Chapter VI: Secretary of the Treasury (2)

"_The redemption of principal has been effected without the aid of
any internal taxes, either direct or indirect, without any addition
during the last seven years to the rate of duties on importations,
which on the contrary have been impaired by the repeal of the duty
on salt, and notwithstanding the great diminution of commerce
during the last four years._ It therefore proves decisively the
ability of the United States with their ordinary revenue to
discharge, in ten years of peace, a debt of forty-two millions of
dollars, a fact which considerably lessens the weight of the most
formidable objection to which that revenue, depending almost solely
on commerce, appears to be liable. In time of peace it is almost
sufficient to defray the expenses of a war; in time of war it is
hardly competent to support the expenses of a peace establishment.
Sinking at once, under adverse circumstances, from fifteen to six
or eight millions of dollars, it is only by a persevering
application of the surplus which it affords us in years of
prosperity, to the discharge of the debt, that a total change in
the system of taxation or a perpetual accumulation of debt can be
avoided. But if a similar application of such surplus be hereafter
strictly adhered to, forty millions of debt, contracted during five
or six years of war, may always, without any extraordinary
exertions, be reimbursed in ten years of peace. This view of the
subject at the present crisis appears necessary for the purpose of
distinctly pointing out one of the principal resources within reach
of the United States. But to be placed on a solid foundation, it
requires the aid of a revenue sufficient at least to defray the
ordinary expenses of government, and to pay the interest on the
public debt, including that on new loans which may be authorized."

From this plain declaration, it was evident that the sum necessary to pay interest on new loans, and provide for their redemption by the operation of the sinking fund, could not be obtained from the ordinary sources of revenue, and that resort must be had to extraordinary imposts or direct taxation. On January 10, 1812, in response to an inquiry of the Ways and Means Committee as to an increase of revenue in _the event of a war_, Gallatin submitted a project for war loans of ten millions a year, irredeemable for ten years. He pointed out that the government had never since its organization obtained considerable loans at six per cent. per annum, except from the Bank of the United States, and these, on a capital of seven millions, never amounted to seven millions in the whole. As the amount of prospective loans would naturally raise the amount of interest, it seemed prudent not to limit the rate of interest by law; ineligible as it seemed to leave that rate discretionary with the executive, it was preferable to leaving the public service unprovided for. For the same reason the loans should be made irredeemable for a term not less than ten years.

He then repeated a former suggestion, that "treasury notes," bearing interest, might be issued, which would to that extent diminish the amount to be directly borrowed and also provide a part of the circulating medium, passing as bank notes; but their issue must be strictly limited to that amount at which they would circulate without depreciation. So long as the public credit is preserved and a sufficient revenue provided, he entertained no doubts of the possibility of procuring on loan the sums necessary to defray the extraordinary expenses of a war. He warned the committee, and through it Congress, that "no artificial provisions, no appropriations or investments of particular funds in certain persons, _no nominal sinking fund_, however constructed, will ever reduce a public debt unless the net annual revenue shall exceed the aggregate of the annual expenses, including the interest of the debt." He then submitted the following estimates:--

"The current or peace expenses have been estimated at nine millions
of dollars. Supposing the debt contracted during the war not to
exceed fifty millions and its annual interest to amount to three
millions, the aggregate of the peace expenditure would be no more
than twelve millions. And as the peace revenue of the United States
may at the existing rate of duties be fairly estimated at fifteen
millions, there would remain from the first outset a surplus of
three millions applicable to the redemption of the debt. So far,
therefore, as can be now foreseen, there is the strongest reason to
believe that the debt thus contracted will be discharged with
facility and as speedily as the terms of the loans will permit. Nor
does any other plan in that respect appear necessary than to extend
the application of the annual appropriation of eight millions (and
which is amply sufficient for that purpose) to the payment of
interest and reimbursement of the principal of the new debt.... If
the national revenue exceeds the national expenditure, a simple
appropriation for the payment of the principal of the debt and
coextensive with the object is sufficient and will infallibly
extinguish the debt. If the expense exceeds the revenue, the
appropriation of any specific sum and the investment of the
interest extinguished or of any other fund, will prove altogether
nugatory; and the national debt will, notwithstanding that
apparatus, be annually increased by an amount equal to the deficit
in the revenue.... What appears to be of vital importance is that
_the crisis_ should at once be met by the adoption of efficient
measures, which will with certainty provide means commensurate with
the expense, and, by _preserving unimpaired instead of abusing that
public credit on which the public resources so eminently depend,
will enable the United States to persevere in the contest until an
honorable peace shall have been obtained_."

On March 14 Congress authorized a public loan of eleven millions of dollars, leaving it optional with the banks who subscribed to take stock, or to loan the money on special contract. The books were opened May 1 and 2, and in the two days $6,118,900 were subscribed: $4,190,000 by banks and $1,928,000 by individuals. The rate was six per cent. Mr. Gallatin reported this result, and proposed the issue of treasury notes for such amount as was desired within the limit of the loan to bear interest at five and two fifths per cent. a year, equal to a cent and a half per day on a hundred dollars' note; 2d, to be payable one year after date of issue; 3d, to be in the meanwhile receivable in payment of all duties, taxes, or debts due to the United States. The first of these ingenious qualifications was adopted by Mr. Chase in his issue of the seven-thirties.

On June 18 war was declared. On the 28th Mr. Gallatin submitted his estimate of receipts and expenditures for the year.

EXPENDITURES IN ROUND NUMBERS.

Civil and miscellaneous $1,560,000 Military establishment, and Indian dept 12,800,000 Naval establishment 3,940,000 Public debt 8,000,000 ---------- $26,300,000 ==========

FUNDS PROVIDED.

