America's Fiscal Constitution (9 page)

Once the military spending measures passed, however, Gallatin took the lead in arguing for the use of higher taxes rather than debt to pay for it. It would not be the last time that some in Congress were more willing to vote to increase military spending than to vote for taxes needed to pay for that spending. President Adams sided with Gallatin. One of the unpopular taxes imposed at the time was the “window tax,” based on the size of houses as determined in part by the number of windows.

If contemporary Americans seek to divine the budget policy of participants in the original Boston Tea Party, organized by John Adams’s cousin, then they need look no further than the views of President Adams. He believed that taxes should be raised as needed to pay for spending appropriated by Congress.

Congress authorized $5 million in debt to fund the building of naval ships, though the net debt of the nation did not increase by this amount, since the Treasury paid down other debt shortly after the bonds were issued.
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Maritime hostilities with France, conducted on each side principally through contractors—“privateers” working on a commission—provided little precedent for future budget policy. American policy during this Quasi-War was, at best, muddled. Vice President Jefferson at times hoped for a French invasion of Great Britain, while Secretary of State Timothy Pickering urged a formal alliance with Great Britain and declaration of war against France. Alexander Hamilton organized an army to resist a potential invasion by France. President Adams grew tired of the military frenzy and developed reservations about the military buildup he had requested.

Critics of Jefferson labeled him a traitor on account of his opposition to military preparations. Jefferson, however, believed that public opinion would vindicate his stance. He likened the war fever to a disease, arguing that “the doctor” was “on his way to cure it, in the guise of a tax gatherer.” The vice president predicted that “excessive taxation” for military spending would soon “carry reason and reflection to every man’s door, particularly in the hour of the election.”
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That election victory came soon enough. Jefferson, Madison, Gallatin, and their allies won the presidency and a congressional majority in an election they would call the “Revolution of 1800.” Hamilton, though he had been frequently at odds with Jefferson, ultimately helped facilitate his election to the presidency. He believed that Jefferson was opportunistic but honorable and that the other candidates, President Adams and Senator Aaron Burr, were temperamentally unfit for the office. Hamilton also correctly believed that Jefferson, with Gallatin’s assistance, would preserve his national bank, whose notes served as an unofficial currency.

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Though Jefferson had once criticized Hamilton’s strong use of executive power, Jefferson’s administration exerted more influence over Congress
than did the Washington or Adams administrations. After all, President Jefferson, Secretary of State James Madison, and Secretary of the Treasury Albert Gallatin also functioned as acknowledged leaders of a party with a congressional majority. That party—originally formed as a means of organizing opposition to federal policies—now provided cohesion between the White House and Congress. President Jefferson dined twice a week with his party’s congressional leaders. When Congress was in session, Gallatin invited key congressional budget allies, including House Speaker Nathanial Macon and Ways and Means Chairman John Randolph, to nightly dinners at his home on Capitol Hill. For years, this close cooperation resulted in a predictable budget process.

Treasury Secretary Gallatin instituted several commonsense budget practices that would serve as structural pillars for the American Fiscal Tradition. He shared Jefferson’s commitment to presenting a budget “as clear and intelligible as merchants’ books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them.”
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Jefferson believed that lucid accounting allowed the public to judge the “comparative [budgets] . . . of different epochs.”
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Gallatin prepared detailed reports of each year’s spending.
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He asked Congress to authorize funds for purposes more specific than the four broad budget categories that had been used during the Washington and Adams administrations. To enhance transparency, Gallatin also eliminated the secret operations of a “sinking fund” committee, instituted by Hamilton, that traded federal debt in public markets. Clear budget accounting became the first budget practice, or pillar, supporting limits on borrowing.

Gallatin also initiated the nation’s first transparent “pay as you go” budget planning. He estimated the tax collections for the next fiscal year, subtracted all interest to be paid on debt, and then allocated the amount remaining into various, detailed categories of spending. This budget practice served to link the level of estimated taxes and spending. Secretary Gallatin’s first budget draft, in 1801, dedicated about two-thirds of all tax revenues to interest payments and debt reduction, and cut everything else—primarily spending on the army and navy—to fit within the remaining third.
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“Pay as you go” budget planning became another pillar supporting limitation of debt.

Congress in 1802 eliminated the unpopular taxes on whiskey and salt. However, Gallatin persuaded Congress to raise import taxes and place
these revenues in a new Mediterranean Fund for use in the financing of naval protection of American shipping from pirates based in Tripoli. The dedication of taxes to a fund for a specific purpose tightened the link between spending and taxes. In fact, revenues from the original whiskey tax were earmarked for the specified purpose of debt service and reduction. This practice, used extensively in the twentieth century, became a third pillar supporting limitation of debt.

Gallatin’s Treasury Department also performed some functions of a central bank. His planned retirement of debt expanded the nation’s money supply without inflation, a practice with an effect similar to later purchases of debt by the Federal Reserve. In 1801 he became the first treasury secretary to bolster bank credit by shifting $50,000 in federal deposits to a sound bank that had a temporary liquidity problem.
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Americans supported Gallatin’s goal of reducing debt. One report of the House Ways and Means Committee noted that the need to reduce debt was “too obviously true to require any illustration.”
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Jefferson observed that, apart from some past differences on foreign policy, “the bulk of both parties had the same principles fundamentally.”
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Gallatin’s drive to reduce federal debt benefited from rising import tax revenues. Most Americans lived on subsistence farms, and one in six was enslaved, but the nation’s maritime industry blossomed. Gallatin reduced the debt from $83,038,050 to $77,054,686 in the first two years of the Jefferson administration.
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By 1803, the debt represented less than a sixth of the annual output of the nation—half what it had been in 1790. While Europeans teetered on the precipice of the Napoleonic Wars and massive related debts, the United States refinanced its debt with lower interest rates. Almost all of its federal debt had been incurred to finance the War for Independence and to preserve the Union. The nation’s federal leaders would soon decide whether to allow the use of debt for another purpose: securing borders and room to grow.

