Albert Gallatin: Fiscal Theories and Policies [Reprint 2022 ed.] 9781978815025

Citation preview

Albert

Gallatin

Albert Gallatin FISCAL

THEORIES

AND

POLICIES

by Alexander Balinky

R U T G E R S

U N I V E R S I T Y

New Brunswick, New Jersey, 1958

P R E S S

To

my Mother

whose more

appreciation

and

Father of education

made

this

and

possible

Copyright © 1958 by Rutgers, T h e State University Manufactured in the United States of America by H. Wolff, New York The Library of Congress has catalogued this book as follows: Balinky, Alexander. Albert Gallatin: fiscal theories and policies. New Brunswick, N. J., Rutgers University Press, 1958. viii, 280 p. 22 cm. 1. Gallatin, Albert, 1761-1849. HJ249.B3 Library of Congress

2. Finance, Public—U. S.—1801-1861. 336.73 58-9105

preface

T h i s book is devoted to an examination and evaluation of the fiscal theories and policies of Albert Gallatin, third Secretary of the Treasury of the United States. It is concerned with a subject which has, to this moment, received only casual and fragmentary treatment by both students of the financial history of the United States and Gallatin's biographers. T h e first biography of Gallatin was written by Henry Adams, the famous historian. Adams's Life of Albert Gallatin is, however, mainly a collection of Gallatin's correspondence with interpretative remarks by the author. Soon thereafter John Austin Stevens published his Albert Gallatin which is sometimes regarded as the official biography of Gallatin. In 1957, after a lapse of sixty-six years, Raymond Walters's Albert Gallatin: Jeffersonian Financier and Diplomat appeared. This is the best, most useful, and complete biography of an almost-forgotten American statesman; one whom history and Alexander Hamilton have tended to obscure. While,

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of necessity, financial and fiscal considerations are dealt with in all three biographies, no attempt has been made by any of them to deal systematically with the whole of Gallatin's fiscal system and its relationship to the political and economic necessities of the period. None of the biographers was or is an economist or a student of public finance or financial history. In order to clarify the difference between the approach taken in this volume and the existing works on Gallatin it may be useful to outline the organization of this book. T h e first half is largely concerned with the formulation of Gallatin's fiscal model. In this case our model is designed to portray the relationship between the political and economic objectives of the Jeffersonian administration and the fiscal means which Gallatin selected as instruments for their realization. It does not concern itself with what actually happened but rather with what the Republican party,* under Jefferson, Gallatin, and Madison, wanted to accomplish politically and economically and Gallatin's views on the fiscal policies which should be employed to gain those Republican ends. Part I is concerned with those variables which pertain to Republican political and economic objectives. Republican philosophy regarding the proper role of government, the place of industry and commerce versus agriculture, etc., belong in this part. Part II deals with Gallatin's views on government revenue, expenditures, and the public debt as means to the end as discussed in Part I. Economic models can be more or less complex depending upon the number of variables and relationships in the system. An effort has been made in this work to strike a balance between accuracy and completeness and the danger involved in • The term "Republican party" as used in this work should not be confused with the Republican party of today. It refers to the Anti-Federalists of the Gallatinian period, headed by Thomas Jefferson.

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the inclusion of marginal variables which tend to fog and confuse the main problems and issues. Such a balance is extremely difficult to attain and may easily leave some readers critical or dissatisfied. T h e author is aware that some readers will regard the model as too complex, that is, as containing more variables than necessary; while others might prefer the inclusion of certain material which the author regards as marginal or unimportant to the broad outlines of the story. T h e second half of this work examines and evaluates the consequences of the application of the Gallatinian fiscal system for the period 1801-1815. Here we observe the actual fiscal policies as executed or administered by Gallatin, their relationship to his fiscal model, and their consequences in terms of the economic and political necessities of the period. This is done in three stages. T h e first begins in 1801 and ends in 1808, encompassing the so-called "Golden Age of Republican Finance." T h e second stage begins in 1808 and terminates with the outbreak of the War of 1812; a period that might be termed the "Age of Indecision." T h e final stage covering the years 1812-1815 is called "The War Years." Thus in the first half I ask and answer the following question: What kind of fiscal system did Gallatin have or conceive and how did he plan to realize, through the aid of that fiscal system, the political and economic objectives of the Republican party? In the second half I ask and answer the corollary questions: What fiscal policies did Gallatin actually employ? T o what extent did those fiscal policies coincide with those in his model? T o what extent was he successful in realizing the objectives as set forth in his fiscal model? And, finally, to what extent did he realize those objectives as a direct consequence of his fiscal system? It was while in the process of searching for answers to the questions listed above that the principal hypothesis of this work made its appearance, evolved, and reached maturity. It is my contention in this book that, in the main, Gallatin

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subordinated fiscal considerations and principles to the political and economic (though nonfiscal) objectives of his party. T h e result of such subordination of what was necessary and sound financial policy to nonfiscal ends resulted in the ultimate collapse of Gallatin's fiscal system and its practical counterpart, his Treasury administration; with the very dangerous consequence of having nearly caused the complete financial ruin of the general government. As a by-product of this first and fundamental proposition, it is also my aim to show that the financial success realized by the Republican administration between 1801 and 1808, and for which Gallatin is usually credited, was not due to the logic or soundness of his fiscal scheme but resulted in spite of it and as a consequence of certain external conditions beyond his or his party's control. By the same token, beginning with 1808 and culminating in the War of 1812, when there occurred a change in those external conditions, the Republican administration suffered serious financial failures, from which Gallatin's fiscal system was unable to rescue it or the nation; and which it had made more severe by its patent unadaptability to the real needs of the nation at that stage of economic development. T h e application of this historical study to the current fiscal scene is, or should be, fairly obvious. T h e present administration has and continues to express sympathy with many of the Gallatinian fiscal and financial principles. Fiscally, Gallatin stood for the following: (1) (2) (3) (4)

Reduction in government spending A decrease in the size of the public debt Alleviation of the tax burden A balanced budget

A n examination of the 1953-1956 budget messages to Congress (as well as certain other fiscal pronouncements by the Eisenhower administration) leaves little doubt that ideally,

