Chapter 6
SECRETARY OF THE TREASURY
_Funding_
The material comfort of every people depends more immediately upon the correct management of its finances than upon any other branch of government. _Haute finance_, to use a French expression for which there is no English equivalent, demands in its application the faculties of organization and administration in their highest degree. The relations of money to currency and credit, and their relations to industry and agriculture, or in modern phrase of capital to labor, fall within its scope. The history of France, the nation which has best understood and applied true principles of finance, supplies striking examples of the benefits a finance minister of the first order renders to his country, and the dangers of false theories. The marvelous restoration of its prosperity by the genius of Colbert, the ruin caused by the malign sciolism of Law, are familiar to all students of political economy. Nor has the United States been less favored. The names of Morris, Hamilton, Gallatin, and Chase shine with equal lustre.
Morris, the Financier of the Revolution, was called to the administration of the money department of the United States government when there was no money to administer. Before his appointment as "Financier" the expenses of the government, military and civil, had been met by expedients; by foreign loans, lotteries, and loan office certificates; finally by continental money, or, more properly speaking, bills of credit emitted by authority of Congress and made legal tender by joint action of Congress and the several States. The relation of coin to paper in this motley currency appears in the appendix to the "Journal of Congress" for the year 1778, when the government paid out in fourteen issues of paper currency, $62,154,842; in specie, $78,666; in French livres, $28,525.[10] The power of taxation was jealously withheld by the States, and Congress could not go beyond recommending to them to levy taxes for the withdrawal of the bills emitted by it for their quotas, _pari passu_ with their issue. When the entire scheme of paper money failed, the necessary supplies for the army were levied in kind. In the spring of 1781 the affairs of the Treasury Department were investigated by a committee of Congress, and an attempt was made to ascertain the precise condition of the public debt. The amount of foreign debt was approximately reached, but the record of the domestic debt was inextricably involved, and never definitely discovered. Morris soon brought order out of this chaos. His plan was to liquidate the public indebtedness in specie, and fund it in interest-bearing bonds. The Bank of North America was established, the notes of which were soon preferred to specie as a medium of exchange. Silver, then in general use as the measure of value, was adopted as the single standard. The weight and pureness of the dollar were fixed by law. The dollar was made the unit of account and payment, and subdivisions were made in a decimal ratio. This was the dollar of our fathers. Gouverneur Morris, the assistant of the Financier, suggested the decimal computation, and Jefferson the dollar as the unit of account and payment. The board of treasury, which for five years had administered the finances in a bungling way, was dissolved by Congress in the fall of 1781, and Morris was left in sole control. Semi-annual statements of the public indebtedness were now begun. The expenses of the government were steadily and inflexibly cut down to meet the diminishing income. A loan was negotiated in Holland, and, with the aid of Franklin, the amount of indebtedness to France was established.
The public debt on January 1, 1783, was $42,000,375, of which $7,885,088 was foreign, bearing four and five per cent. interest; and $34,115,290 was held at home at six per cent. The total amount of interest was $2,415,956. No means were provided for the payment of either principal or interest. In July of the previous year Morris urged the wisdom of funding the public debt, in a masterly letter to the president of Congress. On December 16 a sinking fund was provided for by a resolution, which, though inadequate to the purpose, was at least a declaration of principle. In February, 1784, Morris notified Congress of his intended retirement from office. He may justly be termed the father of the American system of finance. In his administration he inflexibly maintained the determination, with which he assumed the office, to apply the public funds to the purpose to which they were appropriated. He declared that he would "neither pay the interest of our debts out of the moneys which are called for to carry on the war, nor pay the expenses of the war from the funds which are called for to pay the interest of our debts." One new feature of Morris's administration was the beginning of the sale of public lands.
On the retirement of Mr. Morris, November, 1784, a new board of treasury was charged with the administration of the finances, and continued in control until September 30, 1788, when a committee, raised to examine into the affairs of the department, rendered a pitiful report of mismanagement for which the board had not the excuse of their predecessors during the war. They had only to observe the precepts which Morris had enunciated, and to follow the methods he had prescribed, with the aid of the assistants he had trained. But the taxes collected had not been covered into the Treasury by the receivers. Large sums advanced for secret service were not accounted for; and the entire system of responsibility had been disregarded. John Adams attributed all the distresses at this period to "a downright ignorance of the nature of coin, credit and circulation;" an ignorance not yet dispelled. More truly could he have said that our distresses arose from willful neglect of the principle of accountability in the public service.
The first Congress under the new Constitution met at New York on March 4, 1789, but it was not until the autumn that the executive administration of the government was organized by the creation of the three departments: State, Treasury, and War.
