America's Fiscal Constitution (8 page)

Budget issues—especially opposition to Hamilton’s attitude toward spending, taxes, and debt—energized Jefferson’s coalition. Jefferson showed Madison his own calculations of national debt, divided by public revenue, for the United States and ten European countries. Great Britain, with debt at sixteen times the public revenue, had the greatest burden of debt in Europe. Jefferson estimated that US debt amounted to “about 20 years of revenue, and consequently that though the youngest nation in the world we are the most indebted nation also.”
⁴⁹
Jefferson’s comparison of total debt to total tax revenue available to service debt is similar to what is now known as the “debt coverage ratio,” one of the most significant tools used by modern banks and investors in analyzing the creditworthiness of any debtor.
⁵⁰
In September 1792 Jefferson complained to Washington: “this exactly marks the difference between Colonel Hamilton’s views and mine, that I would wish the debt be repaid tomorrow; he wishes it never to be paid, but always to be a thing wherewith to corrupt and manage the Legislature.”
⁵¹

Jefferson and Madison did not like Hamilton’s financial policies, but they seemed incapable of presenting a concrete alternative. That type of criticism angered Hamilton and his supporters. Hamilton protested to Washington that, for Jefferson, “creditor and enemy appear to be synonymous.”
⁵²
Everyone knew that the nation had financed its struggle for independence with debt, a stark reality that Hamilton characterized as “the price of liberty.” No one besides Hamilton offered a plan to pay that price. No one, that is, until Albert Gallatin, a Swiss immigrant who lived in a valley on the nation’s remote frontier.

G
ALLATIN
D
EVELOPS A
F
ISCAL
P
OLICY

Gallatin had emerged from his trading post in Western Pennsylvania as a spokesman for citizens opposing a tax on whiskey production. In 1791 Madison and Hamilton had persuaded Congress to impose that tax for the purpose of servicing state debts assumed by the federal government. Federal leaders received a petition in protest from settlers in the isolated valleys of Western Pennsylvania, a petition written using crisp logic rather than the hyperbolic rhetoric typical of the era. The petition acknowledged the need for federal revenues but argued against taxing “the common drink of a nation, [which,] instead of taxing the citizens in proportion to their property, falls as heavy on the poorest class as on the rich.”
⁵³
It also pointed out that the tax encouraged fraud, since whiskey stills could be easily hidden. The petition concluded by noting that many distillers did not have the cash to pay the tax; whiskey itself, not coins, often served as the region’s currency.

Federal leaders learned that the articulate brief against the whiskey tax had been written by Albert Gallatin. Just who was this Gallatin?

Many in Congress asked that question when thirty-three-year-old Gallatin appeared in the nation’s capital in Philadelphia as a new senator from Pennsylvania in 1793. Within days of joining the Senate, the frontiersman who spoke with a heavy French accent sponsored a resolution that passed unanimously. It called for Secretary Hamilton to report on the terms of all federal debt, to account for all debts repaid and those held by foreign creditors, and to list itemized categories of receipts and expenditures for each of the prior years.

On its face the resolution made sense, but Hamilton angrily complained that it would force him to hire an additional clerk at an expense of $850 to $900. He asserted that he was already working “to the utmost of my faculties and the injury of my heath,” and objected to “distressing calls for lengthy and complicated statements.”
⁵⁴
Hamilton’s supporters, including his mentor and Gallatin’s fellow Pennsylvania senator Robert Morris, asked the upstart immigrant to prove that he had been a citizen for nine years, a constitutional requirement for election to the Senate. Gallatin had enlisted briefly in a Revolutionary militia promptly after his arrival in 1780 and used much of his modest savings to procure military supplies. He believed that he had nothing to prove. The Senate disagreed and promptly ejected Gallatin, who returned to his store in Western
Pennsylvania. Hamilton ignored the earlier resolution, though Gallatin’s probing questions would soon return.