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and in principle, the fiscal principles as expounded in Gallatin's model still hold their appeal. But, as in the days of Gallatin, exogenous factors make the strict application of these fiscal policies impracticable if not impossible today. The New Deal heritage (as embodied, for example, in the Full Employment Act) domestically and the ever-present threat of Soviet imperialism internationally—not fiscal principles—have stood in the way of any serious efforts to cut government expenditures, reduce the size of the public debt, lighten the tax load, and balance the budget. The present administration often finds itself in conflict between the desire to pursue the so-called principles of "sound finance" (Gallatin's principles) and the economic (nonfiscal) and political necessities confronting the nation. It is the same conflict which plagued Jefferson, Gallatin, and Madison. Gallatin's problems, as well as his failures and the consequences suffered by this nation, may well serve as an object lesson for those in policy-making positions today. I am deeply in debt to the many people who have helped me toward the publication of this volume. My interest in this, general field stemmed from my good fortune in having been a graduate assistant to both the late Professor Joseph Schumpeter and Professor Abbot Payson Usher of Harvard in 1946. I am especially grateful to Professor Alexander Gershenkron of Harvard, whose unusually high standards played a significant part in providing the discipline required for scholarship. Professor J . K. Butters of the Harvard School of Business was very helpful in pointing out some of the inconsistencies in an early draft of this manuscript and as my teacher in public finance. My debt to Professor Alvin Hansen is unlimited. He not only read the manuscript twice—on two separate occasions— but was the first to urge me to publish the Gallatin manuscript. Professors Broadus Mitchell and Kenneth Kurihara of

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Rutgers University gave me every assistance possible in the preparation and evaluation of this work. During the years of work on this book I have had the privilege of working with the Gallatin Papers now in the possession of the New York Historical Society; for which I am indebted not only to the Gallatin family for making the material available but to Dr. Robert W. G. Vail, Director of the New York Historical Society, and Dr. Wayne Andrews, former curator of manuscripts at the Society, for their cooperation and assistance. I wish to express appreciation to William Sloane and Alan James of the Rutgers Press for the combination of instruction, patience, and kindness which they have shown me in our joint effort to turn a manuscript into a book. Publication would have been impossible without the generous grant provided by the Rutgers Research Council and its director, Dr. William Cole. Last—and, as the saying goes, far from least—is my unbounded appreciation to my wife whose determination, encouragement, and general wisdom made all this possible. Highland Park New Jersey ALEXANDER BALINKY

contents

PREFACE

vii

1

the logical choice

3

2

financial

5

the debt objective

4

meeting

5

meeting the debt objective:

means and political

revenue

68

the golden age: 1801-1808

7

the age of indecision

8

the war years

9

Gallatin's fiscal system: a critique

INDEX 273

considerations

expenditure

6

NOTES 247

27

29

the debt objective:

considerations

ends

89

128

164 215

part one INTRODUCTION

1 the logical choice

When Albert Gallatin became Secretary of the Treasury in 1801 he was confronted by a financial situation vastly different from that which had faced Alexander Hamilton some twelve years earlier. Hamilton had little with which to begin except a genius for finance and some familiarity with English precedent. There were no financial models which could be neatly fitted to the peculiar American circumstances. There were no established practices which Hamilton could criticize, modify or improve. Hamilton had to conceive, develop, and execute a positive financial program so that a new government could begin its life. He had to find sources for an initial revenue. There was a large, confused, and heterogeneous debt which stood in need of being funded. The Treasury had to be organized and financial procedure had to be established. Hamilton accomplished these tasks between 1789 and 1800.1 What was more, he did it in the face of strong Re-

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publican opposition. For twelve years Republicans fought both Federalist political and economic objectives and the fiscal means by which Hamilton sought to attain them. With the "Revolution of 1800" Republican objections to Hamilton's system of finance had reached their peak. The very genius that had enabled Hamilton to guide his party through turbulent financial waters had become the pivotal point of Republican criticism. By 1801 the Republican party came to power on the crest of an anti-Hamiltonian wave. Once in office, Gallatin must have realized that he was more fortunate than Hamilton had been. Financial machinery had already been established. Sources of revenue had been provided and funds were flowing into the Treasury. The debt had been funded and was being serviced. Gallatin's major task was to use the established financial machinery in the service of Republican political and economic ends. Who was this man that Jefferson selected as Secretary of the Treasury without a moment's hesitation? What talents did he bring with him to an office that could and did shape the destiny of a young Republic? What were the characteristics of the man whose fiscal principles remained the basis of American financial thought for over a century? 2 An examination of Gallatin's talents and qualifications for office has special significance for the purposes of this work. It tends to substantiate the proposition that the failure of Republican fiscal policy was not due primarily to Gallatin's ineptitude for the job. If it were possible to select one word by which to characterize the whole of Gallatin's personality, that word would be "temperate." It was a quality almost universally recognized by his contemporaries. During his long, varied, and difficult career as a public servant Gallatin almost never lost his temper. In the midst of a spirited debate on the floor of the House or while directing Treasury operations, Gallatin maintained a balanced and calm appearance. He would think

5

the logical choice

through a problem without emotion and fight for his position without indulging in personalities. As a matter of fact, he found it difficult to avoid balancing opposing views and seldom followed his own judgment once he was overruled. Gallatin was aware of his own moderation. In a letter to a friend he comments about himself: I am blessed with an even temper . . . it has not been altered by time or politics . . . I do not believe that I am very apt to be led away by passion, or to be blinded by enthusiasm and prejudice.3 Integrity was another of Gallatin's traits worthy of special mention. Toward the end of his financial career, Jefferson summed up Gallatin's contribution by saying: I believe Gallatin to be of pure integrity, and as zealously devoted to the liberties and interests of our country as its most affectionate native citizen.4 Gallatin had Jefferson's purity of motive without his guile. Honesty was so characteristic of his actions that, despite all the venom poured out against him by Federalists, and later by some within his own party, no one questioned his honesty as administrator of the Treasury. One reason was the fact that when Gallatin entered public life he soon abandoned his business interests and steadfastly refused to benefit from some very attractive propositions with which he was tempted by others. 5 In selecting a man for the Treasury Jefferson was particularly impressed with Gallatin's unique combination of party loyalty and independence of mind. Gallatin never hesitated to give Jefferson and Madison opinions contrary to theirs. He would fight stubbornly for his point of view until it was adopted or rejected but never at the expense of his party's interests.