Balance in Treasury, January 1 $2,000,000
Receipts from duties and sales of lands
as by estimate of November 22, 1811 8,200,000
Loan authorized by law 11,000,000
Treasury notes as authorized by House
of Representatives 5,000,000
----------
$26,200,000

The issue of _treasury notes_ was a novel experiment in the United States; but they were favorably received, and Mr. Gallatin calculated that the full amount authorized by law, $5,000,000, could be put in circulation during the year. The result of a loan seemed more doubtful. The old six per cents. and deferred stock had already fallen two or three per cent. below par. Mr. Gallatin again recommended the conversion of these securities into a new six per cent. stock, which would facilitate the new loan, and to prevent the necessity of applying, the same years, the large sums required in reimbursement of and purchase of the public debt.

On December 1 Mr. Gallatin made his last annual statement.

_Treasury Report for Fiscal Year ending September_ 30, 1812.

RECEIPTS.

Customs, sales of lands, etc. $10,934,946.20
On account of loan of eleven millions,
act 14 March, 1812 5,847,212.50
--------------
$16,782,158.70
Balance in Treasury October 1, 1811 3,947,818.36
--------------
$20,729,977.06
==============

DISBURSEMENTS.

Civil Department, foreign intercourse $1,823,069.35 Army, militia, forts, etc. $7,770,300.00 Navy Department 3,107,501.54 Indian Department 230,975.00 ------------- 11,108,776.54 Interest on debt $2,498,013.19 On account of principal 2,938,465.99 ------------- 5,436,479.18 -------------- $18,368,325.07 Leaving in Treasury 30 Sept., 1812 2,361,652.69 -------------- $20,729,977.76

The sums obtained or secured on loans during the year amounted to $13,100,209, and the secretary had the satisfaction to state "that notwithstanding the addition thus made to the public debt, and although a considerable portion has been remitted from England and brought to market in America, the public stocks (which had at first experienced a slight depression) have been for the last three months, and continue to be, at par." His last report to the commissioners of the sinking fund of February 5, 1813, stated the usual application of $8,719,773 to the principal and interest of the debt.

In his report of December 1, 1812, Mr. Gallatin announced that a loan of twenty-one millions was needed for the service of 1813. Congress authorized a loan of $16,000,000, having six years to run, and an additional issue of $5,000,000 of treasury notes. Congress adjourned on March 4. Their procrastination and the pressing demands of the War Department nearly beggared the Treasury before the loans could be negotiated and covered into it.

On April 17 Mr. Gallatin wrote to the secretaries of the army and of the navy, and sent a copy of his letters to Mr. Madison with information that the loan had been filled, and the probable receipts of the Treasury from ordinary sources for the year ascertained. These he estimated at $9,300,000. Deducting the annual appropriation for interest on the debt, the sum expended to March 31, and the amount needed for the civil service, there remained for the War and Navy Departments together the sum of $18,720,000.

The loan of $16,000,000 was obtained in the following places:--

States east of New York $486,700 State of New York 5,720,000 Philadelphia, Pa. 6,858,400 Baltimore and District of Columbia 2,393,300 State of Virginia 187,000 Charleston, S. C. 354,000 ----------- $16,000,000

The history of this subscription is not without interest. The extremely small subscriptions in New England and in the Southern States can hardly be explained on any other theory than that of a belief in the collapse of the finances of the United States and a dissolution of the Union, for which the New England States had certainly been prepared by their governing minds.[14]

Books were opened on March 12 and 13, 1813, at Portsmouth, Salem, Boston, Providence, New York, Albany, Philadelphia, Baltimore, Washington, Richmond, and Charleston. In the two days the subscriptions only reached the sum of $3,956,400. They were again opened on the 25th of March at New York, Philadelphia, Baltimore, and Washington. The New England and Southern States seem to have been disregarded because of their indifference in the first instance. The books remained open from March 25 to 31, during which time there were received $1,881,800, a total of $5,838,200.

The pressure fell on the Middle States. In these, fortunately for the government, there were three great capitalists whose faith in the future prosperity of the United States was unimpaired. All were foreigners: David Parish and Stephen Girard in Philadelphia and John Jacob Astor in New York. These now came forward, no doubt at the instance of Mr. Gallatin, who was a personal friend of each. Parish and Girard offered on April 5 to take eight millions of the loan at the rate of eighty-eight dollars for a certificate of one hundred dollars bearing interest at six per cent., redeemable before December 31, 1825, they to receive one quarter of one per cent. commission on the amount accepted, and in case of a further loan for the service of the year 1813, to be placed on an equal footing with its takers. John Jacob Astor on the same day and at the same place proposed to take for himself and his friends the sum of two million and fifty-six thousand dollars of the loan on the same conditions. These offers were accepted and the loan was complete. An offer on behalf of the State of Pennsylvania to take one million of the loan was received too late. Altogether the offers amounted to about eighteen millions, or two millions more than the sum demanded. Mr. Gallatin, clinging to his old plan, endeavored to negotiate this loan at par, by offering a premium of a thirteen years' annuity of one per cent., but found it impracticable. Indeed, the system of annuity, general in England, has never found favor as an investment in the United States.

This was Mr. Gallatin's last financial transaction. A few weeks later, at his own request, he severed his actual connection with the Treasury Department and was on his way to St. Petersburg to secure the proffered mediation of the emperor of Russia between the United States and Great Britain.