The bill establishing the Treasury Department passed Congress on September 2, 1789. Hamilton was appointed secretary by Washington on September 11. On September 21 the House directed the secretary to examine into and report a financial plan. On the assembling of Congress, June 14, 1790, Hamilton communicated to the House his first report, known as that on public credit. The boldness of Hamilton's plan startled and divided the country. Funding resolutions were introduced into the House. The first, relating to the foreign debt, passed unanimously; the second, providing for the liquidation of the domestic obligations, was sharply debated, but in the end Hamilton's scheme was adopted. The resolutions providing for the assumption of the state debts, which he embodied in his report, aroused an opposition still more formidable, and it was not until August 4 that by political machinery this part of his plan received the assent of Congress. To provide for the interest on the debt and the expenses of the government, the import and navigation duties were raised to yield the utmost revenue available; but, in the temper of Congress, the excise law was not pressed at this session. The secretary had securely laid the foundations of his policy. Time and sheer necessity would compel the completion of his work in essential accord with his original design. The President's message at the opening of the winter session added greatly to the prestige of Hamilton's policy by calling attention to the great prosperity of the country and the remarkable rise in public credit. The excise law, modified to apply to distilled spirits, passed the House in January. The principle of a direct tax was admitted. On December 14, 1790, in obedience to an order of the House requiring the secretary to report further provision for the public credit, Hamilton communicated his plans for a national bank. Next in order came the establishment of a national mint. Thus in two sessions of Congress, and in the space of little more than a year from the time when he took charge of the Treasury, Hamilton conceived and carried to successful conclusion an entire scheme of finance.
One more measure in the comprehensive system of public credit crowned the solid structure of which the funding of the debt was the cornerstone. This was the establishment of the sinking fund for the redemption of the debt. Hamilton conformed his plan to the maxim, which, to use his words, "has been supposed capable of giving immortality to credit, namely, that with the creation of debts should be incorporated the means of extinguishment, which are twofold. 1st. The establishing, at the time of contracting a debt, funds for the reimbursement of the principal, as well as for the payment of interest within a determinate period. 2d. The making it a part of the contract, that the fund so established shall be inviolably applied to the object." The ingenuity and skill with which this master of financial science managed the Treasury Department for more than five years need no word of comment. Nor do they fall within the scope of this outline of the features of his policy. His reports are the textbook of American political economy. Whoever would grasp its principles must seek them in this limpid source, and study the methods he applied to revenue and loans. Well might Webster say of him in lofty praise, "He smote the rock of national resources, and abundant streams of revenue gushed forth; he touched the dead corpse of Public Credit, and it sprung upon its feet."
On the resignation of Hamilton, January 31, 1795, Washington invited Wolcott, who was familiar with the views of Hamilton and on such intimate terms with him that he could always have his advice in any difficult emergency, to take the post. Wolcott had been connected with the department from its organization, first as auditor, afterwards as comptroller of the Treasury. He held the Treasury until nearly the end of Adams's administration. On November 8, 1800, upon the open breach between Mr. Adams and the Hamilton wing of the Federal party, Wolcott, whose sympathies were wholly with his old chief, tendered his resignation, to take effect at the close of the year. On December 31 Mr. Samuel Dexter was appointed to administer the department. But the days of the Federal party were now numbered: it fell of its own dissensions, "wounded in the house of its friends."
There is little in the administration of the finances by Wolcott to attract comment. He managed the details of the department with integrity and skill. On his retirement a committee of the House on the condition of the Treasury was appointed. No similar examination had been made since May 22, 1794. On January 28, 1801, Mr. Otis, chairman of the committee, submitted the results of the investigation in an unanimous report that the business of the Treasury Department had been conducted with regularity, fidelity, and a regard to economy; that the disbursements of money had always been made pursuant to law, and generally that the financial concerns of the country had been left by the late secretary in a state of good order and prosperity. During his six years of administration of the finances Wolcott negotiated six loans, amounting in all to $2,820,000. The emergencies were extraordinary,--the expenses of the suppression of the Whiskey Insurrection in 1794, and the sum required to effect a treaty of peace with Algiers in 1795. To fund these sums Mr. Wolcott had recourse to an expedient which marked an era in American finance. This was the creation of _new stock_, subscribed for at home. No loan had been previously placed by the government among its own citizens. Between 1795 and 1798, four and a half, five, and six per cent. stocks were created. In 1798 the condition of the country was embarrassing. There was a threatening prospect of war. Foreign loans were precarious and improvident; the market rate of interest was eight per cent. Under these circumstances an eight per cent. stock was created, not redeemable until 1809. An Act of March 3, 1795, provided for vesting in the sinking fund the surplus revenues of each year.