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Personal qualities aside, Gallatin had two special talents which marked him as the natural choice for the post of Secretary of the Treasury. He had an "instinct for finance" and a great capacity for administration. Whatever the final evaluation of his fiscal policies may be, there is little doubt that he had a mind of rare power and one that was especially adapted to the problems of finance. His was a mind for which few principles were too broad or details too delicate. In this respect Pennsylvania Senator Jonathan Roberts characterized Gallatin as a truly great man, in quickness, versatility, and clearness, and profundity of conception.6 Gallatin's instinct for finance is equally recognized by his current admirers. Saul Padover observes: In the realm of money Gallatin was as smart as a Yankee trader and as tough as Hamilton . . . his eyes were those of a man who knew the value of money.7 Gallatin had a scientific rather than a broadly political mind. In that he differed from his illustrious predecessor. As a financial technician he may even have been abler than Hamilton. But it is doubtful whether Gallatin could have approached Hamilton in the matter of rearing a financial system from the foundation. Gallatin was conservative where Hamilton had been grandiose. He was stubbornly realistic where Hamilton had been visionary. If Gallatin excelled Hamilton it was as a safer custodian of the purse. With a strong passion for organization, unwilling to do anything by halves, Gallatin left a lasting impression as an excellent administrator. Stevens (Gallatin's biographer) assures us that no man deserves the epithet of "thorough" 8 more than Gallatin. And in order not to slight Gallatin's administrative ability, Henry Adams reminds his readers that

7

the logical choice while Gallatin's reputation rests on his eminence as a financier, he deserves to be remembered as one of the great American administrators.9

In addition to Gallatin's high qualifications for financial office, political considerations played a significant role. Within seven years of the time that Gallatin entered public life he was elected to the Congress of the United States. He rapidly became the acknowledged leader of his party, 10 and during his third term in the House of Representatives he was able to lead the Republican forces to victory. His ascendancy in the Republican party had been rapid despite the fact that he was born in Geneva, studied in France, arrived in the United States with no family or connections and never lost the traces of a foreign accent. By 1801 the Republican party had become a triumvirate composed of Jefferson, Madison, and Gallatin, with Gallatin representing the whole political influence of the great Middle states. This political proximity to Jefferson was an important factor in the selection of Gallatin. Jefferson believed in appointing Cabinet members from among those most intimately connected with him. He made this preference quite clear to Samuel Dexter, who was, in 1801, acting Secretary of the Treasury. In a letter to Dexter Jefferson explained that the geographic separation (putting it politely) between them had prevented Dexter from being in the "President's bosom confidence." 1 1 Gallatin's indispensability to his party rose out of his ability to combine financial competence with political adroitness. Jefferson, although politically Gallatin's superior, knew almost nothing about finance. Gallatin had ample opportunity prior to 1801 to impress Jefferson with his financial talents. Most political figures of that day were dazzled by the brilliance of Hamilton's genius. It had fallen to Gallatin to expose the flaws in Hamiltonian financial policy, as well as to

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GALLATIN

prescribe remedies, and lead the attack against it. As an opposition party, the Republicans needed a financial critic of high order and Gallatin served admirably in that role. Gallatin made Hamiltonian finance an issue in the "Revolution of 1800" and the effectiveness of his criticism was certainly a factor in the victory of that revolution. Actually, Jefferson had little choice, since the Republican party had not produced anyone but Gallatin who could cope with the financial problems and machinery already existing. As Henry Adams has put it: The whole political situation dictated the selection of Gallatin for the Treasury as distinctly as it did that of Jefferson for the Presidency.12 Adams was quite right. Just as Washington depended upon Hamilton, Jefferson would have been helpless without Gallatin; for what Hamilton was to Washington, Gallatin was to Jefferson with only such differences as circumstances required. Gallatin stepped into the Treasury with a considerable backlog of both financial and political experience.13 He was no mere novice with an untested talent. By the time of his appointment as Secretary of the Treasury, he had already formulated an entire system of fiscal thought. That system must stand on its own and cannot be excused by the inexperience of the man. T h e following sketch of Gallatin's financial and political experience is designed to support this proposition. Gallatin's apprenticeship in public service began on September 3, 1788, in Harrisburg, Pennsylvania.14 On that day he met with thirty-two other delegates at a convention called by the Pennsylvania legislature for the purpose of revising the state constitution. Gallatin displayed his anti-Federalist tendencies and his union with the Republican cause at that

p

the logical choice

convention by drafting a resolution to amend the proposed constitution so as to draw it away from its Federalist leanings. He fought for the inclusion of a greater measure of personal liberty and local democracy and against wealth as a condition of suffrage.15 Specifically, he insisted on having a large number of members in the House of Representatives on the assumption that the greater the number the closer Congressional policy would be to the will of the people.16 Gallatin took a clear political position with his first plunge into public life. The clarity of his stand helped rather than hindered his election to the Pennsylvania legislature. From 1790 until 1795 (except as broken by a temporary seat in the United States Senate) Gallatin served that body, devoting his energies almost exclusively to financial affairs.17 T h e scope of his interests and activities may be ascertained from the fact that during his first year he served on no less than twentyseven committees. The following year he extended his scope to thirty-five committees, preparing their reports and drawing up their bills. Gallatin's meticulous nature is evident from an examination of his records, which show that he kept a careful list of the names of the committees on which he served and the various items of business in which he was involved. 18 His principal concern, however, centered around the fiscal department and it was there that he laid the foundation for his financial reputation by his Ways and Means report of February 8, 1791.19 It was while in the service of the Pennsylvania legislature that Gallatin became embroiled in the Whisky Rebellion, gaining experience in the delicate relationship between politics and finance. As a financier he would have preferred to remain aloof from the entire controversy since he did not regard the Hamilton-imposed tax on whisky a matter of serious fiscal importance. But as the elected representative of a remote border county, where the tax was oppressive and where the spirit of rebellion ran high, a failure on his part to

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speak out against it would have been tantamount to political suicide. In characteristic fashion Gallatin tried to play a dual role. He tried to lead the attack against the whisky tax while attempting to restrain his own followers from overt acts and violence over this issue. Despite some serious political errors in judgment (outside the scope of this work), Gallatin's dual role probably produced the effect he sought. While his stock with the Federalists fell to its lowest point, his importance within the Republican party rose immeasurably. In 1792 Gallatin was elected to the Senate 20 but found that he could not retain his seat. Before his full term had expired his opponents succeeded in invoking the existing rule requiring a senator to be a citizen for at least nine years before the formation of the new government. Federalists were able to show that he had not been a citizen in 1780 and was therefore not entitled to remain in the Senate. 21 T h u s he remained in the Senate for only a short period—December 2, 1792, to February 28, 1794. T h e decision to remove Gallatin was purely technical and involved a strict party vote. He carefully recorded the count of the vote that unseated him. It had been 14 for expulsion and 12 against it.22 T h e fact that he had lost by only two votes indicated the growing strength of the Republicans in the Senate. Gallatin seems to have taken the expulsion lightly, 23 feeling that while he may have lost a seat in the Senate he had gained credit within his own party. As might well have been expected by those who knew him, Gallatin turned the Senate's attention to the fiscal concerns of government and the reforms that were needed. As a member of the Senate he succeeded in annoying Hamilton by constantly demanding unreasonably complex, detailed, and lengthy Treasury reports. Compliance with such demands