Gallatin’s erudition set him apart from his rough-edged Scotch-Irish neighbors, who nonetheless respected his principled independence. After leaving the Senate, the unpretentious Gallatin joined residents from nearby valleys in a meeting at a local ferry crossing. The organizers of the gathering intended to form a militia to resist the collection of the federal tax on whiskey distillers. Gallatin disagreed with their position and offered a motion to instead appoint a delegation to negotiate a satisfactory outcome. An angry citizen at the meeting posed a question designed to discredit Gallatin’s more conciliatory approach: Did he also object to the recent burning of a barn belonging to an arrogant and unpopular federal official? Gallatin replied matter-of-factly: “If you had burned him in it, it might have been something, but the barn had done no harm.”
⁵⁵
This disarming reply seemed to win over the majority, who approved Gallatin’s proposal.

Collection of the tax proved difficult, and Hamilton convinced President Washington to take aggressive action to discipline the Western Pennsylvanians. In October 1794 Henry Lee—father of the future rebel general Robert E. Lee—led thirteen thousand soldiers to Western Pennsylvania and brought around twenty alleged rebels back to Philadelphia in chains. Jefferson considered the military response in Pennsylvania as a sign that Hamilton had lost touch with reality: the “insurrection was announced . . . and armed against, but could never be found.”
⁵⁶
It was a pyrrhic victory at best. A generation of Western Pennsylvanians, who did not forget the strong-armed response to their protest, would make their region into a political stronghold for Jefferson’s party. Western Pennsylvanians elected Gallatin to the House of Representatives in 1794, less than a year after the Senate had expelled him. Soon most Americans learned much more about this remarkable Mr. Gallatin.

Gallatin was uniquely prepared for public financial leadership. Born into an elite merchant family in Geneva, he graduated with top grades from the city-state’s schools and colleges, then the finest in the world. Many in the Revolutionary generation admired from a distance the great Enlightenment philosophers Voltaire and Rousseau; Voltaire was a close friend of Gallatin’s family, and Rousseau was part of their social circle. Gallatin, who was orphaned at a young age, emigrated to the rebelling colonies after finishing his education in spite of being warned of the dangers there by Benjamin Franklin, who furnished a letter of reference for the young man at the request
of Gallatin’s prominent relatives. He improved his English while teaching French for a time at Harvard. Gallatin spoke calmly and politely, with an authority conveyed by his poised, penetrating gaze. Virginia’s most talented lawyer, John Marshall, offered to tutor him in law after they became acquainted on one of Gallatin’s journeys to purchase supplies for his isolated mountain store. Gallatin was always polite, and he brandished a wit that was ironic but never sarcastic. Though he spoke with an accent, he could write in clear and forceful English. He communicated even better in the language of numbers.

Gallatin shared Jefferson and Madison’s aversion to debt, though his attitude arose from a different personal experience. Jefferson never managed to escape the debts he inherited from his father and father-in-law, while Gallatin simply avoided personal debt. In Gallatin’s native Geneva, failure to pay debts resulted in the loss of the right to exercise the privileges of citizenship for both the debtor and his children.

Gallatin respected Jefferson and Madison despite having occasional differences of opinion with the two slave owners from Virginia. The Pennsylvanian joined a group advocating the abolition of slavery and supported Hamilton’s Bank of the United States, an institution that Madison and Jefferson had fought. Gallatin’s most severe criticism of Hamilton rested more on the sloppiness of cost controls and his accounting rather than on some grand philosophical difference. Hamilton left his post as secretary of the treasury in January 1795, shortly before Gallatin returned to Congress. Before his departure, the nation’s first treasury secretary had published projections showing how the federal debt might be paid off in thirty years. He also called for higher taxes while noting that Americans strongly supported debt reduction, though not always the taxes required to do it. Hamilton left the Treasury Department in order to practice law to support his family financially. He continued to advise his successor and others allied against Jefferson and Madison.

Gallatin correctly suspected that Hamilton had borrowed more than many realized. He did so largely to fund shortfalls that resulted principally from faulty estimates rather than deliberate policy.
⁵⁷
Days after Gallatin began his first term in the House of Representatives, the body unanimously passed his resolution to establish a committee to examine the federal finances and determine “whether further measures [were] necessary” to balance the budget and repay the debt.
⁵⁸
A few days later, the House asked this Committee on Ways and Means to report on the “Public Debt, revenues, and expenditures.”
⁵⁹
An ad hoc committee of this nature had
existed from time to time, but its responsibilities became more formal after Gallatin’s resolution.