In the formation of the first Republican cabinet Mr. Gallatin was obviously Mr. Jefferson's first choice for the Treasury. The appointment was nevertheless attended with some difficulties of a political and party nature. The paramount importance of the department was a legacy of Hamilton's genius. Its possession was the Federalist stronghold, and the Senate, which held the confirming power, was still controlled by a Federalist majority. To them Mr. Gallatin was more obnoxious than any other of the Republican leaders. In the few days that he held a seat in the Senate (1793) he offended Hamilton, and aroused the hostility of the friends of the secretary by a call for information as to the condition of the Treasury. As member of Congress in 1796 he questioned Hamilton's policy, and during Adams's entire administration was a perpetual thorn in the sides of Hamilton's successors in the department. The day after his election, February 18, 1801, Mr. Jefferson communicated to Mr. Gallatin the names of the gentlemen he had already determined upon for his cabinet, and tendered him the Treasury. The only alternative was Madison; but he, with all his reputation as a statesman and party leader, was without skill as a financier, and in the debate on the Funding Bill in 1790 had shown his ignorance in the impracticability of his plans. If Jefferson ever entertained the thought of nominating Madison to the Treasury, political necessity absolutely forbade it. That necessity Mr. Gallatin, by his persistent assaults on the financial policy of the Federalists, had himself created, and he alone of the Republican leaders was competent to carry out the reforms in the administration of the government, and to contrive the consequent reduction in revenue and taxation, which were cardinal points of Republican policy. Public opinion had assigned Gallatin to the post, and the newspapers announced his nomination before Mr. Jefferson was elected, and before he had given any indication of his purpose. To his wife Mr. Gallatin expressed some doubt whether his abilities were equal to the office, and whether the Senate would confirm him, and said, certainly with sincerity, 'that he would not be sorry nor hurt in his feelings if his nomination should be rejected, for exclusively of the immense responsibility, labor, etc., attached to the intended office, another plan which would be much more agreeable to him and to her had been suggested, not by his political friends, but by his New York friends.' He was by no means comfortable in his finances, and he had already formed a plan of studying law and removing to New York. He had made up his mind to leave the western country, which would necessarily end his congressional career. His wife was forlorn in his absence, and suffered so many hardships in her isolated residence that he felt no reluctance to the change. To one of his wife's family he wrote at this time:--
"As a political situation, the place of secretary of the treasury is doubtless more eligible and congenial to my habits; but it is more laborious and responsible than any other, and the same industry which will be necessary to fulfill its duties, applied to another object, would at the end of two years have left me in the possession of a profession which I might have exercised either in Philadelphia or New York. But our plans are all liable to uncertainty, and I must now cheerfully undertake that which had never been the object of my ambition or wishes."
Well might he hesitate as he witnessed the distress which had overtaken the great party which for twelve years had held the posts of political honor. Fortunately, perhaps for himself and certainly for his party and the country, the proposition came at a time when he had definitively determined upon a change of career. His situation was difficult. The hostility of the Federal senators, and the great exertions which were being made to defeat the appointment, led him to the opinion that, if presented on March 4, it would be rejected. There was the alternative of delay until after that date, which would involve a postponement of the confirmation until the meeting of Congress in December, but there was no certainty that it would then be ratified. Meanwhile he would be compelled to remove to Washington at some sacrifice and expense. He therefore at first positively refused "to come in on any terms but a confirmation by the Senate first given." He was finally induced to comply with the general wish of his political friends. The appointment was withheld by the President that the feeling in the Senate might be judged from its action on the rest of the nominations submitted. They were all approved, and Mr. Dexter consented to hold over until his successor should be appointed. Thus Mr. Gallatin's convenience was entirely consulted. He remained in Washington a few days to confer with the President as to the general conduct of the administration, and on March 14 set out for Fayette to put his affairs in order and to bring his wife and family to Washington. On May 14 Jefferson wrote to Macon, "The arrival of Mr. Gallatin yesterday completed the organization of our administration."
Mr. Gallatin soon realized the magnitude of his task. He did nothing by halves. To whatever work he had to do, he brought the best of his faculty. No man ever better deserved the epithet of "thorough." He searched till he found the principle of every measure with which he had concern and understood every detail of its application. This perfect knowledge of every subject which he investigated was the secret of his political success. As a committee man, he was incomparable. No one could be better equipped for the direction of the Treasury Department than he, but he was not satisfied with direction; he would manage also; and he went to the work with untiring energy. A quarter of a century later he said of it, in a letter to his son, "To fill that office in the manner I did, and as it ought to be filled, is a most laborious task and labor of the most tedious kind. To fit myself for it, to be able to understand thoroughly, to embrace and control all its details, took from me, during the two first years I held it, every hour of the day and many of the night and had nearly brought on a pulmonary complaint. I filled the office twelve years and was fairly worn out."
Mr. Gallatin first drew public attention to his knowledge of finance in the Pennsylvania legislature. An extract from his memorandum of his three years' service gives the best account of this incident. In it appear the carefully matured convictions which he inflexibly maintained.