ii

the logical choice

would have forced Hamilton to abandon all his other administrative responsibilities in the Treasury. 24 O n March 4, 1795, Gallatin took office as a member of the federal House of Representatives and remained there until becoming Secretary of the Treasury in 1801. During those years he followed the pattern that he had established in the Pennsylvania legislature and the United States Senate. He confined himself mainly to financial matters and avoided discussion of foreign affairs as often as possible. As a member of the House of Representatives Gallatin set out to accomplish four fiscal objectives. His most strenuous effort was devoted to cutting down federal expenditures, especially on the army and navy. His second aim was to prevent any further increase in the public debt. As an aid in the realization of these two objectives, Gallatin insisted on greater Congressional supervision over government finance and pressed for a policy of specific appropriations. He was rarely directly successful in getting his policies adopted while a member of the House. T h e one outstanding exception was the creation of a Ways and Means Committee, which he conceived and forced through. During his years in the House he was not successful in blocking Hamilton's financial policies. His greatest value to the Republican party during that period lay in becoming its fiscal and administrative architect. As a theoretical guide to fiscal policy, Gallatin found time to write his Sketch of Finances 25 while serving in the House. T h i s was the statement of fiscal philosophy on which his financial principles and policies were based following his appointment to the Treasury. Bowers catches the precise import of this work when he says that it had aroused a more general public interest in financial matters and served to furnish a textbook for his (Gallatin's) party which was sadly in need of education.26

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Perhaps Gallatin's own words may shed further light on the reasons for his appointment as Secretary of the Treasury. Speaking of his career in the Pennsylvania legislature, he attributes his extraordinary influence in that body to my great industry and to the facility with which I could understand and carry on the current business.27 There is much truth in this observation since at least on financial matters the laboring oar was left almost exclusively to him. Since 1781, when Robert Morris left the Pennsylvania legislature, that body had had no member whose financial ability was first rate. It was only by chance that Gallatin was appointed as one of the members of the powerful Ways and Means Committee. But his talents quickly became apparent. His first concrete financial work was embodied in the 17901791 report of the Ways and Means Committee, a report which was very well received. Gallatin commented on its success with this admission: 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 and without the slightest regard to party feelings or prejudices.28 O n entering the federal House of Representatives Gallatin again found that the financial department within the Republican party was open. With a "thorough and extensive knowledge of political economy and especially finance," with the "patient energy of industry," with the "faculty of concentration on strong points of his own and on the weak points of his opponents," and with a "rich and ready eloquence" coupled with "admirable parliamentary dexterity" 2 9 Gallatin

the logical choice

was able to become not only the financial guide but the political leader of his party. He viewed the matter somewhat more modestly: The financial department in the House was quite vacant so far at least as the opposition was concerned. And having made myself complete master of the subject and occupied that field almost exclusively, it is not astonishing that my views should be adopted by the Republican Party and been acted upon when they came into power.30 It was for all of these reasons, then, that Gallatin was Jefferson's first and only choice for Secretary of the Treasury. And while, technically, Jefferson was to be responsible for the broad aspects of fiscal policy and Gallatin for its details and management, it did not work out that way. Gallatin was given and exercised a free hand with few limitations. He was entrusted with the responsibility of using the Treasury as a means of carrying into effect the main principles of the Republican party. And he was yet to learn—what Hamilton already knew—that his keenest anxieties would come not in his own department but in the effort to control the whole machinery and policy of government which is necessarily forced upon the holder of the purse. T h e overwhelming reasons for Jefferson's selection of Gallatin did not, however, ensure Senate ratification of the appointment. Leading Federalists were only too well aware of the role that Gallatin had played since 1791 in his opposition to Hamiltonian finance specifically and Federalism generally. Federalists opposed the appointment of Gallatin because of his role in the Whisky Rebellion. He was regarded as a prominent leader of the opposition to the excise law and therefore responsible for the troubles that had occurred. There is nothing surprising in this. Gallatin was unknown to the majority of the people, and with the quelling of the rebellion a victorious party in politics was hardly likely to do full justice to

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its opponent. Hamilton tried hard to find incriminating evidence against Gallatin on this matter. T h e absence of such evidence was not sufficient to remove from the popular Federalist mind the stigma attached to Gallatin's participation in this affair. T h e fact was, of course, that Gallatin was the one man in his party who tried to prevent any violence over the issue of the whisky tax. Federalists further opposed his appointment because of his success in forcing the creation of the Ways and Means Committee, which was to act as a "watchdog" over public funds. Such a committee might well limit the powers of the executive branch of the government and set about to investigate what had already been done by the Treasury during Hamilton's and Wolcott's administrations. Throughout his political career Gallatin's analysis and criticism of the Federalists had been so penetrating and incisive as to incur their bitter hostility.31 While in the House of Representatives he had become so unpopular with them that they tried to pass a resolution which would prevent anyone from speaking more than twice on any issue. This proposal was aimed directly at Gallatin and when it failed to pass they tried to have him expelled from the House on the issue of citizenship. By the time he entered the Senate Gallatin had become almost dreaded by the Federalists and had gained the special enmity of Hamilton. Federalist hate of Gallatin increased with their fear as they noticed the talent with which he led his party in financial matters. His criticisms were not easily refuted and his temperate tone and coolness and patience under fire or attack infuriated the Federalists even more. The result was that his opponents seized upon the more personal and superficial basis for criticism. They expressed their contemptuousness of Gallatin for being a foreigner and speaking with an accent. They claimed that anyone who was tainted with a French background must have radical tendencies.32

15

the logical choice

From the beginning of his political life Gallatin was aware of the strength of Federalist opposition to him. By 1798 the opposition had grown so pronounced that he was forced to conclude one of his Congressional speeches by saying: . . . notwithstanding all the violent charges and personal abuse which had been made against me, it would produce no difference in my manner of acting; neither prevent me from speaking against any measure which I thought injurious to the public interest.33 Writing to Thomas Clare on March 9, 1793, he calls his election to the Senate an appointment which has exceedingly mortified the highflyers.34 By 1801 both Gallatin and Jefferson held serious doubts about the probability of immediate Senate ratification. Nevertheless, on May 14, 1801, Jefferson officially appointed Gallatin as Secretary of the Treasury. 35 Because of the prejudice against Gallatin, the President had kept Samuel Dexter as acting head of the Treasury until he made his recess appointment of Gallatin, hoping that the following session of the Senate would be sufficiently Republican to confirm the appointment. Gallatin had a serious problem to cope with under the circumstances. He undoubtedly wanted the office despite his knowledge of the difficulties of the tasks that would confront him. He wrote to his sister-in-law: 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.36 On the other hand, a recess appointment forced him into certain personal inconveniences. He wrote of these to his wife:

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As I had foreseen, the greatest exertions are made to defeat the appointment of a Secretary of the Treasury, and I am still of the opinion that if presented the 4th of March, it will be rejected. If not presented, and an appointment by President, without Senate should afterward take place, it must be confirmed in December next, and although it is probable, yet it is not certain that it would then be ratified. This would be a serious inconvenience.37 In the final analysis, and under the pressure of his political friends, Gallatin accepted the recess appointment. O n January 6, 1802, he was nominated in the new Senate and twenty days later he was confirmed as Secretary of the Treasury. 88

2 financial means and political ends

Once in office, Gallatin could no longer remain mainly or merely critical. The challenge facing him was how to modify the existing financial machinery so as to bring it in line with Republican political and economic objectives. A meaningful evaluation of his success or failure in meeting that challenge must be made against a background of Republican political and economic philosophy, since the usefulness or validity of a given fiscal policy often depends upon the nonfiscal ends sought. It is important, for example, to know what Gallatin, and his party, believed regarding the question of peace and war, the government's role in economic life, or the utility of a navy, before launching into an examination of his fiscal system. For a Secretary of the Treasury during Gallatin's period was more than a mere technician. He had to be a statesman whose principal concern was the totality of government administration. With this in mind attention is briefly directed

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to an examination of the political and economic philosophy of the Republican party. 1 Politically, Republicanism stood for a reduction in the positive role played by the central government during the Federalist administration. According to Republican political ideals, the central government should limit its functions to three essential categories: the maintenance of domestic order, protection of its sovereignty from foreign aggression, and the enforcement of voluntary contracts. Stripped of Jefferson's notions of humanitarianism, the Republican view of the proper role of government was the acceptance of the "police role" assigned to government by classical theory. Jefferson, the principal philosopher and architect of Republicanism, envisaged an ideal society as a democracy of small landowning farmers. His was an agrarian faith and his appeal was to the landed classes. Jefferson's agrarian views were based on his belief that the true wealth of a nation lay in her soil and the products of that soil and that agriculture was, therefore, the most useful occupation of man. In his search for the ideal society Jefferson concluded that, of all possible occupations, agriculture develops and maintains in man those qualities which are the most desirable in a democracy. 2 But Jefferson was a pragmatic realist who never permitted his enthusiasm for an ideal to stand in the way of the conditions under which an approximation to that ideal could be realized. He admitted to himself, as well as to others, that the trend in the world was toward commerce and that the United States had to share in that modern source of wealth. 3 He explained his position on the question of agriculture versus commerce in a letter to a close friend as early as 1785: You ask what I think on the expediency of encouraging our States to be commercial? Were I to indulge in my own theory, I should wish them to practice neither commerce nor naviga-

ip

financial means and political

ends

tion, but to stand with respect to Europe on the footing of China . . . But this is theory only, and a theory which the servants of America are not at liberty to follow. Our people have a decided taste for navigation and commerce. They take this from their mother country; and their servants are in duty bound to calculate all their measures on this datum.4 [Italics mine. A.B.] Jefferson's compromise with commerce was limited. He understood and accepted the necessity of domestic trade, as a way by which agricultural surpluses could be marketed, but could never bring himself to accept the usefulness of the carrying trade. 6 So that when, on taking office as President, Jefferson promised to cherish commerce as a handmaiden of agriculture as a matter of principle and duty,8 he referred only to that commerce without which the surplus of agricultural produce could not be exchanged. Jefferson had two great fears regarding the growth and development of the second type of trade. His first was that the extension of the carrying trade would cause the conversion of the great agricultural country into a city o£ Amsterdam—a mere headquarters for carrying on the commerce of all nations with one another.7 Such an eventuality had its clear and undesirable implicacations for Jefferson. It would mean a departure from that occupation which he believed to be the most productive. 8 It would create a society less conducive to the practices of democracy, as he understood them; for Jefferson never fully accepted the Hamiltonian ideal of an alliance between government and the mercantile capitalists. T h e second consequence of an expanding carrying trade

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which Jefferson dreaded was the possibility of foreign entanglements to which such a trade might lead.9 He was convinced that foreign commerce would bring the United States into collision with others in every sea and will force the United States into every war of the European powers.10 Wars, and the entangling political and economic alliances which lead to them, were events which Jefferson felt an overwhelming passion to avoid. As a statesman, Jefferson's first approach to foreign policy was isolationism based on a separation of the United States from Europe. As a liberal, Jefferson was keenly sensitive to the insane waste, suffering, and danger to liberty that war involved. For these reasons alone his first policy was always that of taking a peaceful alternative. Practically, too, Jefferson would seek almost any honorable alternative to war. He calculated that while the United States was still young a period of peace would permit it to achieve the stability and wealth which were needed for its own prosperity and continued independence, as well as the strength necessary to resist future aggression. But, while Jefferson abhorred war as a moral scourge and opposed it as economically unsound, he was not an absolute pacifist,11 as is evidenced in his decision to use force against the Barbary States. The maintenance of peace had become one of Jefferson's principal aims, for as he wrote to General Thaddeus Kosciusko: Peace has been our principle, peace is our interest and peace has saved to the world this only planet of free and rational government now existing in it.12 Unwilling to consider disarmament as the way to peace, Jefferson selected the path of isolation. He relied on America's

2i

financial means and political

ends

geographic separation from Europe as a general preservative of peace. " O u r distance," he wrote, "enables us to pursue a course which the crowded situation of Europe renders impracticable there." 1 3 T o aid mere distance in preserving the peace, Jefferson wished his nation to do its share in keeping out of European affairs. Just a few months before an avalanche of unfortunate events descended on his administration and the nation, Jefferson wrote: I consider Europe, at present, as a world apart from us, about which it is improper for us even to form opinions.14 In the interest of peace he was even willing to curb the natural impulse to spread one's faith to others. He advised that America was not to engage in any crusades and was not to preach any new gospel of liberty to the oppressed of the world. If these two factors were insufficient to ensure the peace, Jefferson would add a third. He would permit limited commercial relations with other nations but as little political connection as possible. Jefferson was careful not to get into any entangling alliances even with friendly powers. H e was opposed to taking any side in the European war. 15 Where possible Jefferson preferred a system of not having treaties with nations if it could be avoided. H e believed that with nations, as with individuals, dealings may be carried on to mutual advantage where faith and good treatment prevailed. 16 He was willing to open the ports of the United States to all nations, without distinction, and believed in unmolested enjoyment of the seas as an inviolable right. 17 H e offered freedom for freedom but at the same time insisted on prohibition for prohibition in equal measure. When, despite all efforts, friction arose, Jefferson held that peaceable coercion was more likely to meet the desired results than war or threat of war. 1 8 " W e think," Jefferson wrote