Thus ended Mr. Gallatin's administration of the national finances. The hour for saving had passed. The imperious necessities of war take no heed of economic principles. The work which the secretary had done became as the rope of sand. It is not surprising that Gallatin wearied of his post; that he watched with vain regret and unavailing sighs the unavoidable increase of the national debt, and that he sought relief in other services where success was not so evanescent as in the Treasury Department. Before the close of Madison's administration, February 12, 1816, the public debt had run up to over one hundred and twenty-three millions,[15] and a sum equal to the entire amount of Mr. Gallatin's savings in two terms had been expended in one. But his work had not been in vain. The war was the crucial test of the soundness of his financial policy. The maxims which he announced, that debt can only be reduced by a surplus of revenue over expenditure, and the accompaniment of every loan by an appropriation for its extinguishment, became the fundamental principle of American finance. Mr. Gallatin was uniformly supported in it by Congress and public opinion. It was faithfully adhered to by his distinguished successors, Dallas and Crawford, and the impulse thus given continued through later administrations, until, in 1837, twenty years after the peace, the entire debt had been extinguished. All this without any other variation from Mr. Gallatin's original plan than an increase of the annual appropriation, to the sinking fund for its reimbursement, from eight to ten millions.[16]

The only charge which has ever been made against Gallatin's administration was, that he reduced the debt at the expense of the defenses and security of the country; but, to quote the words of one of his biographers:[17] "Mr. Gallatin had the sagacity to know that it [the redemption of the debt] would make but little difference in the degree of preparation of national defense and means of contest, for which it is impossible ever to obtain a considerable appropriation before the near approach of the danger that may render them necessary. He knew that the money thus well and wisely devoted to the payment of the debt was only rescued from a thousand purposes of extravagance and mal-application to which all our legislative bodies are so prone whenever they have control of surplus funds." In our own day the irresistible temptations of a full treasury need no labored demonstration. Friend and foe drop political differences over the abundant fleshpot. The very thought of catering to such appetites disgusted Gallatin. To Jefferson he frankly said, in 1809, that while he did not pretend to step out of his own sphere and to control the internal management of other departments, yet he could not "consent to act the part of a mere financier, to become a contriver of taxes, a dealer of loans, a seeker of resources for the purpose of supporting useless baubles, of increasing the number of idle and dissipated members of the community, of fattening contractors, pursers, and agents, and of introducing in all its ramifications that system of patronage, corruption, and rottenness which you justly execrate."

RECEIPTS AND EXPENDITURES DURING MADISON'S ADMINISTRATION, FROM
ELLIOTT'S SYNOPTICAL EXHIBITS.

RECEIPTS.

------------+----------------+---------------+----------------+ Four Years | Customs. | Internal | Direct Taxes. | Ending | | Revenue. | | Dec. 31. | | | | ------------+----------------+---------------+----------------+ 1812 | $38,151,330.15 | $18,674.03 | $28,491.87 | 1816 | 62,813,212.43 | 11,470,507.24 | 8,639,611.38 | |----------------+---------------+----------------+ Madison | 100,964,542.58 | 11,489,181.27 | 8,668,103.25 | ------------+----------------+---------------+----------------+ ----------------+----------------+-------------------+----------------+ Postage. | Public Lands. | Loans and | Dividends | | | Treasury Notes. | Sales of | | | | Bank Stock. | ----------------+----------------+-------------------+----------------+ $85,077.40 | $2,889,466.46 | $15,606,201.30 | - | 364,787.84 | 4,977,570.54 | 94,321,103.73 | - | ----------------+----------------+-------------------+----------------+ 449,865.24 | 7,867,037.00 | 109,927,305.03 | - | ----------------+----------------+-------------------+----------------+

----------------+---------------- Miscellaneous. | Total. | | ----------------+---------------- $209,309.34 | $56,988,550.55 630,248.16 | 183,217,041.32 ----------------+---------------- 839,557.50 | 240,205,591.87 ----------------+----------------

EXPENDITURES.

-----------+-----------------+---------------+----------------+ Four Years | Civil List. | Foreign | Miscellaneous. | Ending | | Intercourse. | | Dec. 31. | | | | -----------+-----------------+---------------+----------------+ 1812 | $2,887,197.98 | $860,281.28 | $1,619,849.12 | 1816 | 3,768,342.61 | 1,042,633.42 | 5,015,100.92 | |-----------------+---------------+----------------+ Madison | 6,655,540.59 | 1,902,914.70 | 6,634,950.04 | -----------+-----------------+---------------+----------------+

----------------+----------------+-------------------+----------------+ Military Dept. | Pensions. | Indian Dept. | Naval Dept. | | | | | | | | | ----------------+----------------+-------------------+----------------+ $19,480,722.54 | $338,023.68 | $944,848.84 | $10,006,934.54 | 70,809,210.90 | 435,614.48 | 1,140,015.30 | 26,326,169.25 | ----------------+----------------+-------------------+----------------+ 90,289,933.44 | 773,638.16 | 2,084,864.14 | 36,333,103.79 | ----------------+----------------+-------------------+----------------+

----------------+----------------
Public Debt. | Total.
|
|
----------------+----------------
$26,920,285.12 | $63,058,143.10
56,508,652.66 | 165,045,739.54
----------------+----------------
83,428,937.78 | 228,103,882.64
----------------+----------------

