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repealed and the surplus of the budget stripped from it, without Mr.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.

[Illustration: A. J. Dallas]

* * * * *

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_

To arrive at a correct estimate of Mr. Gallatin's administration of the

Treasury Department, a cursory review of the establishment as he

received it from the hands of Mr. Wolcott is necessary. This review is

confined to administration in its limited sense, namely, the direction

of its clerical management under the provisions of statute law. The

organization of the department as originated by Hamilton and established

by the act of September 2, 1789, provided for a secretary of the

treasury as head of the department, whose general duty should be to

supervise the fiscal affairs of the country, and particularly to suggest

and prepare plans for the improvement and support of the public credit;

and, under his direction and supervision, a comptroller to adjust and

preserve accounts; an auditor to receive, examine, and rectify accounts;

a treasurer to receive, keep, and disburse moneys on warrants signed and

countersigned; a register to keep the accounts of receipts and

expenditures; and an assistant to the secretary of the treasury to fill

any vacancy from absence or other temporary cause. In addition to the

departments of State, Treasury, and War, a fourth, that of the Navy, was

established April 30, 1798. The three departments were brought into

relation with that of the Treasury by an act passed July 16, 1798,

supplementary to that organizing the Treasury, and which provided, 1st,

for the appointment of an accountant in each department, who was

required to report to the accounting officer of the Treasury; 2d, that

the Treasurer of the United States should only disburse by warrants on

the Treasury, countersigned by the accountant of the Treasury; 3d, that

all purchases for supplies for military or naval service should be

subject to the inspection and revision of the officers of the Treasury.

Mr. Jefferson, after his usual fashion of economy in the wrong

direction, proposed to Mr. Gallatin "to amalgamate the comptroller and

auditor into one, and reduce the register to a clerk of accounts: so

that the organization should consist, as it should at first, of a keeper

of money, a keeper of accounts, and the head of the department." But in

the Treasury Department there was no extravagance during Gallatin's

administration, and the shifting of responsibility would bring no saving

of salaries.

In May, 1800, an act was passed making it "the duty of the secretary of

the treasury to digest, prepare, and lay before Congress at the

commencement of every session a report on the subject of finances,

containing estimates of the public revenue and expenditures, and plans

for improving and increasing the revenue from time to time, for the

purpose of giving information to Congress in adopting modes for raising

the money requisite to meet the expenditures." Hamilton had never sent

in any other than a statement of expenditure for the past fiscal year,

together with the estimate of the accountant of the Treasury for the

proximate wants of the departments of government. Mr. Gallatin

incorporated in his annual report a balance sheet in accordance with the

ordinary forms of book-keeping familiar to every accountant and

indispensable in every business establishment, and such as is presented

to the public in the monthly and annual statements of the Treasury

Department at this day.

The statutes show no legislation during Mr. Gallatin's period of

administration, and to its close he was in continual struggle to force

upon Congress and the departments an accord with his pet plan of minute

specific appropriation of the sums estimated for and expended by each.

Mr. Madison heartily agreed with Mr. Gallatin on this subject, and on

taking office placed the relations of the State Department upon the

desired footing. But the heads of the Army and Navy were never willing

to consent to the strict limitation which Mr. Gallatin would have

imposed on their expenditures. In his notes to Jefferson for the draft

of his first message in 1801, Mr. Gallatin said that the most important

reform he could suggest was that of 'specific appropriations,' and he

inclosed an outline of a form to be enforced in detail. In January,

1802, he sent to Joseph H. Nicholson a series of inquiries to be

addressed to himself by a special committee on the subject, with regard

to the mode by which money was drawn from the Treasury and the situation

of accounts between that department and those of the Army and Navy. To

these questions he sent in to the House an elaborate reply, which he

intended to be the basis of legislation. Strict appropriation was the

ideal at which he aimed, and this word was so often on his tongue or in

his messages that it could not be mentioned without a suggestion of his

personality. He carried the same nicety of detail into his domestic

life. He managed his own household expenses, and at a time when

bountiful stores were the fashion in every household he insisted on a

rigid observance of the more precise French system. He made an

appropriation of a certain sum each day for his expenses, and required

from his purveyor a strict daily account of disbursements. An amusing

story is told of him at his own table. On an occasion when entertaining

a company at dinner, he was dissatisfied with the menu and expressed his

disapprobation to his maître d'hôtel, a Frenchman, who replied to him

in broken English, that it was not his fault, but that of the

"mal-appropriations."

The example set by Mr. Gallatin in this particular was never forgotten,

and from his day to this strict accountability has been the tradition of

the Treasury Department, now greatly increased in detail, but in

structure essentially as it was originally organized. Of its management

Mr. Sherman was able to say in his report of December 1, 1879, "The

organization of the several bureaus is such, and the system of

accounting so perfect, that the financial transactions of the government

during the past two years, aggregating $3,354,345,040, have been

adjusted without question with the exception of a few small balances,

now in the process of collection, of which it is believed that the

government will eventually lose less than $13,000, or less than four

mills for each $1000 of the amount involved;" and in 1880 he said with

entire truth, "The department is a well organized and well conducted

business office, depending mainly for its success upon the integrity and

fidelity of the heads of bureaus and chiefs of divisions."

