent. in ten years, and the corresponding growth of the revenue, he could count upon a net annual surplus of $5,500,000, he now proposed to convert the several outstanding obligations into a six per cent. stock amounting, January 1, 1809, to less than forty millions of dollars, which the continued annual appropriation of $8,000,000 would, besides paying the interest on the Louisiana debt, reimburse within a period of less than seven years, or before the end of the year 1815. After that year no other incumbrance would remain on the revenue than the interest and reimbursement of the Louisiana stock, the last payment of which in the year 1821 would complete the final extinguishment of the public debt. The conversion act was passed February 1, 1807, and books were opened on July 1 following. On February 27, 1807, Mr. Gallatin made a special report on the state of the debt from 1801 to 1807, showing a diminution, notwithstanding the Louisiana purchase, of $14,260,000.

In the summer of 1807 war with England seemed inevitable. Gallatin had the satisfaction to report a full treasury,—the amount of specie October 7, 1807, reaching over eight and one half millions,—and an annual unappropriated surplus, which could be confidently relied upon, of at least three millions of dollars. On this subject his remarks in the light of subsequent history are of extreme interest. While refraining from any recommendations as to the application of this surplus, either to “measures of security and defense,” or to “internal improvements which, while increasing and diffusing the national wealth, will strengthen the bonds of union,” as “subjects which do not fall within the province of the Treasury Department,” he proceeds to consider the advantage of an accumulation in the Treasury. In this report he rises with easy flight far above the purely financial atmosphere into the higher plane of political economy.

He then enumerates the several branches of revenue which might be selected to provide for the interest of war loans and to cover deficiencies. First, a considerable increase of the duties on importations; and here he says:—

The Orders in Council of November 11, 1807, avowedly adopted to compel all nations to give up their maritime trade or accept it through Great Britain, reached Washington on December 18, 1807, and were immediately replied to by the United States by an embargo act on December 22. The history of the political effect of this measure is beyond the limits of this economic study, and will be touched upon in a later chapter, but the result of its application upon the Treasury falls within this analysis of the methods of Mr. Gallatin's administration.

On December 18 Gallatin wrote Jefferson that “in every point of view, privations, sufferings, revenue, effect on the enemy, politics at home, etc.,” he preferred “war to a permanent embargo;” nevertheless he was called upon to draft the bill. The correctness of Mr. Gallatin's prevision was soon apparent. In his report of December 10, 1808, he reviewed the general effect of the measure. "The embargo has brought into and kept in the United States almost all the floating property of the nation. And whilst the depreciated value of domestic product increases the difficulty of raising a considerable revenue by internal taxes, at no former time has there been so much specie, so much redundant unemployed capital in the country." Again stating his opinion that loans should be principally relied on in case of war, he closed with the following words: “The high price of public stocks (and indeed of all species of stocks), the reduction of the public debt, the unimpaired credit of the general government, and the large amount of existing bank stock in the United States [estimated by him at forty millions of dollars], leave no doubt of the practicability of obtaining the necessary loans on reasonable terms.”

From January 1, 1791, to January 1, 1808, the debt had fallen from $75,169,974 to $57,023,192; during the first ten years it had increased nearly seven millions of dollars, in the last eight it had been diminished more than twenty millions and Louisiana had been purchased. Thus closed the second term of Gallatin's service. Happen what might, the credit of the country could not be in a better situation to meet the exigencies of a war. A letter from Mr. Jefferson to Mr. Gallatin after the close of this administration, and Gallatin's reply, show the entire accord between them upon the one cardinal point of financial policy. Mr. Jefferson, October 11, 1809, wrote from Monticello, “I consider the fortunes of our republic as depending in an eminent degree on the extinction of the public debt before we engage in any war; because, that done, we shall have revenue enough to improve our country in peace and defend it in war, without incurring either new taxes or new loans.” And urging Gallatin to retain his post, he closed with the striking words, “I hope, then, you will abandon entirely the idea you expressed to me, and that you will consider the eight years to come as essential to your political career. I should certainly consider any earlier day of your retirement as the most inauspicious day our new government has ever seen.” To which Gallatin replied from Washington, on November 10:—

In his eight years of service under Jefferson, Gallatin had not found the Treasury Department a bed of roses. Under Madison there was an undue proportion of thorns.

