Albert Gallatin
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