* * * * *

_Revenue_

_L'État c'est moi_ was the autocratic maxim of Louis Quatorze. An adherence to it cost the Bourbons their throne. Burke was more philosophical when he said, "The revenue of the State is the State." Its imposition, its collection, and its application involve all the principles and all the powers of government, constitutional or extraordinary. It is the sole foundation of public credit, the sole support of the body politic, its life-blood in peace, its nerve in war. The "purse and the sword" are respectively the resource and defense of government and peoples, and they are interdependent powers. With the discovery of the sources of revenue, and the establishment of its currents, Mr. Gallatin, in the first eight years of his administration of the Treasury, had nothing to do. He had only to maintain those systems which Hamilton had devised, and which, wisely adapted to the growth of the country, proved amply adequate to the ordinary expenditures of the government and to the gradual extinguishment of the debt. The entire revenue included three distinct branches: imposts on importations and tonnage, internal revenue, sales of public lands. The duties on imports of foreign merchandise were alone sufficient to meet the current expenses of the various departments of administration on a peace establishment, and, increasing with the growth of the country, would prove ample in future. The gross amount of imports in the four years of Adams's administration, 1796-1800, was about three hundred and fourteen millions of dollars, and the customs yielded about thirty millions.

Mr. Gallatin's first annual report, submitted to the House of Representatives in December, 1801, exhibited his financial scheme. He recapitulated the various sources of permanent revenue. They were those of Hamilton's original tariff.

The revenues for the year ended September 30, 1801, were the basis of the estimates for future years. These were

Duties on imports and tonnage $10,126,213.92 Internal revenue 854,000.00 Land sales 400,000.00 -------------- $11,380,213.92

But the close of the war in Europe sensibly diminished the enormous carrying trade which fell to the United States as neutrals, and, as a consequence, the revenue from that source; large quantities of goods were brought into the United States and reëxported to foreign ports under a system of debenture. The revenue on what Mr. Gallatin calls "this accidental commerce" was $1,200,000. He therefore _estimated the permanent revenues at_

Customs duties $9,500,000 Land sales 400,000 Postage 50,000 Internal revenue 650,000 ----------- $10,600,000

Or, without the internal revenue, say ten millions of permanent revenue, as a basis for _the permanent expenditures_.

To bring the expenditures within this sum, however, a reduction in the army and navy establishments was necessary. This Gallatin soon found to be too radical a measure for success, either in the cabinet or Congress, however well it may have accorded with Jefferson's utopian views. In the budget of 1802 the internal revenue, $650,000, was, therefore, a necessary item. The expenditures proposed were

Annual appropriation for interest and principal of debt $7,100,000 Civil list $780,000 Foreign intercourse 200,000 Military and Indian Dept 1,420,000 Naval 1,100,000 ----------- $3,500,000 3,500,000 ----------- $10,600,000

In this budget the estimate for the military establishment was an increase over that of Wolcott for 1801, which was $1,120,000. But the Republicans in the House were not content with this arrangement. The internal revenues were utterly distasteful to them. They had been laid against their protest and collected under military menace. They were of those Federal measures of which they would have none. John Randolph, chairman of the Committee of Ways and Means, reported, March 2, 1802, against the entire system of internal duties, in the old words of the Pennsylvania radicals, as vexatious, oppressive, and peculiarly obnoxious; as of the nature of an excise which is hostile to the genius of a free people, and finally because of their tendency to multiply offices and increase the patronage of the executive. The repeal was imperative upon the Republican party. On April 6, 1802, the act was repealed and the surplus of the budget stripped from it, without Mr. Gallatin's consent, certainly, but also without protest from him.

The prosperity of the country continued. The impost duties for the fiscal year ending September 30, 1802, rose to $12,280,000, the sales of the public lands to $326,000, and the postage to $50,500, a total of $12,656,500, and left in the Treasury, September 30, 1802, the sum of $4,539,675. This large increase in the Treasury did not in the least change Mr. Gallatin's general plan, and his budget for 1803 was based on his original scale of a permanent revenue of $10,000,000, to correspond with which the estimates of the preceding year were reduced. The fiscal year closed September 30, 1803, with a balance in the Treasury of $5,860,000. This situation of the finances was fortunate in view of secret negotiations which the President and Congress were initiating for the purchase of Louisiana from France.

The secretaries of war and of the navy had promised to reduce their expenditures to a figure approximate to Mr. Gallatin's estimates; but the breaking out of hostilities with Tripoli prevented the proposed economy, and Mr. Gallatin was called upon to provide for an increased expenditure with one certain source of revenue definitively closed. He therefore proposed an additional tax of two and one half per cent. on all importations which paid an _ad valorem_ duty. This additional impost, laid by act of March 25, 1804, called the Mediterranean Fund, remained in force long after the war closed and held its place on the books of the Treasury under that name.

The bulk of the cost of Louisiana was met by an issue of bonds; but Mr. Gallatin, true to his principle, applied the moneys in the Treasury as far as they would go. The budget for 1805 was on a different scale. The increase in the debt demanded a proportionate increase in the revenue to meet the additional sum required for interest and gradual annual reimbursement. The Mediterranean Fund was sufficient to meet the increased amounts required for the navy. In this manner he held up the Navy Department to a strict accountability and made it responsible to Congress and not to the cabinet for its administration, and he thus, from his own point of view, relieved the Treasury Department from any responsibility for extraordinary expenditure.

Mr. Gallatin closed his four years of administration with flying colors. The successful management of the finances was an important factor in the election of 1804, which returned Mr. Jefferson to the presidential chair and insured to the country the inestimable advantages of Mr. Gallatin's practical mind. Order reigned in his department at least, and order subordinate to the strictest requirements of law. In the four years, 1801-1804, Jefferson's first term, the imports aggregated $337,363,510 and the customs yielded $45,000,000.