It has been shown that the entire reliance of Gallatin for the expenses of government was on customs, tonnage dues, and land sales. The effect of the Embargo Act was soon felt in the falling off of importations, and consequently in the revenue from this source. Mr. Gallatin felt the strain in the spring of 1809; and on March 18, soon after Mr. Madison's inauguration, he gave notice to the commissioners of the sinking fund of a probable deficiency. In his annual report to Congress, December, 1809, he announced the expenses of government, exclusive of the payments on account of the principal of the debt, to have exceeded the actual receipts into the Treasury by a sum of near $1,300,000. For this deficiency, and the sum required for the sinking fund, Gallatin was authorized in May to borrow from the Bank of the United States $3,750,000 at six per cent., reimbursable on December 31, 1811. Of this sum only $2,750,000 was taken, the expenses having proved less than Mr. Gallatin had anticipated.

Madison called Congress together on November 1, 1811. The political tension was strong, and he was anxious to throw the responsibility of peace or war upon Congress. On November 22, 1811, Mr. Gallatin made his report on the finances and the public debt. It was, as usual, explicit and in no manner despondent. The actual receipts arising from revenue alone exceeded the current expenses, including the interest paid on the debt, by a sum of more than five and one half millions of dollars. The public debt on January 1, 1812, was $45,154,463. Since Gallatin took charge of the department, the United States had in ten years and nine months paid in full the purchase money of Louisiana, and increased its revenue nearly two millions of dollars. For eight years eight millions of dollars had been annually paid on account of the principal and interest of the debt. And as though intending to leave as the legacy of his service a lesson of financial policy, he said:—

From this plain declaration, it was evident that the sum necessary to pay interest on new loans, and provide for their redemption by the operation of the sinking fund, could not be obtained from the ordinary sources of revenue, and that resort must be had to extraordinary imposts or direct taxation. On January 10, 1812, in response to an inquiry of the Ways and Means Committee as to an increase of revenue in the event of a war, Gallatin submitted a project for war loans of ten millions a year, irredeemable for ten years. He pointed out that the government had never since its organization obtained considerable loans at six per cent. per annum, except from the Bank of the United States, and these, on a capital of seven millions, never amounted to seven millions in the whole. As the amount of prospective loans would naturally raise the amount of interest, it seemed prudent not to limit the rate of interest by law; ineligible as it seemed to leave that rate discretionary with the executive, it was preferable to leaving the public service unprovided for. For the same reason the loans should be made irredeemable for a term not less than ten years.

He then repeated a former suggestion, that “treasury notes,” bearing interest, might be issued, which would to that extent diminish the amount to be directly borrowed and also provide a part of the circulating medium, passing as bank notes; but their issue must be strictly limited to that amount at which they would circulate without depreciation. So long as the public credit is preserved and a sufficient revenue provided, he entertained no doubts of the possibility of procuring on loan the sums necessary to defray the extraordinary expenses of a war. He warned the committee, and through it Congress, that "no artificial provisions, no appropriations or investments of particular funds in certain persons, no nominal sinking fund, however constructed, will ever reduce a public debt unless the net annual revenue shall exceed the aggregate of the annual expenses, including the interest of the debt." He then submitted the following estimates:—

On March 14 Congress authorized a public loan of eleven millions of dollars, leaving it optional with the banks who subscribed to take stock, or to loan the money on special contract. The books were opened May 1 and 2, and in the two days $6,118,900 were subscribed: $4,190,000 by banks and $1,928,000 by individuals. The rate was six per cent. Mr. Gallatin reported this result, and proposed the issue of treasury notes for such amount as was desired within the limit of the loan to bear interest at five and two fifths per cent. a year, equal to a cent and a half per day on a hundred dollars' note; 2d, to be payable one year after date of issue; 3d, to be in the meanwhile receivable in payment of all duties, taxes, or debts due to the United States. The first of these ingenious qualifications was adopted by Mr. Chase in his issue of the seven-thirties.

On June 18 war was declared. On the 28th Mr. Gallatin submitted his estimate of receipts and expenditures for the year.