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1803–1824: Years when deficits exceeded debt service = 4 (1812–1815, War of 1812)

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First Consul of France Napoleon Bonaparte spent his Easter Sunday, April 10, 1803, preparing for war. The de facto dictator, then only thirty-three, was considering how best to use French territory in North America to finance a likely war against Great Britain.

France had acquired—but not yet occupied—a vast amount of Spanish territory west of the Mississippi and north of the Rio Grande. Americans were still angry that Spain had temporarily limited their ability to store goods in the Port of New Orleans. In response the US ambassador to France, Robert Livingston, informed French officials that President Jefferson might seek help from the British navy to guarantee free access to the port.

Jefferson’s threat signaled a new low in relations between the former English colonies and France. Just twenty years earlier the French fleet had forced the surrender of British forces at the decisive Battle of Yorktown. Jefferson never forgot France’s crucial help during the Revolution, but he considered any nation that possessed New Orleans as the “natural and habitual enemy” of the United States because “the produce of three-eighths of our territory” had to pass through that city’s port.
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Americans in the new states
of Kentucky and Tennessee were especially vulnerable to shipping disruptions on the routes from the Ohio and Mississippi Rivers to New Orleans.

Napoleon did not relish a battle with the United States, whose “numerous, warlike, and frugal population” he regarded as “an enemy to be feared.”
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He was also haunted by the loss of more than sixty thousand French soldiers, including his own brother-in-law, in an unsuccessful effort to suppress a slave revolt in the colony of Saint-Domingue, present-day Haiti, in 1802. France could not afford a similar diversion of resources during a war with Great Britain.

French diplomat Pierre Samuel du Pont de Nemours had formulated a means to resolve the issues troubling his friends Bonaparte and Jefferson. Du Pont was an early member of a group of French intellectuals who the English called “economists.” In 1802 Du Pont counseled Jefferson to dispense with military threats and instead just offer to buy New Orleans. He advised Jefferson to calculate the cost of war and agree to pay “a part—a half, let us say,” of that sum. Du Pont urged prompt action, since the price might rise if French soldiers took possession of New Orleans. Du Pont also knew that Albert Gallatin planned to retire all federal debt within fifteen years and noted in a letter to Jefferson that the United States would get “an excellent bargain . . . from a pecuniary point of view” by extending the federal debt another “three or four years” to purchase New Orleans.
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Du Pont, in this same letter to Jefferson, mentioned that he had just set up a factory in Delaware that might satisfy the American need for gunpowder and wryly implored the president to “not burn it against” France. Jefferson authorized Du Pont to explore with Napoleon the idea of the United States purchasing New Orleans, but also insisted that Du Pont convey the threat of a potential American alliance with Great Britain.

Napoleon listened to Du Pont carefully. On New Year’s Eve 1802 Jefferson received a letter from Du Pont recommending a price of about $6 million.

Jefferson never referred publicly to Du Pont’s advice, but he did ask Congress in January 1803 to delay military preparations against France and to send James Monroe to the country for the purpose of negotiating a settlement. Seventeen years earlier Monroe had led the fight against a proposed Confederation treaty that would have recognized Spanish control of the Mississippi, earning him credibility among settlers in the West who demanded military preparations to secure their access to the Port of New Orleans. Monroe also commanded respect in France, where he had
arrived as the American minister in 1794, when many other nations had withdrawn their embassies because of the chaos of the French Revolution.

Gallatin asked Congress to set aside $2 million for a potential monetary settlement, while Jefferson secretly authorized Monroe to pay up to 50 million livres, or $9 million, for New Orleans and the part of Spanish Florida around Mobile Bay.
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In light of the Jefferson administration’s frugality, Monroe arranged to pay for his own trip to France by selling his silverware to Secretary of State Madison.

On Easter 1803, with Monroe due to arrive any day in Paris, Napoleon knew he had to decide quickly how best to use his vast New World claims. Great Britain was not going to relinquish Malta, as demanded in an ultimatum from Napoleon, so the young French ruler’s attention turned to war. France lacked the domestic bond market that enabled the British to ramp up military spending quickly. Excessive taxation had resulted in the protests that incited the French Revolution, and Bonaparte had avoided similar unrest only by financing his prior military campaigns with loot from conquests.

The Port of New Orleans remained closed to free storage of American exports, and Napoleon was aware that the US Congress had grown impatient with diplomatic approaches to that problem. He did not assign resolution of this issue to Foreign Minister Talleyrand, whose demand for bribes had precipitated the Quasi-War with the United States only six years earlier.
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Napoleon turned instead to his finance and naval ministers. Finance minister Francois Barbé-Marbois, a friend of President Jefferson who had married an American woman, argued in favor of a quick sale. Minister of the Navy Denis Decrès, however, wanted to retain New Orleans because he believed the city could become a major world port if a canal was ever built to cross the Isthmus of Panama.

It was time for Napoleon to make a decision.