"The report of the Committee of Ways and Means of the session 1790-1791 (presented by Gurney, chairman) was entirely prepared by me, known to be so, and laid the foundation of my reputation. I was quite astonished at the general encomiums bestowed upon it, and was not at all aware that I had done so well. It was perspicuous and comprehensive; but I am confident that its true merit, and that which gained me the general confidence, was its being founded in strict justice without the slightest regard to party feelings or popular prejudices. The principles assumed, and which were carried into effect, were the immediate reimbursement and extinction of the state paper money, the immediate payment in specie of all the current expenses or warrants on the Treasury (the postponement and uncertainty of which had given rise to shameful and corrupt speculations), and provision for discharging, without defalcation, every debt and engagement previously recognized by the State. In conformity with this, the State paid to its creditors the difference between the nominal amount of the state debt assumed by the United States and the rate at which it was funded by the act of Congress.
"The proceeds of the public lands, together with the arrears, were the fund which not only discharged all the public debts, but left a large surplus. The apprehension that this would be squandered by the Legislature was the principal inducement for chartering the Bank of Pennsylvania with a capital of two millions of dollars, of which the State subscribed one half. This and similar subsequent investments enabled Pennsylvania to defray out of the dividends all the expenses of government without any direct tax during the forty ensuing years, and till the adoption of the system of internal improvement, which required new resources."
This report was printed in the Journal of the House, February 8, 1791. The next year he made a report on the same subject which was printed February 22, 1792.
But his equal grasp of larger subjects was shown in his sketch of the finances of the United States, which he published in November, 1796. It presents under three sections the revenues, the expenses, and the debts of the United States, each subdivided into special heads. The arguments are supported by elaborate tabular statements. No such exhaustive examination had been made of the state of the American finances. The one cardinal principle which he laid down was the extinguishment of debt. He severely criticised Hamilton's methods of funding, and outlined those which he himself later applied. He charged upon Hamilton direct violations of law in the application of money, borrowed as principal, to the payment of interest on that principal. The public funds he regarded as three in number: 1st, the sinking fund; 2d, the surplus fund; 3d, the general fund.
In July, 1800, Mr. Gallatin published a second pamphlet, "Views of the Public Debt, Receipts, and Expenditures of the United States," the object of the inquiry being to ascertain the result of the fiscal operations of the government under the Constitution. The entire field of American finance is examined from its beginning. He severely condemns the mode of assumption of the state debts in Hamilton's original plan, and no doubt his strictures are technically correct. The debts assumed for debtor States were not due by the United States, nor was there any moral reason for their assumption. But the assumption was sound financial policy, and all the cost to the nation was amply repaid by the order which their assumption drew out of chaos, and the vigor given to the general credit by the strengthening of that of its parts. The course of the Federalists and Republicans on this question shows that the former had at heart the welfare of all the States, while the latter confined their interest to their own body politic.
Had Mr. Gallatin never penned another line on finance, these two remarkable papers would place him in the first rank of economists and statisticians. There are no errors in his figures, no flaws in his reasoning, no faults in his deductions. In construction and detail, as parts of a complete financial system of administration, they are beyond criticism. Opinions may differ as to the ends sought, but not as to the means to those ends.
For a long period Mr. Gallatin found no more time for essays; he was now to apply his methods. These may be traced in his printed treasury reports, which are lucid and instructive. He was appointed to the Treasury on May 14, 1801, as appears by the official record in the State Department. Before he entered on the duties of the office he submitted to Mr. Jefferson, March 14, 1801, some rough sketches of the financial situation, and suggested the general outlines of his policy. He insisted upon a curtailment in the appropriations for the naval and military establishments, the only saving adequate to the repeal of all internal duties; and upon the discharge of the foreign debt within the period of its obligation. He estimated that the probable receipts and expenditures for the year 1801 would leave a surplus of more than two millions of dollars applicable to the redemption of the debt.
On taking personal charge of the Treasury Department, his first business was to get rid of the arrears of current business which had accumulated since the retirement of Wolcott; his next, to perfect the internal revenue system, so far as it could be remedied without new legislation. The entire summer of 1801 was passed in "arranging, or rather procuring correct statements amongst the Treasury documents," a task of such difficulty that he was unwilling, on November 15, to arrive at an estimate of the revenue within half a million, or to commit himself to any opinion as to the feasibility of abolishing the internal revenues. In his "notes" submitted to Jefferson upon the draft of his first message, there are several passages of interest which show Mr. Gallatin's logical habit of searching out economic causes. Under the head of finances, he remarks, "The revenue has increased more than in the same ratio with population: 1st, because our wealth has increased in a greater ratio than population; 2d, because the seaports and towns, which consume imported articles much more than the country, have increased in a greater proportion." The final paragraph in these "notes" is a synopsis of his entire scheme of administration.