The annual report, made December 9, 1805, announced an increasing revenue, amounting in all to thirteen and one half millions of dollars, chiefly from customs. Still Mr. Gallatin made but small addition to his estimates for the coming year. The permanent revenue he raised to twelve and one half millions and increased the appropriation for the payment of the debt and interest to eight millions. Nothing occurred during the next year to check the growth of the country; the revenue continued on a rising scale, and reached close upon fifteen millions of dollars.

So far Mr. Gallatin had met but inconsiderable obstacles in his course, and these he used to his advantage to impress economy upon the Army and Navy Departments, and enforce his principle of minute appropriations for their government. All that he had already accomplished in the establishment of a sound financial system and the support of the credit of the United States was but the basis of a broader structure of national economy. His extensive scheme of internal improvements was hardly matured when the thunder broke in the clear sky.

The acquisition of Louisiana, the large carrying trade which had passed under the American flag, and the rapid prosperity of the financial and industrial condition of the country aroused the jealousy of Great Britain, and determined her to check the further progress of the United States by war, if need be. The capture of the American frigate Chesapeake by the man-of-war Leopard, June 22, 1807, was only the first in a series of outrages which rendered the final collision, though long delayed, inevitable. Mr. Gallatin at once recognized that the Treasury could no longer be conducted on a peace basis. "Money," he wrote to Joseph H. Nicholson, "we will want to carry on the war; our revenue will be cut up; new and internal taxes will be slow and not sufficiently productive; we must necessarily borrow. This is not pleasing to me, but it must be done." Congress was called together for October 26, 1807, and on November 5, Mr. Gallatin sent in his annual report. There was still hope that Great Britain would make amends for the outrage, and Congress was certainly peaceably disposed. In the condition of the Treasury there was no reason as yet for recommending extraordinary measures. The revenues for the year passed the sum of seventeen millions; the balance in the Treasury reached eight and one half millions; the surplus on a peace footing was twelve millions. Mr. Gallatin recommended that the duties should be doubled in case war were threatened. He said, "Should the revenue fall below seven millions of dollars, not only the duty on salt and the Mediterranean duties could be immediately revived, but the duties on importation generally be considerably increased, perhaps double, with less inconvenience than would arise from any other mode of taxation." Experience had proven that this source of revenue is in the United States "the most productive, the easiest to collect, and least burdensome to the great mass of the people." But still the war-cloud did not break. Mr. Canning contented himself with war in disguise, and by his Order in Council of November 11, 1807, shut the ports of Europe to American trade, and wiped away the advantages of the United States as a neutral power. The United States answered with the act of embargo on December 22, 1807, completing, as far as it was possible for legislation to effect it, the blockade of the Treasury Department as regarded revenues from foreign imports. The immediate effect, however, of these acts in Great Britain and America was an enormous temporary increase of importations in the interim from the time of the passage of the act until the date when it took effect. To aid merchants in this peculiar condition of affairs an act was passed by Congress, on March 10, 1808, extending the terms of credit on revenue bonds.

Mr. Gallatin's report of December 16, 1808, closed the record of his eight years of management of the Department. In the second term of Jefferson's administration, 1805-1808, the gross amount of imports had risen to $443,990,000, and the customs collected to nearly $60,000,000. In the entire eight years, 1800-1808, the gross amount of importations was $781,000,000, and the customs yielded $105,000,000. The entire expenses of the government in the same period, including $65,000,000 of debt, had been liquidated from customs alone.

The specie in the Treasury on September 20, 1808, reached nearly $14,000,000. Mr. Jefferson knew of the amount in the Treasury when he wrote his last message, November 8, 1808, and he could not have been ignorant of Mr. Gallatin's warning of the previous year that a continuance of the embargo restriction would reduce the revenue below the point of annual expenditures and require an additional impost; yet he had the ignorance or the presumption to say in his message, "Shall it (the surplus revenue) lie unproductive in the public vaults? Shall the revenue be reduced? or shall it not rather be appropriated to the improvement of roads, canals, rivers, education, and other great foundations of prosperity and union under the powers which Congress may already possess or such amendments of the Constitution as may be approved by the States? While uncertain of the course of things, the time may be advantageously employed in obtaining the powers necessary for a system of improvement, should it be thought best." In these words Jefferson surrendered the vital principle of the Republican party. In his satisfaction at the only triumph of his administration, the management of the finances and the purchase of a province without a ripple on the even surface of national finance, he gave up the very basis of the Republican theory, the reduction of the government to its possible minimum, and actually proposed a system of administration coextensive with the national domain, an increase of the functions of government, and consequently of executive power.

The annual report of the Treasury, presented December 16, 1808, showed no diminution of resources. The total receipts for the fiscal year were nearly eighteen millions. The total receipts for--

Customs reached $26,126,648 On which debentures were allowed on exportations 10,059,457 ----------- Actual receipts from customs $16,067,191

But this source of revenue was now definitively closed by the embargo, while the expenditures of the government were increased. Mr. Gallatin met the situation frankly and notified Congress of the resources of the Treasury.

RESOURCES FOR 1809

Cash in Treasury $13,846,717.52 Back customs, net 2,154,000.00 -------------- Total resources $16,000,717.52

The receipts from importations and land sales would be offset by deductions for bad debts and extensions of credit to importers. The expenditures were set at $13,000,000, which would leave in the Treasury for extraordinary expenditure $3,000,717. The disbursements had been far beyond the estimates; those for the military and naval establishments reaching together six millions.

