Financial History Issue 127 (Fall 2018) - Page 25

But Gallatin and Jefferson embraced the vision of republican peace, and they thought Hamilton’s system for funding the public debt threatened it. Perhaps it was a “visionary dream,” Gallatin had said when he was in Congress, but he hoped America’s distance from Europe could allow Americans to avoid conflict and live in peace “without armies and navies, and without being deeply involved in debt.” He thought Americans should strive to “become a happy, and not a powerful nation.” Running up debt to fund military spending would be a confession that Amer- icans meant to join the great nations of Europe in their wasteful careers of war and destruction. Jefferson took the same view, and he spoke of “peace, economy and rid- dance of public debt” as a composite objec- tive—each interlocking element dependent on the others. He thought that the best way to keep a country at peace was to deny it the means for waging war. In peacetime, the government should disband its armed forces and rely on the militia for defense. If the government could do without excise taxes, he and Gallatin agreed, it should repeal them because the people would be more willing to pay taxes in wartime if they did not have to bear them in peace. Whatever the merits of the Republi- cans’ political economic theories, repeal of the Federalists’ excise taxes was popular. A crowd in the town soon to be Ohio’s capi- tal celebrated the repeal of those “oppres- sive and odious” measures by consigning the laws to a bonfire and toasting the health of “the present economical admin- istration.” Stalwart Republicans like John Taylor of Caroline had never doubted the political importance of tax repeal. A “rigid economy,” he wrote shortly after Jeffer- son’s election, would allow the adminis- tration to repeal obnoxious taxes, and tax repeal would cement popular support for the new Republican regime. Jefferson’s lofty political sentiments were all very well, Taylor told James Monroe a few years later, but it was really just taxes that determined who won American elections. Debt repayment and tax reduction were popular, but Gallatin pursued those reforms with a single-mindedness that lib- eral European political economists could scarcely have imagined when they wrote about the fiscal reforms needed in their own countries. Although Hamilton had copied some of the British fiscal arrange- ments, Hamilton’s regime placed a far lighter burden on the American economy than the burdens that had sparked the liberal economic critiques in Europe. Brit- ain and France had a complex variety of taxes on trade, consumption, land and even incomes, and they had accumulated large public debts over almost a century of expensive warfare. Rough estimates suggest that their taxes extracted 7–12% of national income during the late 18th century and that their national debts were 10 to 15 times larger than their annual tax revenues. America’s situation was different. The Revolutionary War and Hamilton’s refi- nancing had saddled the federal govern- ment with a debt that was 30 times its annual tax revenue, but the government itself was far smaller, and the federal taxes amounted to only about 2% of national income. State taxes probably accounted for another 2%. The relatively undevel- oped country already showed great poten- tial for rapid expansion of population and economic output. So when Jefferson complained that the United States was the most indebted nation in the Atlantic world, he was misjudging the effective burden. Gallatin’s sweeping fiscal reforms were—even from the liberal economic perspective—overkill. Gallatin’s excessive frugality had a price. Gallatin was still at the Treasury a decade later when the War of 1812 revealed the flaws in his policy. Gallatin had taken three risks when he reformed Hamilton’s system, and the war with Britain brought all three of them home. First, Gallatin’s repeal of all excise taxes had narrowed the tax base down to import duties. A narrow tax base was inherently inflexible, and import duties were notoriously vulnerable to wartime disruptions in trade. Gallatin had believed that the people would be more willing to pay excise taxes in war- time if they did not have to pay them in peace, but Congress did not work up the political courage to test that proposition until the skyrocketing costs of the war had already severely damaged the govern- ment’s credit. Second, Gallatin had given debt repay- ment unquestioned priority over military spending, even as the French Revolution and Napoleon’s rise to power fueled one of the largest military conflicts in Atlan- tic history. Because Gallatin and other Republicans believed they could not afford a viable military establishment, they never seriously considered how long the nation could go on without one. When British interference in America’s neutral trade with France finally provoked the United States to declare war, the country had only 7,000 soldiers and 17 naval ships. Finally, Gallatin had expected that a fiscally responsible Treasury could obtain new loans whenever war required extraor- dinary spending. But Congress’ reluctance to raise new taxes and military defeats attributable to inadequate preparations blasted his expectations. He was forced to borrow at deep discounts and, even then, he found less money than he needed to pay for the war. By the time Gallatin sailed for Europe in 1813 to seek peace with Britain, the future of the Republican regime he had helped to build was cloudy. All three of the American army’s attacks on the British in Canada during the previous year had failed. Despite a few spectacular American naval victories, the British navy so thoroughly dominated the American coast that Gallatin could not sail without a British passport. The Republican major- ity in Congress was about to accept the need for new taxes, but it trembled at the consequences. The people, wrote one of Gallatin’s friends in Congress, “will be dis- gusted with an administration, who have declared war, without ability to conduct it, to a favorable issue; disgrace & taxes will not suit any nation.” Gallatin himself did not survive the debacle. His enemies pushed him out of the Treasury while he was in Europe, and he never again held political office. But despite a brief turn toward more Hamil- tonian fiscal policies immediately after the war, the essential elements of Gallatin’s policy survived. Twenty years after Galla- tin left office, Andrew Jackson would crow that the federal government had repaid the last dollar of its debt. For better or worse, the fiscal culture that Gallatin had nurtured would persist well into the next century.  Gregory May is the author of Jefferson’s Treasure: How Albert Gallatin Saved the New Nation from Debt (Regnery History, 2018), from which this article has been adapted. He clerked for Justice Powell, practiced corporate tax law in Washington, DC and New York for over 30 years, and he now writes about the history of the Early Republic.  |  Fall 2018  |  FINANCIAL HISTORY  23