"There is but one subject not mentioned in the message which I feel extremely anxious to see recommended. It is generally that Congress should adopt such measures as will effectually guard against misapplications of public moneys, by making specific appropriations whenever practicable; by providing against the application of moneys drawn from the Treasury under an appropriation to any other object or to any greater amount than that for which they have been drawn; by limiting discretionary power in the application of that money; whether by heads of department or by any other agents; and by rendering every person who receives public moneys from the Treasury as immediately, promptly, and effectually accountable to the accounting officer (the comptroller) as practicable. The great characteristic, the flagrant vice, of the late administration has been total disregard of laws, and application of public moneys by the Department to objects for which they were not appropriate."
Outlines for a system of specific appropriations were inclosed.
That the mission of Jefferson's administration was the reduction of the debt, Gallatin set forth in his next letter of November 16, 1801. "I am firmly of opinion that if the present administration and Congress do not take the most effective measures for that object, the debt will be entailed on us and the ensuing generations, together with all the systems which support it, and which it supports." On the other hand he says, "If this administration shall not reduce taxes, they never will be permanently reduced." To reduce both the debt and the taxes was as much a political as a financial problem. To solve it required the reduction to a minimum of the departments of War and Marine. But Mr. Jefferson was not a practical statesman. His individuality was too strong for much surrender of opinion. He stated the case very mildly when he wrote in his retirement that he sometimes differed in opinion from some of his friends, from those whose views were as "pure and as sound as his own." It was not his habit to consult his entire cabinet except on general measures. The heads of each department set their views before him separately. Under this system Mr. Gallatin was never able to realize that harmonious interdependence of departments and subordination of ways to means which were his ideal of cabinet administration.
The successful application of Mr. Gallatin's plan would have subordinated all the executive departments to the Treasury. The theory was perfect, but it took no account of the greed of office, the jealousies of friends, the opposition of enemies, and the unknown factor of foreign relations. A speck on the horizon would cloud the peaceful prospect, a hostile threat derange the intricate machinery by which the delicate financial balance was maintained. Mr. Gallatin was fast realizing the magnitude of his undertaking, in which he was greatly embarrassed by the difficulty of finding faithful examining clerks, on whose correctness and fidelity a just settlement of all accounts depends. The number of independent offices attached to the Treasury made the task still more arduous. He wrote to Jefferson at this time, "It will take me twelve months before I can thoroughly understand every detail of all these several offices. Current business and the more general and important duties of the office do not permit me to learn the lesser details, but incidentally and by degrees. Until I know them all I dare not touch the machine." One of the acquirements which he considered indispensable for a secretary of the treasury was a "thorough knowledge of book-keeping." The recollection of his persistent demands for information from Hamilton and Wolcott during his congressional career would have stung the conscience of an ordinary man. But Gallatin was not an ordinary man. He asked nothing of others which he himself was not willing to perform. His ideal was high, but he reached its summit. It seems almost as if, in his persistent demand that money accountability should be imposed by law upon the Treasury Department, he sought to set the measure of his own duty, while in the requirement that it should be extended to the other departments, he pledged himself to the perfect accomplishment of that duty in his own.
In his first report to Congress,[11] made December 18, 1801, Mr. Gallatin submitted his financial estimate for the year 1802.
REVENUE. EXPENDITURES.
Imposts $9,500,000 Int. on debts. $7,100,000 Lands } 450,000 Civil List 980,000 Postages } Army 1,420,000 Internal Rev. 650,000 Navy 1,100,000 ---------- ---------- $10,600,000 $10,600,000
Mr. Wolcott, in his last report to the Commissioners of the Sinking Fund, stated the amount in the Treasury to its credit at $500,718. Mr. Gallatin denied that there was any such surplus, but said that instead of a credit balance the treasury books showed a deficiency of $930,128 on the aggregate revenue from the establishment of the government to the close of the year 1799. Elliott, in his "Funding System," said concerning this once vexed controversy, that it was difficult to reconcile such a diversity of opinion on so intricate a subject; and concerning the official statements of Hamilton and Wolcott, that it was hardly to be credited that they were so superficial or imperfect. Mr. Gallatin himself furnishes the apology that the difference might arise from "entries made or omitted on erroneous principles." To the Federal financiers the palliation was as offensive as the charge, and rankled long and sore. If it were not possible, when Elliott made an examination, to arrive at the precise facts, it is certainly now a secret as secure from discovery as the lost sibylline leaves.
Mr. Gallatin stated the debt of the United States--
On January 1, 1801, at $80,161,207.60 On January 1, 1802, at 77,881,890.29 --------------- Reduction $2,279,317.31
This difference was the amount of principal paid during the year 1801, the result of the management of his predecessors. On December 18, 1801, Mr. Gallatin entered upon an examination of the time in which the total debt might be discharged, and showed that, by the annual application of $7,300,000 to the principal and interest the debt would in eight years, _i. e._ on January 1, 1810, be reduced (by the payment of $32,289,000 of the principal) to $45,592,739, and that the same annual sum of $7,300,000 would discharge the whole debt by the year 1817. The revenues of the Union he found sufficient to defray all the current expenses. In his report to Congress at the beginning of the session he designated this sum of $7,300,000 to be set aside from the revenues, and Congress gave the requisite authority. An extract from a tabular statement submitted to the House of Representatives, April 16, 1810, will show how nearly Mr. Gallatin approached the result at which he aimed, and the nature of the embarrassment he encountered on the path.
