America's Fiscal Constitution (10 page)

Talleyrand believed that “speech was given to man to disguise his thoughts,” but Napoleon announced his decision unambiguously to Barbé-Marbois on April 11, 1803: “It is not only New Orleans that I cede; it is the whole colony, without reserve. I know the price of what I abandon. . . . I renounce it with the greatest regret; to attempt obstinately to retain it would be folly. . . . Have an interview this very day with Mr. Livingston.”
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Ambassador Livingston, a proud, nearly deaf New Yorker who had administered the first inaugural oath to President Washington, expressed interest in France’s offer while explaining that his instructions only
concerned New Orleans and perhaps the portion of Florida around Mobile Bay. Though the French offered 100 million francs, Livingston speculated that his country might not object to paying 20 million francs, or less than $4 million.
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Talleyrand, who had insinuated himself in the negotiations, rejected the low price, and Livingston responded that he would present the French proposal to Monroe, who had just arrived in Paris.

Livingston resented Monroe’s role in the negotiations, but nonetheless graciously invited the Virginian and his clerk to dine at his home in Paris. During dessert, they noticed someone watching them through the dining room window. Livingston recognized the man as the French finance minister and invited him inside. The anxious Barbé-Marbois told the Americans that Napoleon made decisions “like lightning” and warned them to conclude the deal quickly.

Napoleon did indeed act decisively when Barbé-Marbois advised him that the United States could not afford the price of 100 million francs. Napoleon cut his price for the half a billion acres of French territory to 50 million francs, in cash.
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It was, Talleyrand commented, history’s greatest drop in the value of real estate.

On April 24 Barbé-Marbois called on Monroe, who was lying on a couch incapacitated by back pain from the long voyage, and presented him with an agreement drafted by Napoleon himself. After brief negotiations, they settled on a price: a note for 60 million francs for all French territory in North America and an additional 20 million francs in cash earmarked to pay claims against France by influential merchants whose cargoes had been lost to French privateers.
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One can detect the hidden hand of Du Pont in the deal; the 50 million franc sum that Napoleon had “pulled out of the air” was the same amount that Jefferson had previously authorized. It was the same amount that bankers were offering to pay for a 60 million franc note payable by the United States over fifteen years.

Napoleon intended to transfer to the United States all of the territorial rights France had acquired from Spain, but he refused the American request for a more detailed description of the territory being sold. France had acquired the land by a secret treaty in 1800 in which Napoleon had made a promise that he had not yet kept. The transfer was also complicated by the fact that Spain had arguably ceded control to France of a region now called Texas, an area where Spanish citizens lived. Gallatin later discouraged Jefferson from trying to occupy that portion of the territory, “the miserable establishments of Santa Fe and San Antonio.”
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Aware that
Spain might still claim ownership of some of the Louisiana territory, Napoleon insisted on the equivalent of what lawyers call a quitclaim deed—a legal instrument conveying any rights of the holder without guarantying the legal validity of those rights.

Within weeks of signing the agreement with the United States, Napoleon declared war on Great Britain.

The Louisiana Purchase was paid for with a bond, at the time referred to as “stock,” for $11,250,000, accruing annual interest at 6 percent.
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The final principal payment was not due for fifteen years, which was consistent with the estimated date for the retirement of all other federal debt. The American assumption of private claims against France, valued at $3,750,000, seemed far more important to Livingston and his merchant friends in New York than it did to either France or the Jefferson administration.
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Gallatin could pay that amount out of cash balances.

Napoleon needed the cash immediately, so France sold the bond to a Dutch bank and its British partner, Baring Brothers. They paid 78.5 cents on each dollar of the principal amount of the American debt. Gallatin perceived something a bit strange about the transaction, since American 6 percent notes traded in European markets at a smaller discount. The Dutch bankers, in fact, repackaged the bonds in smaller denominations and sold them at face value, netting a large profit. History does not record all the details of the dealings between the bankers and French officials, but one might draw conclusions from the fact that the corrupt Talleyrand had investment bankers in place to purchase the debt for less than market value. Barbé-Marbois received cash from the sale in the form of a commission set by Napoleon.

The United States could not have afforded the Louisiana Purchase without incurring long-term debt; its entire annual budget, exclusive of interest, was only $4 million in 1802.
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The Louisiana Purchase doubled the nation’s territory, secured the nation’s borders, and allowed for future growth, all at the price of pennies an acre. Yet one aspect of the transaction troubled President Jefferson. He and Madison had opposed Hamilton’s use of powers not explicitly granted in the Constitution, which said nothing about buying vast new territories. Jefferson quickly drafted a constitutional amendment authorizing the purchase.

Bankers would not provide funds to France until the Senate ratified the treaty and Congress authorized the debt. When warned by Gallatin and Livingston that further delays could lead Spain to challenge the legality
of the sale, Jefferson dropped the idea of a constitutional amendment and characterized the Louisiana Purchase as an implied use of the power to make treaties and defend the nation.

Jefferson did, however, articulate a principle to justify this use of federal debt. Incurring debt to acquire territory directly benefited the next generation. As Jefferson explained in August 1803: “It is the case of a guardian, investing the money of his ward in purchasing an important adjacent territory; and saying to him when of age, I did this for your good. . . . I thought it my duty to risk myself for you.”
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Most Americans rejoiced at news of the Louisiana Purchase, though critics of the Jefferson administration decried the potential cost of protecting the new territories. Years later, the historian Henry Adams described public reaction: “the Federalist [anti-Administration] orators of July 4, 1803, set about their annual task of foreboding the ruin of society amid the cheers and congratulations of the happiest society the world then knew.”
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Adams’s grandfather, John Quincy Adams, was the only Federalist member of Congress from New England to vote for the ratification of the Louisiana Purchase, although he unsuccessfully fought to resolve the issue of the rights and future governance of the people residing in the new territory. Americans in the West celebrated the loudest. On hearing of the Louisiana Purchase a young Tennessee politician, Andrew Jackson, wrote to Jefferson about how it put smiles on the faces of everyone he saw. Even Virginian John Taylor, the most doctrinaire philosopher of limited government, defended the Louisiana Purchase as a means of providing an outlet for healthy growth away from cities.