It is not to be supposed that Mr. Gallatin saw this depletion of the Treasury, this rapid dissipation of the specie,--always desirable and never more so than in periods of trouble,--without disappointment and regret. His report to Congress was as outspoken politically as it was financially, and from a foreign-born citizen to an American Congress must have carried its sting. "Either America," he wrote, "must accept the position of commerce allotted to her by the British edicts, and abandon all that is forbidden,--and it is not material whether this is done by legal provisions limiting the commerce of the United States to the permitted places, or by acquiescing in the capture of vessels stepping beyond the prescribed bounds. Or the nation must oppose force to the execution of the orders of England; and this, however done, and by whatever name called, will be war." He recalled to them his advice of the preceding years in a vein of tempered bitterness: "Had the duties been doubled on January 1, 1808, as was then suggested, in case of war the receipts into the Treasury during that and the ensuing year would have been increased nine or ten millions of dollars." He then proposed to continue the Mediterranean Fund and to double all existing duties on importations after January 1, 1809. He informed them that no internal taxes, either direct or indirect, were contemplated by him even in the case of hostilities against the two belligerent powers; France having responded to the Orders in Council by Napoleon's Milan decree, December 17, 1807, which was quite as offensive to the United States as that of Canning. With true statesmanship Mr. Gallatin nerved the country to extraordinary exertion by reminding it that the geographical situation of the United States and their history since the Revolution removed every apprehension of frequent wars.

During the year 1809 the country drifted along apparently without rudder or compass, helmsman or course, and the treasury locker was being rapidly reduced to remainder biscuit. Mr. Madison was inaugurated in March. In his first message, May 23, 1809, he exposed the financial situation with an indecision which was as marked a trait of his character as optimism was of that of Jefferson. In his message of November 29, 1809, he said "the sums which had been previously accumulated in the Treasury, together with the receipts during the year ending on September 30 last, and amounting to more than nine millions of dollars, have enabled us to fulfill all our engagements and defray the current expenses of government without recurring to any loan; but the insecurity of our commerce and the consequent demands of the public revenue will probably produce a deficiency in the receipts of the ensuing year." Beyond this Madison did not venture; Gallatin was left alone.

The Treasury report of December 8, 1809, announced the beginning of short rations. The expenses of government, exclusively of the payments on account of the principal of the debt, had exceeded the actual receipts into the Treasury by a sum of near $1,300,000. If the military and naval establishments were to be continued at the figures of 1809, when six millions were expended, there would result a deficiency of $3,000,000, and a loan of $4,000,000 would be necessary. Otherwise the Mediterranean Fund would suffice. The cash in the Treasury had fallen from nearly fourteen millions on June 2, 1809, to less than six millions on September 3, following. In this report Gallatin expressed his opinion, that the system of restriction established by the embargo and partly relaxed must be entirely reinstated or wholly abandoned. On May 1, 1810, an act of strict prohibition of importations from Great Britain and her dependencies was passed.

While from the incompetency of the administration the country was fast approaching the real crisis of open war, the Republicans in Congress were deliberately destroying and undermining the basis of national credit, by which alone it could be carried on. In February the United States Bank, by which, and its branches, the customs were collected throughout the country, was destroyed by the refusal of Congress to renew its charter. Mr. Gallatin in his combinations never contemplated such a contingency as the total destruction of the fiscal agency on which the government had relied for twenty years. Unwilling to struggle longer against the mean personalities and factious opposition of his own party in Congress, he tendered his resignation to Mr. Madison. But the Republican party was a party of opposition, not of government. With the exception of Mr. Gallatin, no competent administrative head had as yet appeared. There was no one in the party or out of it to take his place. Mr. Madison knew it. Mr. Gallatin felt it, and remained. Congress met in November. On the 25th Mr. Gallatin sent in his annual report; the receipts reached thirteen and a half million dollars.

The budget for 1812 left a deficiency to be provided for of $1,200,000. This was a small matter. The revenue Mr. Gallatin proposed to increase, on the plan before recommended, by additions of fifty per cent, to the imposts on foreign commerce. This he preferred to any internal tax.

At the close of the year the country, chafed beyond endurance by the indignities put upon it and the sufferings it encountered without compensation to its pride, was eager for war. Congress was no way loath to try the dangerous path out of its labyrinth of blunders. The near contingency imposed the necessity of an immediate examination of the sources of revenue. In January, 1812, Mr. Gallatin was requested by the chairman of the Committee of Ways and Means to give his opinion as to the probable amount of receipts from duties on tonnage and merchandise in the event of war. This, in view of the vigorous restrictions laid by France under her continental system of exclusion, Mr. Gallatin estimated under existing rules as not to exceed $2,500,000. He then stated, without hesitation, that it was practicable and advisable to double the rate of duties, and to renew the old duty on salt. The sum acquired, with this addition, he anticipated, would amount to $5,400,000.

On the basis of annual loans of ten millions of dollars during the continuance of the war (the sum assumed by the committee), the deficiency for 1814 would amount, by Mr. Gallatin's estimate, to $4,200,000. To produce a net revenue equal to this deficiency he stated that the gross sum of taxes to be laid must be five millions of dollars. He then reverted to his report of December 10, 1808, in which he had stated that "no internal taxes, either direct or indirect, were contemplated, even in the case of hostilities carried on against the two great belligerent powers." The balance in the Treasury was then nearly fourteen millions of dollars, but in view of the daily decrease of the revenue he had recommended "that all the existing duties be doubled on importations subsequent to the first day of January, 1809." As the revenues of 1809, 1810, and 1811 had yielded $26,000,000, the sum on hand, with the increase thus recommended, would have reached $20,000,000, a sum greater than the net amount of the proposed internal taxes in four years.