+--------------+--------------+---------------+-------------+ | Amount of | Payments | Debt | Annual | Years.| Public Debt | on | Contracted. | Increase. | | January 1st. | Principal. | | | ------+--------------+--------------+---------------+-------------+ 1802 |$80,712,632.25| $3,657,945.95| - | - | 1803 | 77,054,686.30| 5,627,565.42| $15,000,000* |$9,372,434.58| 1804 | 86,427,120.88| 4,114,970.38| - | - | 1805 | 82,312,150.50| 6,588,879.84| - | - | 1806 | 75,723,270.66| 6,504,872.02| - | - | 1807 | 69,218,398.64| 4,022,080.67| - | - | 1808 | 65,196,317.97| 8,173,125.88| - | - | 1809 | 57,023,192.09| 3,850,889.77| - | - | 1810 | 53,172,302.32| - | - | - | ------+--------------+--------------+---------------+-------------+ ----------------- Annual Decrease. ----------------- $3,657,948.95 - 4,114,970.38 6,588,879.84 6,504,872.02 4,022,080.67 8,173,125.88 3,850,889.77 - ----------------- * Louisiana purchase.
1802 $80,712,632.25 Decrease $36,912,764.51 1810 53,172,302.32 Increase 9,372,434.58 -------------- -------------- $27,540,329.93 Decrease in 8 yrs. $27,540,329.93
From this it appears that, notwithstanding the extraordinary increase of the principal by the amount of the Louisiana purchase, Mr. Gallatin contrived a reduction of $27,540,329. But if to this be added the true reduction for the year 1803, namely, the difference between the Louisiana debt, $15,000,000, and the increase for that year, by reason of that purchase, $9,372,434, say $6,627,565, the reduction is found to be, and but for that disturbing cause would have reached, $34,167,895, a sum exceeding by $1,878,895 that estimated by Mr. Gallatin in his report of 1801 as the amount of eight years' reduction, namely, $32,289,000.
The ways and means of this remarkable example of financial management appear in the following extracts from Elliott's synoptical statement (table given on page 194).
The purchase of Louisiana was the extraordinary financial measure of Jefferson's first presidential term. Though the new obligation for the consideration money, fifteen millions of dollars, was a large sum in proportion to the total existing debt of the United States, it did not in the least derange Gallatin's plan of funding and reduction, but was brought without friction within his general scheme. With the terms of the contract Gallatin had nothing to do. They were arranged by Livingston and Monroe, the American commissioners; the intervention of the houses of Hope and the Barings being a part of the understanding between the commissioners and the French government. These bankers engaged to make the money payments and take six per cent. stock of the United States at seventy-eight and one half cents on the dollar. With this price Mr. Gallatin does not seem to have been satisfied, though of course he interposed no objection to the terms; but to Jefferson he wrote, August 31, 1803, that the low price at which that stock had been sold, was "not ascribable to the state of public credit nor to any act of your administration, and particularly of the Treasury Department;" and he adds in a postscript, "at that period our threes were in England worth one per cent. more at market than the English."
RECEIPTS.
+----------------+---------------+-------------+ Four years | Customs. | Internal | Direct | ending | | Revenue. | Taxes. | December 31. | | | | ------------------+----------------+---------------+-------------+ Adams, 1800 | $30,347,093.62 | $2,808,382.37 | $734,223.97 | +--------------- +-------------- +------------ + Jefferson, 1804 | 44,766,997.61 | 1,936,053.30 | 862,986.46 | 1808 | 59,813,257.40 | 63,110.73 | 131,539.54 | +--------------- +-------------- +------------ + | 104,580,255.01 | 1,999,146.03 | 994,526.00 | ------------------+----------------+---------------+-------------+
+-------------+--------------+---------------+ Four years | Postage. | Public | Loans and | ending | | Lands. | Treasury | December 31. | | | Notes. | ------------------+-------------+--------------+---------------+ Adams, 1800 | $223,000.00 | $95,947.46 | $7,055,791.25 | +-------------+--------------+---------------+ Jefferson, 1804 | 157,427.26 | 1,009,556.56 | 25,255.00 | 1808 | 60,074.90 | 2,419,541.86 | 179,534.81 | +-------------+--------------+---------------+ | 217,502.10 | 3,429,098.42 | 205,089.81 | ------------------+-------------+--------------+---------------+
+--------------+----------------+---------------- Four years | Dividends | Miscellaneous. | Total. ending | and sales of | | December 31. | Bank Stock. | | ------------------+--------------+-------------- -+---------------- Adams, 1800 | $607,220.00 | $168,971.76 | $42,040,630.45 +--------------+----------------+---------------- Jefferson, 1804 | 1,416,360.00 | 672,148.72 | 50,846,784.91 1808 | -- | 85,782.03 | 62,758,841.27 +--------------+----------------+---------------- | 1,416,360.00 | 757,930.75 | 113,605,626.18 ------------------+--------------+----------------+----------------
EXPENDITURES.