Jefferson’s party crushed its opposition in the 1804 elections. In the president’s second term, his administration used budget surpluses to steadily pay down debt. Gallatin had warned Jefferson years earlier that if the federal government could not generate enough revenues from land sales and import taxes, their administration would have to cut spending, forestall plans to reduce unpopular taxes on whiskey, or delay planned annual reductions in the debt. He argued strenuously against delaying debt reduction, which would push debt onto “ensuing generations.”
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Fortunately, flourishing trade during the initial years of the Napoleonic Wars produced revenues from import taxation that consistently exceeded estimates. Warring nations refused to trade with one another, and US merchants and ships often filled the gap. The fledgling democracy became
one of the world’s leaders in maritime commerce. Import taxes averaged $12.2 million annually from 1801 through 1811, up sharply from the previous high of $7.5 million in 1797. The amount of outstanding debt fell from $86.4 million in 1803 to $45.2 million in 1811.
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Treasury Secretary Gallatin understood that the nation needed to conserve its credit capacity for use in an emergency. So, unlike the practice in more recent history, Gallatin used bonds with long maturities—even if that meant paying somewhat higher interest rates. Long maturities on federal debt gave the United States more flexibility in dealing with the unknown.

In 1806, after learning of a larger federal budget surplus than had been originally projected, the president urged Congress to begin considering investments for the “great purposes of the public education, roads, rivers, canals.”
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Jefferson asked Gallatin whether the country could afford to fund a great national university, though Gallatin had his own dreams for federal investments, with roads and canals topping the list. His store in Pennsylvania was located near the intersection of the headwaters of the Potomac and Ohio Rivers, so he appreciated the need for a road linking the markets east and west of the Appalachian Mountains.

Jefferson and Gallatin refrained from pushing for spending on projects they personally favored so long as they doubted the public’s willingness to pay for them with higher taxes. Instead, they endorsed various long-run goals—like funding for higher education and roads—without rushing to gain credit for implementing them until the Treasury paid down more debt. Gallatin began to devote half of the annual federal budget to a sinking fund or reserve to ensure debt reduction, a use of funds that decreased annual interest expense and preserved national credit for use in response to a serious threat.

One such threat loomed on the horizon. As France and Great Britain tightened trade embargoes against each other, they intensified their attacks on US ships.
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Napoleon seemed to back off when confronted with American protests, but Great Britain’s navy did not. Against Gallatin’s advice in 1807, Jefferson persuaded Congress to respond to these attacks with an embargo on trade with Great Britain. That trade embargo illustrates how the law of unintended consequences preys on minds distracted by lofty ideals. The embargo hurt the nation’s economy far worse than British naval attacks. It crippled port cities and caused a sharp drop in the import tax
revenues that sustained federal budgets. Gallatin used the Treasury’s cash reserves to cover the shortfall. Congress repealed the embargo on the last day of Jefferson’s presidency.

The naval budgets in Jefferson’s second term provide a valuable lesson on the perils of detaching defense spending from the practical requirements of a military mission. Everyone at the time recognized that the United States could not afford a navy capable of fully protecting its commerce against the massive British navy. Against Gallatin’s advice, Jefferson yielded to congressional pressure for a naval response by supporting construction of a fleet of small coastal gunboats, an affordable alternative to a full oceangoing fleet. Yet the gunboats proved useless, since they could be sunk by a single cannon shot from British warships.

Near the close of his presidency, Jefferson expressed to Gallatin his pride in how they had subordinated other policy goals—including ones they highly valued—in favor of debt reduction. He hoped that future federal leaders would follow their example and entertained little doubt that his friend James Madison, the country’s next president, would do so. Madison took the oath of office on March 4, 1809, almost twenty years after he and Jefferson had discussed the need for strong and practical principles to limit the burden of federal debt. Jefferson offered budget advice to the nation’s fourth president: “extinguishment of our public debt [would] open upon us the noblest application of revenue that has ever been exhibited by any nation.”
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Gallatin, who stayed on as secretary of the treasury, also counseled Madison that they should pay off more debt before participating in military combat. By early 1811 Gallatin battled Secretary of State Robert Smith and his brother, Maryland senator Samuel Smith, over the amount spent on the navy. The Smiths controlled Maryland’s electoral votes and pressed for higher naval spending to support a stronger response to attacks on US shipping and to bolster employment in their state’s shipyards. Gallatin grew weary of fighting the Smiths’ demands and offered to resign. Gallatin’s steady budget leadership had become invaluable, however. The president asked James Monroe, his former rival in his first congressional race and more recent competitor for succeeding Jefferson in the White House, to replace Robert Smith as secretary of state.

Monroe became convinced that the United States should retaliate against attacks on its shipping. Former President Jefferson remained skeptical. In April 1811 he expressed to Du Pont his “hopes that, if war be
avoided, Mr. Madison will be able to compleat the paiment of debt with his term.” Jefferson also shared with Du Pont his vision for future federal finances: “We are all the more reconciled to the tax on importations, because it falls exclusively on the rich. . . . Our revenues once liberated by the discharge of the public debt, and its surplus applied to canals, roads, schools, etc., . . . the farmer will see his government supported, his children educated, and the face of his country made a paradise by contributions of the rich alone. . . . The path we are now pursuing leads directly to this end.”
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