At that time no symptoms had appeared from which the absolute dissolution of the Bank of the United States without any substitute could have been anticipated. If its charters had been renewed, on the conditions suggested by Mr. Gallatin, the necessity for internal taxes would have been avoided. The resources of the country, properly applied, however, were amply sufficient to meet the emergency; but Mr. Gallatin distinctly threw upon Congress, and by implication upon the Republican majority, the responsibility for the state of the Treasury, and the imperative necessity for a form of taxation which it detested as oppressive, and which it was a party shibboleth to declare in and out of season, to be unconstitutional. The choice of the administration was between the Bank which Jefferson detested and Gallatin favored, and the internal tax which Mr. Gallatin considered as the most repulsive in its operation of any form of revenue.

But necessity knows no law, and the prime mover, if not the original author, of the opposition to Hamilton's system was driven to propose the renewal of the measures, opposition to which had brought the Republican party into power, and had placed himself at the head of the Treasury. He now proposed to raise the five millions deficiency by internal taxation--$3,000,000 by direct tax and $2,000,000 by indirect tax.

Continuing his lucid and remarkable report with careful details of the methods to be adopted, Gallatin closed with an urgent recommendation that the crisis should at once be met by the adoption of efficient measures to provide, with certainty, means commensurate with the expense, and by preserving unimpaired, instead of abusing, that credit on which the public resources eminently depend, to enable the United States to persevere in the contest until an honorable peace should be obtained. Thus he held the bitter cup to the lips of the Republican Congress, which, however, was not yet to drain its full measure. War was declared June 18, 1812. On July 1, 1812, an act was passed imposing an additional duty of one hundred per cent. on all importations, an additional ten per cent. on goods brought in foreign vessels, and also a duty of $1.50 per ton on all foreign vessels. The duty was to remain until the expiration of one year after peace should be made with Great Britain. On December 5, 1812, Mr. Gallatin sent in his last report. The balance in the treasury was $3,947,818. His estimate for the service of the year 1813 was a war budget. Resources, $12,000,000; expenditures, $31,926,000; promising a deficiency of $19,925,000. For this and other contingencies Mr. Gallatin asked for a loan of twenty millions. The authority was granted, but the recommendations of direct and indirect taxes were disregarded. Here Mr. Gallatin's direct connection with the customs system closed.

The value of foreign importations during Madison's first term was $275,230,000, and the customs derived from them thirty-eight millions of dollars.

* * * * *

Congress adjourned March 4, 1813, but was called together again in May, when the subject of internal taxes was again forced upon them. The internal revenue was a part of Hamilton's general scheme. His original bill was passed, and, after numerous amendments suggested by trial, its grievances were tempered and the friction removed. In Adams's term it yielded nearly three millions of dollars. In Jefferson's first term, before the rise in customs revenue allowed of its abandonment, Mr. Gallatin drew from this source nearly two millions of dollars, enough to pay the interest and provide for the extinguishment of a six per cent. loan of thirty millions; a war budget in itself. But it had been so entirely set aside that in Jefferson's second term, 1808-1812, it had fallen to a little over sixty-three thousand; in Madison's first term, to a little under nineteen thousand dollars. Was it to this Mr. Dallas referred in that passage of his report, made in 1815, on the financial operations of the war, in which he expresses his regret "that there existed no system by which the internal resources of the country could be brought at once into action, when the resources of its external commerce became incompetent to answer the exigencies of the time? The existence of such a system would probably have invigorated the early movements of the war, might have preserved the public credit unimpaired, and would have rendered the pecuniary contributions of the people more equal, as well as more effective." "It certainly," to use the words of this Mr. Gallatin's oldest and best political friend, "furnishes a lesson of practical policy." Disagreeable as the necessity was, it could not be avoided, and Mr. Gallatin met it manfully. Nay more, he seems to have had a grim satisfaction in proposing the measure to the Congress which had thwarted him in his plans. In accordance with his suggestions, Congress, in the extra session of May, 1813, laid a direct tax of $3,000,000 upon the States, and specific duties upon refined sugar, carriages, licenses to distillers of spirituous liquors, sales at auction, licenses to retailers of wines, and upon notes of banks and bankers. These duties, in the beginning temporary, were calculated to yield $500,000, and with the direct tax to give a sum of $3,500,000. But the increasing expenditures again requiring additional sums of revenue, the duties were made permanent and additional taxes were laid; the entire revenue for 1815 being raised so as to yield $12,400,000. In the second term of Mr. Madison the internal revenue brought in nearly eleven and a half millions. The Federalists, who as a party were opposed to the war, enjoyed the situation; Mr. Gallatin was compelled to impose the internal revenue tax which he detested, and Mr. Dallas was called upon to enforce its application.