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to a friend, "that peaceable means may be devised of keeping nations in the path of justice toward us by making justice their interest, and injury to react on themselves." 19 Underlying this next to the last resort was the assumption that by giving England a market for her goods and supplying France with ships, neither nation could afford to throw the United States onto the scale of the other. In a word, Jefferson's foreign policy was that of peace, commerce, and honest friendship with all nations; entangling alliances with none. Republican economic philosophy, then, called for limiting the government's role in making the United States a leading commercial and industrial power prematurely and preferred to place reliance on natural self-interest for the economic development of the nation and on common sense for the attainment of internal prosperity and order. When Jefferson spoke of "an equilibrium of agriculture, manufacturing and commerce" as essential to independence, he meant "manufacturing for our own consumption of what we raise, the raw materials, and no more; commerce sufficient to carry the surplus produce of agriculture, beyond our own consumption . . . and no more." These, he concluded, "are the true limits of manufacturing and commerce. T o go beyond them is to increase our dependence on foreign nations and our liability to war." 20 T o establish and follow the economic and political doctrines noted thus far was, according to Republican ideology, to make democratic government a success. T o defer the establishment of these doctrines was to run the risk of following the career of England into "debt, corruption and rottenness." 21 In broad outline Gallatin agreed with each of these doctrines. Any differences that arose were not of major rank and did not become significant until the latter part of his term in office as Secretary of the Treasury. Of all Republican apprehensions, Gallatin feared most the extension in the power of

25

financial means and political ends

the central government. His reaction against strong government (and, as Gallatin believed, its corollary, corruption) had a great deal to do with that general feeling of restlessness and revolt which had drawn him into political life initially. The root of the difficulty, as seen by Gallatin, was that the new Constitution had gone too far toward making the central government powerful. 22 There is little question but that Gallatin had an abiding distrust of strong government and a dread of the ambitions of men. In his inaugural address to the New York Historical Society, he warned that power is ever apt to corrupt those who are in possession of it.23 Had it been within Gallatin's power he would have circumscribed the authority and scope of each of the departments of the central government. He would have reduced the President to a mere figurehead, seriously limited the functions and power of the legislature, and restricted the judiciary to admiralty and interstate affairs. Unable to have his way, even during the period of Republican rule, Gallatin concentrated on trying to hold the three branches of the government to the limits of the Constitution and law. Although Gallatin did not leave us a treatise on his concepts of an ideal government, some picture of it may be pieced together from various fragments in his writings. Gallatin's ideal government would have shown the greatest respect for individual rights and permitted unlimited liberty of conscience.24 That government would have taken a simple, republican form based on frequent elections and universal suffrage. John A. Stevens, Gallatin's first biographer, holds that neither a President nor a Senate would have been included in Gallatin's ideal government, for they bore too close a resemblance to kings and lords to win his approval. 25 It is certainly true that Gallatin leaned toward a single house with temporary executives directly appointed by that house; or, if

24

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elected by the people, then for a short term of office, without renewal. He saw great virtue in having a large number of representatives in this single house on the supposition that the greater the number the closer would the policies of the house be to the will of the electorate.26 Gallatin's antipathy to strong government was so great that in his ideal he would even have reduced the power of the single legislature to its narrowest possible limit. In his own words: The legislature should be limited to its own sphere, imposing only necessary and salutory restraints, not harassing and disgusting individuals by multiplied innovations and regulations . . . of doubtful utility, and not interfering in the management of their own concerns, with the free action of men unless where it infringes the rights of others.27 Such a government would be a government without too much power, free from corruption, and without the capacity for violence, with only as much debt, navy, and taxes as minimally required. This, and only this, type of government, said Gallatin, would make the United States "a happy and not a powerful nation, or at least no way powerful except for selfdefense." 28 Unable to realize the ideal, Gallatin took to preventing an undue and unwarranted interference by government in the economic affairs of men. Like Jefferson, he opposed Federalist efforts at making the United States an industrial and commercial power; though Gallatin was neither so specific nor so articulate as Jefferson on this subject. Along with Jefferson, he shared the view that government prohibitions always did more mischief than was realized and that no statesman should hazard to regulate the affairs of individuals as if he could do it better than they. On foreign affairs Gallatin more than shared in Jefferson's isolationism. American independence, sovereignty and dig-

25

financial means and political ends

nity, said Gallatin, could best be protected by a careful use of A m e r i c a n resources for the purpose of self-development. T o be drawn into the political movements of Europe, and therefore into its wars, constituted, for Gallatin, the greatest single sin that any statesman could perpetrate against the A m e r i c a n people. Even more than Jefferson he placed great faith in the factor of America's geographic separation from the affairs and wars of Europe. 2 9 H e felt certain that unless brought into European affairs and wars by an ill-advised act on the part of the A m e r i c a n government the great distance that separated the two continents w o u l d enable the U n i t e d States to live in peace without an army or a navy. Federalist pressure for the expansion of the army and navy as instruments for the protection of A m e r i c a n honor, sovereignty, and trade could only result in foreign involvements and wars. It w o u l d be a case of borrowing a foreign institution unsuited to the needs of the U n i t e d States. 30 Repayment of the foreign debt, conjectured Gallatin, w o u l d impress other nations more than a display of military might. 3 1 Gallatin felt certain that unless the U n i t e d States sought out a war it w o u l d not find itself involved in one. W i t h Jefferson, he reasoned that France and England were equally anxious to keep the U n i t e d States neutral. 3 2 T h a t being the case, all the U n i t e d States had to do was to wait out the present European war; for f o l l o w i n g that war there w o u l d be a long period of peace d u r i n g w h i c h the U n i t e d States could conclude its program of b u i l d i n g for prosperity. 33 By 1801 Gallatin had become so certain that the United States w o u l d not get into a war that w h e n Jefferson asked h i m what reven u e problems might arise in the event of a war Gallatin replied that such a consequence need not even be calculated. 3 4 Fully aware of the fact that A m e r i c a n ships were being molested and A m e r i c a n sailors impressed—the price that America was paying for her commercial expansion—Gallatin took the position that for the time being it was just as well to

26

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ignore these violations of American neutrality. He would have found compensation for these foreign outrages in the domestic prosperity which the European war had made possible and in the thought that prosperity and peace were the conditions necessary for the United States ultimately to show the world that a new type of nation and a new type of power could exist.35 For the time being, Gallatin thought, the interests of the United States were too serious to be put to the hazard of war. Gallatin's optimism regarding domestic and foreign affairs seemed to be justified by 1801. For the first time no serious difficulties appeared to exist in America's foreign relations. Friendship with France had been restored without offending the British. T h e problem with the Barbary States remained but there was no domestic dissension over the issue. Only the problem of impressment continued, and that had become chronic. At home the irksome Alien and Sedition Laws were no longer in effect and all that remained unsatisfactory on the domestic scene (from Gallatin's point of view) was now going to be changed by a new administration. These were the circumstances and this was the political and economic philosophy with which Gallatin stepped into the Treasury. No analysis or evaluation of his fiscal policies can ignore the background against which they were applied or the economic and political ends which they were designed to serve. As succeeding chapters will make clear, many aspects of Gallatin's fiscal policies make sense, if at all, only in terms of the particular economic and political ends sought by the Republican administration.

