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.
www.MoAF.org | Fall 2018 | FINANCIAL HISTORY 23