The issue of treasury notes was a novel experiment in the United States; but they were favorably received, and Mr. Gallatin calculated that the full amount authorized by law, $5,000,000, could be put in circulation during the year. The result of a loan seemed more doubtful. The old six per cents. and deferred stock had already fallen two or three per cent. below par. Mr. Gallatin again recommended the conversion of these securities into a new six per cent. stock, which would facilitate the new loan, and to prevent the necessity of applying, the same years, the large sums required in reimbursement of and purchase of the public debt.

On December 1 Mr. Gallatin made his last annual statement.

Treasury Report for Fiscal Year ending September 30, 1812.

The sums obtained or secured on loans during the year amounted to $13,100,209, and the secretary had the satisfaction to state “that notwithstanding the addition thus made to the public debt, and although a considerable portion has been remitted from England and brought to market in America, the public stocks (which had at first experienced a slight depression) have been for the last three months, and continue to be, at par.” His last report to the commissioners of the sinking fund of February 5, 1813, stated the usual application of $8,719,773 to the principal and interest of the debt.

In his report of December 1, 1812, Mr. Gallatin announced that a loan of twenty-one millions was needed for the service of 1813. Congress authorized a loan of $16,000,000, having six years to run, and an additional issue of $5,000,000 of treasury notes. Congress adjourned on March 4. Their procrastination and the pressing demands of the War Department nearly beggared the Treasury before the loans could be negotiated and covered into it.

On April 17 Mr. Gallatin wrote to the secretaries of the army and of the navy, and sent a copy of his letters to Mr. Madison with information that the loan had been filled, and the probable receipts of the Treasury from ordinary sources for the year ascertained. These he estimated at $9,300,000. Deducting the annual appropriation for interest on the debt, the sum expended to March 31, and the amount needed for the civil service, there remained for the War and Navy Departments together the sum of $18,720,000.

The loan of $16,000,000 was obtained in the following places:—

The history of this subscription is not without interest. The extremely small subscriptions in New England and in the Southern States can hardly be explained on any other theory than that of a belief in the collapse of the finances of the United States and a dissolution of the Union, for which the New England States had certainly been prepared by their governing minds.[14]

Books were opened on March 12 and 13, 1813, at Portsmouth, Salem, Boston, Providence, New York, Albany, Philadelphia, Baltimore, Washington, Richmond, and Charleston. In the two days the subscriptions only reached the sum of $3,956,400. They were again opened on the 25th of March at New York, Philadelphia, Baltimore, and Washington. The New England and Southern States seem to have been disregarded because of their indifference in the first instance. The books remained open from March 25 to 31, during which time there were received $1,881,800, a total of $5,838,200.

The pressure fell on the Middle States. In these, fortunately for the government, there were three great capitalists whose faith in the future prosperity of the United States was unimpaired. All were foreigners: David Parish and Stephen Girard in Philadelphia and John Jacob Astor in New York. These now came forward, no doubt at the instance of Mr. Gallatin, who was a personal friend of each. Parish and Girard offered on April 5 to take eight millions of the loan at the rate of eighty-eight dollars for a certificate of one hundred dollars bearing interest at six per cent., redeemable before December 31, 1825, they to receive one quarter of one per cent. commission on the amount accepted, and in case of a further loan for the service of the year 1813, to be placed on an equal footing with its takers. John Jacob Astor on the same day and at the same place proposed to take for himself and his friends the sum of two million and fifty-six thousand dollars of the loan on the same conditions. These offers were accepted and the loan was complete. An offer on behalf of the State of Pennsylvania to take one million of the loan was received too late. Altogether the offers amounted to about eighteen millions, or two millions more than the sum demanded. Mr. Gallatin, clinging to his old plan, endeavored to negotiate this loan at par, by offering a premium of a thirteen years' annuity of one per cent., but found it impracticable. Indeed, the system of annuity, general in England, has never found favor as an investment in the United States.

This was Mr. Gallatin's last financial transaction. A few weeks later, at his own request, he severed his actual connection with the Treasury Department and was on his way to St. Petersburg to secure the proffered mediation of the emperor of Russia between the United States and Great Britain.