* * * * *

The only remaining source of revenue was the sale of public lands. This also was a part of Hamilton's original scheme. The public lands of the United States were acquired in three different ways, namely, 1, by cessions from the States of such lands as they claimed, or were entitled to by their original grants or charters from the crown, while colonies; 2, by purchase from Indian tribes; 3, by treaties with foreign nations,--those of 1783 and 1794 with Great Britain, of 1795 with Spain, and of 1803 with France. The need of bringing this vast territory under the control of the government and disposing of it for settlement was early apparent. In July, 1791, Hamilton sent in to the House a report on "A uniform system for the disposition of the lands, the property of the United States." In March preceding, grants of the United States had confirmed to the actual settlers in the Illinois country the possession of their farms. But what with the Indian wars and the rebellion within the United States, no action was taken by Congress to carry the recommendations of the secretary into effect, until Mr. Gallatin, whose residence on the frontier gave him direct interest in the subject, brought up the matter at the very first session he attended. In 1796 a bill was passed authorizing and regulating the sale of lands northwest of the Ohio and above the mouth of the Kentucky River, and a surveyor-general was appointed with directions to lay out these lands in townships. The sales under Adams's administrations were trifling, the total amount received from this source before the year 1800 being slightly over one hundred thousand dollars. In May, 1800, sales of the same lands were authorized at public vendue at not less than two dollars per acre; four land offices were established in the territory; surveyors were appointed, and a register of the land office was made a permanent official. In March, 1803, an act was passed to regulate the sale of the United States lands south of the Tennessee River, two land offices were established and public sale provided for at the same price set in the act of 1800. In March, 1804, the Indiana lands lying north of the Ohio and east of the Mississippi were brought within similar regulations, and an act was passed concerning the country acquired under Spanish and British grants. In the same month Louisiana was erected into two territories. The sums received from the sales during the first term of Jefferson's administration amounted to little more than one million of dollars. In January, 1805, the territory of Indiana was divided into two separate governments; that one which was set off received the name of Michigan, and in 1808, its territory was brought under the regulations of the land office.

The sums received from the sales in the second term of Jefferson's administration reached nearly two and one half millions of dollars, and in Madison's first term, nearly three millions of dollars. From first to last Mr. Gallatin never lost sight of the subject, though occasion did not serve for more than organization of the system which, in the four years ending 1836, yielded nearly fifty million dollars, and paid more than one third of the entire expenses of the government. To John W. Eppes[18] Mr. Gallatin wrote in the crisis of 1813, "The public lands constitute the only great national resource exclusive of loans and taxes. They have already been mentioned as a fund for the ultimate extinguishment of the public debt." The land offices were then in full operation.

In 1810 Mr. Gallatin prepared an "Introduction to the collection of laws, treaties, and other documents respecting the public lands," which was published pursuant to an act of Congress passed in April of that year.

_Free Trade_

While Mr. Gallatin differed from his early Republican associates in many of their theories of administration, he was a firm believer in the best of their principles, namely, the wisdom of giving free scope to the development of national resources with the least possible interference on the part of government. One of his purposes in his persistent desire for economy in expenditure was to reduce the tariff upon foreign importations to the lowest practicable limit. He was the earliest public advocate in America of the principles of free trade, and an experience of sixty years confirmed him in his convictions.

The extinguishment of the debt rendered a great reduction in the revenue possible. On the other hand, it brought the friends of a low tariff face to face with the problem of internal improvements. As the election of 1832 drew near, the advocates of the two systems ranged themselves in two great parties precisely as to-day: the advocates of the protective or American system with internal improvements as an outlet for accumulations of revenue on the one side; on the other the advocates of free trade. Between his desire for the advantages of the one with its attendant disadvantages of government interference in its prosecution, and the freedom of commerce from undue restrictions, Mr. Gallatin did not hesitate. He threw the whole force of his experience and character into the free trade cause, and became the leader of its friends.

On September 30, 1831, a convention of the advocates of free trade, without distinction of party, met at the Musical Fund Hall in Philadelphia. Two hundred and twelve delegates appeared. Among them were Theodore Sedgwick, George Peabody, and John L. Gardner from Massachusetts; Preserved Fish, John Constable, John A. Stevens, Jonathan Goodhue, James Boorman, Jacob Lorillard, and Albert Gallatin from New York; C. C. Biddle, George Emlen, Isaac W. Norris from Pennsylvania; Langdon Cheves, Henry Middleton, Joseph W. Allston, and William C. Preston from South Carolina; and men of equal distinction, bankers, merchants, statesmen, and political economists from other States. Of this convention Mr. Gallatin was the soul. He opened its business by stating the objects of the meeting, and nominated the Hon. Philip P. Barbour of Virginia for president. A general committee of two from each State was appointed, which recommended an address to the people of the United States and a memorial to Congress. The address to the people closed with a declaration that the near extinguishment of the national debt, which would be discharged by the available funds of the government on January 1, 1833, suggested that the moment was propitious for the establishment of the principles of free trade. Thus the people of the United States, who had successfully asserted the doctrines of free government, might add to its claims upon the gratitude of the world by being the first also to proclaim the theory of a free and unrestricted commerce, the genuine "American system." Mr. Gallatin was the chairman of the committee of fourteen, one from each State represented in the convention, to prepare the memorial which was presented in their behalf to Congress, the conclusions of which, presented with his consummate ability, demonstrated with mathematical precision that a duty of twenty-five per cent. was sufficient for all the legitimate purposes of government. Here he found himself in direct opposition to Mr. Clay, whose political existence was staked upon the opposite theory. Mr. Clay answered in a great speech in the Senate in February, 1832, and forgot himself in personal denunciation of Mr. Gallatin as a foreigner with European interests at heart, and of utopian ideas; for this he expressed his regret to Mr. Gallatin in an interview arranged by mutual friends at a much later period. Mr. Gallatin's views were accepted as the policy of the country, and after some shifting of parties, in which friends and foes changed ground in subordination to other political exigencies, they prevailed in the tariff of 1846, the best arranged and most reasonable which the United States has yet seen.

It is certain that Mr. Gallatin was opposed to "protective" revenue. His preference was for an "even" duty on all imports. This is not the place for an economic discussion. The true policy of the United States is probably between the extremes of protection and free trade. The nature of our population has been changed by the enormous immigration of the last fifty years. Moreover, instead of an absolute freedom from debt the nation has had to endure the legacy of debt left by the Civil War, to meet which a development of all its resources of manufacture as well as of agriculture is required.

_Administration_