Financial History Issue 127 (Fall 2018) - Page 23

of his person & dress—his linen is often soiled & his clothes tattered.” That may have been an exaggeration, but Gallatin’s homeliness and his reputation for thrift encouraged such exaggerations. Even his smoking habits became the stuff of fable. He stopped buying cigars in bulk, a Con- gressman reported, because he found that he smoked fewer and spent less if he bought only a quarter’s worth at a time. Gallatin’s thrift became legendary because he slashed federal spending to find the money he needed to repay the national debt. During his years as an opposition leader in Congress, Gallatin had dismissed Alexander Hamilton’s plan for repaying the debt. Hamilton’s plan used revenues from specific taxes to pay interest on particular bonds, all subject to a variety of contingencies. It also allocated sur- pluses, which had probably never existed and which no one had ever bothered to calculate, to a sinking fund that could repurchase bonds in the market. The plan was complicated and—perhaps intention- ally—confusing. Jefferson described it as “a number of scraps & remnants many of which were nothing at all” applied to “dif- ferent objects in reversion and remainder until the whole system was involved in impenetrable fog.” Its purpose was not so much to extinguish the debt as to manipu- late repayments and repurchases in order to support the government’s credit and increase the price of its bonds. Gallatin had fundamentally different intentions. The only way the government could reduce its debt, he had repeated throughout his six years in Congress, was to spend less than it received. In the flush of the Republicans’ electoral triumph, he set out to do that. As he set to work on the first Republi- can budget, Gallatin used straightforward arithmetic. He estimated that federal reve- nues for the following year would amount to $10.6 million. He liquidated the various existing appropriations for principal and interest on the debt into a definite annual sum of $7.3 million. He determined (with a bit of algebra that both he and Jef- ferson found difficult) that fixed annual payments of that amount could repay the entire federal debt within 16 years. Since the terms of some of the bonds prevented the government from repaying them any earlier, he adopted the $7.3 mil- lion annual payment as the foundation for his budget. That left him $3.3 million to Letter from Albert Gallatin to Blair W. Clenachan, Esq., agent and commissioner of loans in Philadelphia, dated October 31, 1811, regarding pension disbursements. pay government expenses that had aver- aged $5.8 million over the previous four years. Pressure to repeal Hamilton’s excise taxes on whiskey and other goods soon required Gallatin to cut another $650,000 from spending, but he pressed ahead. He thought import duties would raise enough money to pay for peacetime government. Within months Congress had adopted Gallatin’s budget and replaced Hamil- ton’s vague debt repayment plan with a $7.3 million fixed annual appropriation that took priority over all other federal spending. Gallatin’s reforms provoked a diatribe from Hamilton that lasted almost as long as it took Congress to enact them. In newspaper essay after essay, Hamilton excoriated Gallatin for pandering to the people and cutting off the government spending that was needed to strengthen the new nation. “Practical politicians,” Hamil- ton said, knew that governments must use their fiscal resources to encourage national prosperity. Gallatin’s obsession with debt repayment would “sink the government” by cutting off the money essential to “its respectability,” “the accomplishment of its most salutary plans,” and “its power of being useful.” Indeed, Hamilton sneered, Gallatin’s reforms would not even be pos- sible if Hamilton himself had not already stabilized the government’s finances by funding the public debt. The reforms were the measures of “LITTLE POLITICIANS, who now...enjoy the benefits of a policy,  |  Fall 2018  |  FINANCIAL HISTORY  21