Thus ended Mr. Gallatin's administration of the national finances. The hour for saving had passed. The imperious necessities of war take no heed of economic principles. The work which the secretary had done became as the rope of sand. It is not surprising that Gallatin wearied of his post; that he watched with vain regret and unavailing sighs the unavoidable increase of the national debt, and that he sought relief in other services where success was not so evanescent as in the Treasury Department. Before the close of Madison's administration, February 12, 1816, the public debt had run up to over one hundred and twenty-three millions,[15] and a sum equal to the entire amount of Mr. Gallatin's savings in two terms had been expended in one. But his work had not been in vain. The war was the crucial test of the soundness of his financial policy. The maxims which he announced, that debt can only be reduced by a surplus of revenue over expenditure, and the accompaniment of every loan by an appropriation for its extinguishment, became the fundamental principle of American finance. Mr. Gallatin was uniformly supported in it by Congress and public opinion. It was faithfully adhered to by his distinguished successors, Dallas and Crawford, and the impulse thus given continued through later administrations, until, in 1837, twenty years after the peace, the entire debt had been extinguished. All this without any other variation from Mr. Gallatin's original plan than an increase of the annual appropriation, to the sinking fund for its reimbursement, from eight to ten millions.[16]

The only charge which has ever been made against Gallatin's administration was, that he reduced the debt at the expense of the defenses and security of the country; but, to quote the words of one of his biographers:[17] “Mr. Gallatin had the sagacity to know that it [the redemption of the debt] would make but little difference in the degree of preparation of national defense and means of contest, for which it is impossible ever to obtain a considerable appropriation before the near approach of the danger that may render them necessary. He knew that the money thus well and wisely devoted to the payment of the debt was only rescued from a thousand purposes of extravagance and mal-application to which all our legislative bodies are so prone whenever they have control of surplus funds.” In our own day the irresistible temptations of a full treasury need no labored demonstration. Friend and foe drop political differences over the abundant fleshpot. The very thought of catering to such appetites disgusted Gallatin. To Jefferson he frankly said, in 1809, that while he did not pretend to step out of his own sphere and to control the internal management of other departments, yet he could not "consent to act the part of a mere financier, to become a contriver of taxes, a dealer of loans, a seeker of resources for the purpose of supporting useless baubles, of increasing the number of idle and dissipated members of the community, of fattening contractors, pursers, and agents, and of introducing in all its ramifications that system of patronage, corruption, and rottenness which you justly execrate.”

Receipts.

Expenditures.

Revenue

L'État c'est moi was the autocratic maxim of Louis Quatorze. An adherence to it cost the Bourbons their throne. Burke was more philosophical when he said, “The revenue of the State is the State.” Its imposition, its collection, and its application involve all the principles and all the powers of government, constitutional or extraordinary. It is the sole foundation of public credit, the sole support of the body politic, its life-blood in peace, its nerve in war. The “purse and the sword” are respectively the resource and defense of government and peoples, and they are interdependent powers. With the discovery of the sources of revenue, and the establishment of its currents, Mr. Gallatin, in the first eight years of his administration of the Treasury, had nothing to do. He had only to maintain those systems which Hamilton had devised, and which, wisely adapted to the growth of the country, proved amply adequate to the ordinary expenditures of the government and to the gradual extinguishment of the debt. The entire revenue included three distinct branches: imposts on importations and tonnage, internal revenue, sales of public lands. The duties on imports of foreign merchandise were alone sufficient to meet the current expenses of the various departments of administration on a peace establishment, and, increasing with the growth of the country, would prove ample in future. The gross amount of imports in the four years of Adams's administration, 1796-1800, was about three hundred and fourteen millions of dollars, and the customs yielded about thirty millions.

Mr. Gallatin's first annual report, submitted to the House of Representatives in December, 1801, exhibited his financial scheme. He recapitulated the various sources of permanent revenue. They were those of Hamilton's original tariff.

The revenues for the year ended September 30, 1801, were the basis of the estimates for future years. These were

But the close of the war in Europe sensibly diminished the enormous carrying trade which fell to the United States as neutrals, and, as a consequence, the revenue from that source; large quantities of goods were brought into the United States and reëxported to foreign ports under a system of debenture. The revenue on what Mr. Gallatin calls “this accidental commerce” was $1,200,000. He therefore estimated the permanent revenues at