+---------------+---------------+--------------+ Four years | Civil List. | Foreign |Miscellaneous.| ending | | Intercourse | | December 31. | | including | | | | Awards. | | ------------------+---------------+---------------+--------------+ Adams, 1800 | $2,329,433.08 | $1,793,879.57 | $621,633.37 | +---------------+---------------+--------------+ Jefferson, 1804 | 2,297,648.17 | 3,144,093.00 | 1,169,601.87 | 1808 | 2,616,772.77 | 5,441,669.24 | 1,721,876.87 | +---------------+---------------+--------------+ | 4,914,420.94 | 8,585,762.24 | 2,891,478.74 | ------------------+---------------+---------------+--------------+
+---------------+-------------+--------------+ Four years | Military | Pensions. | Indian | ending | Forts, etc. | | Department. | December 31. | | | | | | | | ------------------+---------------+-------------+--------------+ Adams, 1800 | $8,076,750.71 | $356,677.06 | $99,299.88 | +---------------+-------------+--------------+ Jefferson, 1804 | 4,549,572.11 | 301,968.66 | 279,500.00 | 1808 | 6,126,656.97 | 316,806.16 | 849,700.00 | +---------------+-------------+--------------+ | 10,676,229.08 | 618,774.82 | 1,129,200.00 | ------------------+---------------+-------------+--------------+
+----------------+----------------+---------------- Four years | Naval | Public Debt. | Total. ending | Establishment. | | December 31. | | | | | | ------------------+----------------+----------------+---------------- Adams, 1800 | $8,070,777.52 | $18,957,962.69 | $40,306,413.88 +----------------+----------------+---------------- Jefferson, 1804 | 5,432,049.15 | 32,258,658.68 | 49,433,091.64 1808 | 6,853,673.79 | 32,927,739.85 | 56,854,985.65 +----------------+----------------+---------------- | 12,285,722.94 | 65,186,398.53 | 106,288,077.29 ------------------+----------------+----------------+----------------
Adams--Receipts $42,040,630.45 Adams--Expenditures 40,306,413.88 -------------- Under Wolcott, Secretary 1,734,216.57
Jefferson--Receipts $113,605,626.18 Jefferson--Expenditures 106,288,077.29 -------------- Under Gallatin, Secretary 7,317,584.89[12]
[**Transcriber's Note: Some of the numbers in the above tables do not add up, but reflect the actual numbers given in the original document.]
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.
RECEIPTS.
Duties on tonnage and importation of foreign merchandise $45,174,837.22
From all other sources 5,492,629.82 -------------- $50,667,467.04 ==============
EXPENDITURES.
Civil list and miscellaneous $3,786,094.79
Intercourse with foreign nations 1,071,437.84
Military establishment and Indian department 4,405,192.26
Naval establishment 4,842,635.15
Interest on foreign debt 16,278,700.95
Reimbursement of debt from surplus revenue 19,281,446.57 -------------- $49,665,507.56
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.
"A previous accumulation of treasure in time of peace might in a great degree defray the extraordinary expenses of war and diminish the necessity of either loans or additional taxes. It would provide during periods of prosperity for those adverse events to which every nation is exposed, instead of increasing the burthens of the people at a time when they are least able to bear them, or of impairing, by anticipations, the resources of ensuing generations....
"That the revenue of the United States will in subsequent years be considerably impaired by a war neither can nor ought to be concealed. It is, on the contrary, necessary, in order to be prepared for the crisis, to take an early view of the subject, and to examine the resources which should be selected for supplying the deficiency and defraying the extraordinary expenses....
"Whether taxes should be raised to a greater amount or loans be altogether relied on for defraying the expenses of the war, is the next subject of consideration.
"Taxes are paid by the great mass of the citizens, and immediately affect almost every individual of the community. Loans are supplied by capital previously accumulated by a few individuals. In a country where the resources of individuals are not generally and materially affected by the war, it is practicable and wise to raise by taxes the greater part at least of the annual supplies. The credit of the nation may also from various circumstances be at times so far impaired as to have no resource but taxation. In both respects the situation of the United States is totally dissimilar....
"An addition to the debt is doubtless an evil, but experience having now shown with what rapid progress the revenue of the Union increases in time of peace, with what facility the debt, formerly contracted, has in a few years been reduced, a hope may confidently be entertained that all the evils of the war will be temporary and easily repaired, and that the return of peace will, without any effort, afford ample resources for reimbursing whatever may have been borrowed during the war."