part two GALLATIN'S FISCAL MODEL

3 the debt objective

For eleven years Gallatin had been building a set of financial and fiscal principles which he was now in a position to test. He was fully aware of the general principles which he had conceived and then strove to enforce. But nowhere in his writings or speeches, or in the literature about Gallatin, can one find a systematically integrated statement of the totality of his financial views as well as their relationship to Republican political and economic ends. The construction of such a picture is the task undertaken by Part II of this work. A general remark or two on the treatment of Gallatin's financial model appears desirable. Many of his fiscal doctrines appear almost foolishly erroneous when appraised against a background of current circumstances and modern economic theory. They appear far less so when regarded in the context of the conditions and objectives of Gallatin's society and the general level of development of economic doctrine. Throughout this work a consistent effort is made to evalu-

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ate Gallatin's financial principles and policies i n terms of f o u r criteria: 1. Do the premises reflect the realities of that period? 2. D o the conclusions follow logically from the premises? 3. D o the fiscal policies in question meet the requirements of the stated economic and political objectives? 4. Do the nonfiscal objectives (of the Republican administration) really meet the economic and political needs of the nation at that point in its development? T h e existence of a federal d e b t h a d b e e n the center of Gallatin's criticism of H a m i l t o n i a n finance. I n 1801 it b e c a m e the focal p o i n t of r e f o r m b y the R e p u b l i c a n administration. T h e s e factors alone m a r k it as the logical p o i n t of o r i g i n f r o m w h i c h to b e g i n a discussion of Gallatin's financial model. G a l l a t i n began his fiscal t h i n k i n g w i t h the proposition that a n a t i o n a l d e b t was an u n m i t i g a t e d evil. I n the words of H e n r y A d a m s , G a l l a t i n regarded the d e b t as the most potent source of all political evil and the most active centre of every social corruption. 1 H i s objections to the creation of a d e b t w e r e m a n y and varied. T o g e t h e r they constituted a f o r m i d a b l e set of

arguments

against its creation and expansion. First, there was Gallatin's c o n t e n t i o n that g o v e r n m e n t expenditures, especially

when based on borrowing,

constituted

destruction of n a t i o n a l capital. 2 H e derived this v i e w f r o m a division of p u b l i c e x p e n d i t u r e s i n t o three categories. 3 T h e first was e x p e n d i t u r e f o r war, w h i c h he regarded as totally destructive. T h e second was civil e x p e n d i t u r e , w h i c h Gallatin regarded as simply u n p r o d u c t i v e , c o n f e r r i n g n o

direct

benefit o n the people. It is i m p o r t a n t to n o t e here that Gallatin identified his concept of p r o d u c t i v i t y w i t h that of the early economists, w h o t h o u g h t of it o n l y in terms of the crea-

the debt objective tion of material goods. The third type of government expenditure related to internal improvements such as roads, canals, etc. This was the only category of expenditure that Gallatin regarded as productive. But, since the - government had not yet really entered this field, all that remained was the totally destructive or unproductive kind. Gallatin's greatest concern was the government's inclination toward borrowing in order to meet these destructive or unproductive expenditures. There were two related sins involved. The original sin was the very fact of government spending. T o the extent that such spending was financed out of current tax revenue there was some sobering effect. It tended to minimize the scale of expenditure and discourage totally unnecessary public ventures.4 A resort to borrowing compounded the evil. Gallatin feared that the ease with which government could ordinarily borrow would incite rather than check extravagant spending. He regarded the defraying of public expenditures by a loan as the mode of the spendthrift. He felt certain that any capital suddenly acquired by borrowing (like sudden wealth) would be squandered at the expense of society as a whole. It would be far better, he advised, to prevent government from borrowing so that the same capital could be productively employed in the private sector of the economy. In that way society could gain an addition to the national wealth and realize an increase in the capital of the community. 5 Gallatin derived these conclusions from premises and economic doctrines which are woefully outmoded by present standards. An attempt to evaluate Gallatin's position on the debt question in terms of current circumstances and modern economic theory must inevitably lead to an unfair and harsh judgment. In considering Gallatin the financier, it is unreasonable to expect his economic doctrines to be ahead of his time. As subsequent chapters will show, however, his fiscal

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policies were inadequate and often wrong even in terms of the necessities and circumstances of his own period. It is at this level that criticism should be aimed. A key to an understanding of Gallatin's attitude toward the debt is the fact that he makes no distinction between private and public borrowing. T o him the consequences of both are alike. In his writings he constantly shifts his discussion from private to public borrowing without acknowledging that fact. H e saw no importance in doing so because the results of borrowing were identical for him in either case. Gallatin would not agree with Hamilton that a national debt could be a national blessing.6 Hamilton saw nothing to fear from a reasonable amount of public indebtedness. On the contrary, he saw certain advantages to a properly funded debt. In support of his proposal to fund the earlier confused and heterogeneous debt, Hamilton argued that a soundly funded debt would act as an addition to the nation's capital at a time when it was badly needed. Gallatin looked at the act of borrowing, public or private, as neutral at best. He could not comprehend how a debt could "increase the existing amount of cultivated lands, of houses [or] of consumable commodities," for he concluded that a debt "makes not the smallest addition either to the wealth or to the annual labor of a nation." 7 In the case of private borrowing, Gallatin reasoned along the following lines: If borrowers get temporary command over capital, lenders lose command over the same amount. If the holder of debt sells his certificate, he acquires capital but does not create it, since the purchaser of the debt certificate must pay for it out of already existing capital. The same applied to public borrowing, as far as Gallatin could see, with only one difference. Taxes would become necessary in order to pay interest, a factor which would tend to limit capital accumulation. In his opposition to indebtedness Gallatin failed to distin-