The following year Jefferson requested that Gallatin “reduce this [budget] chaos to order” and “present us with a clear view of our finances.”
⁶⁰
The congressman personally reviewed the Treasury’s records and prepared the comprehensive “Sketch of the Finances of the United States,” a two-hundred-page treatise that included detailed appendices.

Gallatin’s “Sketch,” published in 1796, served as the foundation for the budget policies of Jefferson’s party. Higher interest payments, Gallatin argued, redistributed national wealth but did not increase it. A larger debt required interest payments paid for with either higher taxes or a reduction in other useful public spending. Moreover, federal debt reduced the amount of national savings that could be invested to build the new nation’s economy, including needed manufacturing. If the nation used import taxes to pay down interest-bearing debt, the interest rate on the remaining debt would decline while savings available for investment would increase.

He described lessons from other nations “enfeebled by a public debt. Spain . . . and . . . Holland . . . still feel the effects of the debts they began to contract two centuries ago, and their present political weakness stands as a monument of the unavoidable consequences of that fatal system. . . . France, where the public debt . . . has at last overwhelmed government itself . . . Taxes in Great Britain, would, if unencumbered [by interest,] discharge the yearly expenses even of the war in which she is now engaged.”
⁶¹

Madison and Jefferson exulted in the financial genius of their young partner. Madison described Gallatin to Jefferson as “an absolute treasure . . . sound in his principles, accurate in his calculations, and indefatigable in his researches.”
⁶²
At last they had found an ally who could translate into actual budget math the ideas they could only describe in prose. The rustic folk in the hill country of Pennsylvania had sent to Congress a man who, for almost two decades, knew the budget by memory and, after he became Jefferson’s secretary of treasury in 1801, would serve longer in that position than any other American. Gallatin attributed his rapid rise in influence, despite speaking “in a foreign language with a very bad pronunciation,” to “laborious investigation, habits of analysis, thorough knowledge of the subjects under discussion, and more extensive general information, due to an excellent early education.”
⁶³

Although Washington had come to believe that Jefferson treated Hamilton’s administration unfairly, he shared his concern about debt. The first president’s farewell address asked his fellow citizens to “discharge the debts,”
rather than “ungenerously throwing upon posterity the burdens which we ourselves ought to bear.”

Vice President John Adams narrowly defeated his old friend Jefferson in the election to succeed Washington. In his inaugural address, the nation’s second president warned that the “accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own.” Adams advocated federal spending only of an amount that could be supported “by immediate taxes, and as little as possible by loans.” A French insult to American pride soon tested that resolve.

When Adams took office in March 1797, both Europe and American policy toward various European nations were in disarray. The ruling French Directory lashed out at foreign and domestic enemies, funded its government by printing currency, and plundered other nations to supply needed revenue. France declared its freedom to attack ships trading with Great Britain, the dominant American trading partner. When the United States sent a delegation to France for the purpose of negotiating an end to attacks on American commercial vessels, French foreign minister Maurice Talleyrand conditioned negotiations on the payment of a bribe and demanded a $10 million loan to France.
⁶⁴

Americans were outraged by the requested bribe. Robert Goodloe Harper, a member of the Ways and Means Committee, expressed the public’s attitude: “Millions for defense, sir, but not one cent for tribute!” Congress increased military spending, principally for the construction of naval vessels. Gallatin thought it foolish to arm against a French invasion, and reasoned that “if the sums to be expended to build and maintain the frigates were applied to paying a part of our national debt, the payment would make us more respectable in the eyes of foreign nations than all the frigates we can build.” Like many in future generations, Gallatin was resigned to having his motives for opposing the military buildup questioned, but he pledged to persist even when “branded with the usual epithets[:] Jacobins and tools of foreign influence.”
⁶⁵