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:--
"Without resorting to the example of other nations, experience has proven that this source of revenue is in the United States the most productive, the easiest to collect, and the least burthensome to the great mass of the people. 2d. Indirect taxes, however ineligible, will doubtless be cheerfully paid as _war taxes_, if necessary. 3d. Direct taxes are liable to a particular objection arising from unavoidable inequality produced by the general rule of the Constitution. Whatever differences may exist between the relative wealth and consequent ability of paying of the several States, still the tax must necessarily be raised in proportion to their relative population."
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."
The receipts into the Treasury during the year ending September, 1808, the last of Jefferson's administration, were $17,952,419.90
The disbursements during the same period were 12,635,275.46 ------------- Excess of receipts $5,317,144.44
And the specie in Treasury, October 1, 1808 $13,846,717.82
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:--
"The reduction of the public debt was certainly the principal object in bringing me into office, and our success in that respect has been due both to the joint and continued efforts of the several branches of government and to the prosperous situation of the country. I am sensible that the work cannot progress under adverse circumstances. If the United States shall be forced into a state of actual war, all the resources of the country must be called forth to make it efficient and new loans will undoubtedly be wanted. But whilst peace is preserved, the revenue will, at all events, be sufficient to pay the interest and to defray necessary expenses. I do not ask that in the present situation of our foreign relations the debt be reduced, but only that it shall not be increased so long as we are not at war."
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:--
"_The redemption of principal has been effected without the aid of any internal taxes, either direct or indirect, without any addition during the last seven years to the rate of duties on importations, which on the contrary have been impaired by the repeal of the duty on salt, and notwithstanding the great diminution of commerce during the last four years._ It therefore proves decisively the ability of the United States with their ordinary revenue to discharge, in ten years of peace, a debt of forty-two millions of dollars, a fact which considerably lessens the weight of the most formidable objection to which that revenue, depending almost solely on commerce, appears to be liable. In time of peace it is almost sufficient to defray the expenses of a war; in time of war it is hardly competent to support the expenses of a peace establishment. Sinking at once, under adverse circumstances, from fifteen to six or eight millions of dollars, it is only by a persevering application of the surplus which it affords us in years of prosperity, to the discharge of the debt, that a total change in the system of taxation or a perpetual accumulation of debt can be avoided. But if a similar application of such surplus be hereafter strictly adhered to, forty millions of debt, contracted during five or six years of war, may always, without any extraordinary exertions, be reimbursed in ten years of peace. This view of the subject at the present crisis appears necessary for the purpose of distinctly pointing out one of the principal resources within reach of the United States. But to be placed on a solid foundation, it requires the aid of a revenue sufficient at least to defray the ordinary expenses of government, and to pay the interest on the public debt, including that on new loans which may be authorized."
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:--
"The current or peace expenses have been estimated at nine millions of dollars. Supposing the debt contracted during the war not to exceed fifty millions and its annual interest to amount to three millions, the aggregate of the peace expenditure would be no more than twelve millions. And as the peace revenue of the United States may at the existing rate of duties be fairly estimated at fifteen millions, there would remain from the first outset a surplus of three millions applicable to the redemption of the debt. So far, therefore, as can be now foreseen, there is the strongest reason to believe that the debt thus contracted will be discharged with facility and as speedily as the terms of the loans will permit. Nor does any other plan in that respect appear necessary than to extend the application of the annual appropriation of eight millions (and which is amply sufficient for that purpose) to the payment of interest and reimbursement of the principal of the new debt.... If the national revenue exceeds the national expenditure, a simple appropriation for the payment of the principal of the debt and coextensive with the object is sufficient and will infallibly extinguish the debt. If the expense exceeds the revenue, the appropriation of any specific sum and the investment of the interest extinguished or of any other fund, will prove altogether nugatory; and the national debt will, notwithstanding that apparatus, be annually increased by an amount equal to the deficit in the revenue.... What appears to be of vital importance is that _the crisis_ should at once be met by the adoption of efficient measures, which will with certainty provide means commensurate with the expense, and, by _preserving unimpaired instead of abusing that public credit on which the public resources so eminently depend, will enable the United States to persevere in the contest until an honorable peace shall have been obtained_."
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.
EXPENDITURES IN ROUND NUMBERS.
Civil and miscellaneous $1,560,000 Military establishment, and Indian dept 12,800,000 Naval establishment 3,940,000 Public debt 8,000,000 ---------- $26,300,000 ==========
FUNDS PROVIDED.
Balance in Treasury, January 1 $2,000,000 Receipts from duties and sales of lands as by estimate of November 22, 1811 8,200,000 Loan authorized by law 11,000,000 Treasury notes as authorized by House of Representatives 5,000,000 ---------- $26,200,000
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.
RECEIPTS.
Customs, sales of lands, etc. $10,934,946.20 On account of loan of eleven millions,