35

the debt objective

guish between lenders who are typically capitalists and borrowers who are entrepreneurs, thus ignoring the functional relationship between them. He did not recognize that lenders can, if they will, allocate capital into productive channels through careful scrutiny of the purposes for which a loan is made. Gallatin was not even willing to concede Hamilton's point that a public debt could advantageously add to the circulating medium of the nation. 8 He maintained that, since the public debt was itself subject to market fluctuations, it would only serve to unstabilize the nation's circulating medium further. There were more than mere financial considerations in Gallatin's attitude toward borrowing. One feels a strong sense of Geneva's awe-inspiring morality throughout Gallatin's discussion of the debt question. He moralized against any form of expenditure—public or private—which had to be paid for out of sources other than current income or revenue. He could not envisage any debtor as being better off for his debt or having acquired it for any other reason than past extravagance. From this it was an easy step for Gallatin to conclude that a public debt could not contribute more to the welfare, happiness, or wealth of a nation than a private debt contributes to the opulence and prosperity of an individual. 9 In this view Gallatin was greatly influenced by his Geneva heritage. His notion that being in debt was far from a prerequisite for personal happiness came from certain earlier observations and from his reading of Montesquieu's The Spirit of Laws. He was inclined to agree with Montesquieu's observation that it is well to exclude from public life the children of those who have lived or died insolvent until they have discharged their fathers' debts. Gallatin was further convinced that this spirit should be practiced in public life as well, "lest a free nation fall into disgrace." 10 T h u s far attention has been directed at Gallatin's objections to the very principle of indebtedness. There were cer-

34

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GALLATIN

tain by-products which also concerned him. He was convinced, for instance, that an existing debt simply opens the floodgates to an even larger debt. He had no confidence that a government would retain its revenue system once it found a less painful method of meeting its expenditure needs. Borrowing would become a habit, laying the foundation for a national curse, a growing and permanent debt which would "be entailed on future generations with all the systems that support it and which it supports." 1 1 Gallatin felt that it was wrong to borrow on the future resources of a nation because posterity may have problems and dangers of its own to encounter. Gallatin certainly had Jefferson's wholehearted support on this matter, for Jefferson stated the case even more articulately than his Secretary of the Treasury. Writing to John Eppes in 1813, Jefferson expressed the belief that government has no right to perpetuate a debt beyond one generation because one generation has no right to bind the next. Perpetuating a debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.12 Both Gallatin and Jefferson ignored the fact that the greater part of the cost of (say) any war must be borne by the current generation, regardless of how such an expenditure is financed. T h e y made it appear as if one reckless generation could engage in an economically cost-free war by passing the burden on to a future generation through borrowing. T h e y paid far too little attention to the fact that, in any war, much of the real cost is the immediate reallocation of human and material resources toward war goods at the expense of consumers' goods. But this was only a minor argument against indebtedness; its effectiveness lay in the realm of the emotional. T h e theory was that a nation of parents could easily be convinced not to burden their children.

35

the debt objective

Beyond this question Gallatin saw in a growing debt a very special hazard. A n increasing debt would lead to greater interest payments, giving rise to two undesirable results. T h e payment of interest would have to be met out of a permanent tax which would fall upon the industrious to the advantage of the idle. Even worse, Gallatin feared that ultimately the government's annual interest payments would come to exceed the maximum that the government would have the power to raise in revenue. Such a danger would materialize only if Gallatin's earlier assumption was true. He simply took for granted that, once government began to borrow, it would lose all incentive to tax for any purpose—a position as extreme as it was unrealistic. There are few who would say that, all other things being equal, a government should borrow and borrow again as a permanent method of meeting its expenditures. Taken out of the context of a given economic, political, or military situation borrowing is not its own reward. T h e ceteris paribus clause may, however, be an all-important factor under certain historical conditions. Even Gallatin would have admitted, as he did at the time of the Louisiana Purchase, that certain events make government borrowing not only necessary but desirable. It is not the purpose here to recount the political and economic circumstances faced by the United States during the period that Gallatin formed his fiscal principles. It is merely necessary to point out the possibility that good statesmanship may have called for a policy of greater military or naval expenditures without undertaking the political hazards of raising the entire sum out of current taxes. Nowhere in his fiscal theory (except in the case of war) did Gallatin recognize the possible desirability of borrowing under any circumstances. Practical considerations forced him to accede to borrowing, and even defend that act, but he never incorporated that relativistic attitude toward the debt into his theoretical fiscal structure.

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Gallatin had political as well as economic and moral objections to public indebtedness. His first pertained to the composition of the creditor class. In the main, the debt was held by merchants, infant industrialists and bankers, the very classes of Federalists who opposed the Republican administration and its philosophy. T o place the "ownership" of the government in the hands of these classes would have meant a drastic departure from that political ideal for which the Republicans had fought and on the basis of which they believed they now had a mandate to govern. T o become indebted to the mercantile, industrial, and banking classes meant an association of government with the rule of the financiers, and all the vices that pertained to such an unholy alliance. This was precisely what Gallatin feared. Hamilton, in arguing the case for funding the debt, stressed the advantage that lay in attaching the creditors to the interests of the new government, thus helping to make it more stable. T o this Gallatin replied that creditors have only an artificial interest in the stability of government, and that the debt had brought on jealousies, apprehensions, and discontent, all of which were injurious to the domestic tranquillity and destructive of the unity of the nation.13 Gallatin and Jefferson both opposed an alliance with the moneyed interests, however indirect. They saw in that union the granting of special privilege, the negation of equal rights, the end of economic justice, and the further concentration of property in the hands of a small group. They feared, too, that a public debt would create a class of men whose influence on government would be such as to force that government into an ever-expanding sphere of activity and interference with the economic life of the nation. Stretching their fears to the utmost, both Gallatin and Jefferson visualized the final consequences of a heavy public debt as being the cause for internal collapse and revolution.

57

the debt

objective

From his study of the affairs of other nations Gallatin was convinced that England, France, and Spain had each been enfeebled by an overburdening debt 14 and that a heavy debt had been the proximate cause of the French Revolution. 15 In complete agreement, Jefferson regarded debt and revolution as cause and effect. He reasoned that a government which was greatly in debt was no longer free, but was a pawn in the hands of its creditors. T o borrow, to be obliged to repay on demand, to be forced to reborrow, meant the loss of freedom and the acceptance of servitude. T o permit a debt to grow meant paying progressively higher interest charges and that implied higher taxes and a reduction in the standard of living of the people. It meant "coddling the bankers" and "robbing the toilers." 16 He believed this so passionately that he regarded the public debt as a "moral canker" 17 which, unless avoided, would commit the nation to "the English career of debt, corruption and rottenness, closing with revolution." 18 Was there any reason for such grave concern? Despite a policy of political isolationism, Jefferson and Gallatin had not yet learned to disentangle themselves from European affairs. Unconsciously they observed European policies and their consequences and applied them to the unique circumstances of the United States. Undeniably the United States had serious problems but they were not those of Europe. A new government, lacking financial experience, had to undergo relatively heavy initial outlays, some of which it was not feasible to meet out of current revenue. But the burden of the debt was far from crushing. After funding, the per capita debt of the United States stood at $20 with per capita interest payments of $1 annually. Contrast that with the British debt of that same year, which amounted to a per capita figure of $200 and required an annual per capita payment of $8 in interest.19 Even if what Jefferson said was true, the United States had a long distance to travel before facing the same catastrophe.

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