_Banking_

There is no more instructive chapter in the history of finance than that

upon the banking system of the United States. It has its distinct eras

of radical change, each of which presents a series of tentative

experiments. The outcome, by a process of development, in which

political expediency has been as effective an agency as financial

necessity, is the present national banking system. Though the term

"government," or "national," bank is constantly used in reference to the

great banking institutions of England, France, and the United States, no

one of these is in the true sense of the word a national bank. The Bank

of England is a chartered corporation, the Bank of France an association

instituted by law. The Bank of North America, and the Bank of the United

States which followed it, were founded on the same principle. Both were

corporations of individuals intimately connected with the government,

enjoying certain privileges accorded and being under certain

restrictions, but otherwise independent of government control.

The Bank of North America, the first bank established in the United

States, was also the first which had any direct relation to the

government. It was the conception of the comprehensive and original mind

of Robert Morris, the financier or superintendent of the public finances

of the United States. Its purpose was not the convenience or profit of

individuals, but to draw together the scattered financial resources of

the country and found a public credit. He submitted his plan to

Congress, which adopted a resolution of approval May 26, 1781. The

original plan contemplated a capital of ten millions of dollars; but the

collection of such a sum in gold and silver in one depository was beyond

the range of possibility at that period, and the capital was finally

fixed at four hundred thousand dollars, in one thousand shares of four

hundred dollars each. Subscription books were immediately opened, but

not more than $70,000 was entered during the summer months. The arrival

at Boston of a French war frigate with a remittance of $470,000 in

specie, which was brought to Philadelphia and deposited in the vaults of

the bank, enabled Mr. Morris to mature his plans. He designed to retain

this sum in the bank as a specie basis; but the necessities of the

country were so urgent during the critical season of the Yorktown

campaign, that nearly one half of it was exhausted before an

organization could be effected. In December Congress passed an ordinance

of incorporation. Mr. Morris then subscribed the specie remaining in the

Treasury, about $254,000, for shares for account of the United States,

which became thereby the principal stockholder. The limit assigned by

the ordinance remained, however, at ten millions of dollars. There was

nothing in the acts of Congress which implied any exclusive right of the

United States government in the bank except during the war of the

Revolution. A local charter was obtained from the legislature of

Pennsylvania, and the bank was opened in Philadelphia for the

transaction of business in January, 1782. Its services to the government

during the period of the war were inestimable. In the words of Hamilton,

"American independence owes much to it." But after the war such were

the local jealousies, the fears of oppression, and the dread of foreign

influence, that, on the petition of the inhabitants of Philadelphia and

some of the neighboring counties, the legislature of Pennsylvania

repealed its charter on September 13, 1785. The bank continued its

operations, however, under the charter from Congress. On March 17, 1787,

the legislature of Pennsylvania renewed the charter for fourteen years

and limited the capital to two millions of dollars. The charter was

extended for a similar term of fourteen years on March 26, 1799. Thus in

the beginning of the American banking system are found that distrust and

jealousy of money power which seem inherent in democracies. The exercise

of state jurisdiction over the existence of the Bank of North America

suggested possible embarrassments, which could not escape the

discernment of Hamilton, whose policy, as it was also that of the

Federal party, was to strengthen the powers of the government in every

vital branch of administration.

* * * * *

In his comprehensive plan of government Hamilton included a financial

institution to develop the national resources, strengthen the public

credit, aid the Treasury Department in its administration, and provide a

secure and sound circulating medium for the people. On December 13,

1790, he sent in to Congress a report on the subject of a national bank.

The Republican party, then in the minority, opposed the plan as

unconstitutional, on the ground that the power of creating banks or any

corporate body had not been expressly delegated to Congress, and was

therefore not possessed by it. Washington's cabinet was divided;

Jefferson opposing the measure as not within the implied powers, because

it was an expediency and not a paramount necessity. Later he used

stronger language, and denounced the institution as "one of the most

deadly hostility existing against the principles and form of our

Constitution," nor did he ever abandon these views. There is the

authority of Mr. Gallatin for saying that Jefferson "died a decided

enemy to our banking system generally, and specially to a bank of the

United States." But Hamilton's views prevailed. Washington, who in the

weary years of war had seen the imperative necessity of some national

organization of the finances, after mature deliberation approved the

plan, and on February 25, 1791, the Bank of the United States was

incorporated. The capital stock was limited to twenty-five thousand

shares of four hundred dollars each, or ten millions of dollars, payable

one fourth in gold and silver, and three fourths in public securities

bearing an interest of six and three per cent. The stock was immediately

subscribed for, the government taking five thousand shares, two millions

of dollars, under the right reserved in the charter. The subscription of

the United States was paid in ten equal annual installments. A large

proportion of the stock was held abroad, and the shares soon rose above

par. By an act of March 2, 1791, the funded three per cents. were also

made receivable in payment of subscriptions to the bank, whence it has

been said that out of the funding system sprung the bank, as three

fourths of its capital consisted of public stocks. Authority was given

the bank to establish offices of discount and deposit within the United

States. The chief bank was placed in Philadelphia, and branches were

established in eight cities, with capitals in proportion to their

commercial importance.

In 1809 the stockholders of the Bank of the United States memorialized

the government for a renewal of their charter, which would expire on

March 4, 1811; and on March 9, 1809, Mr. Gallatin sent in a report in

which he reviewed the operations of the bank from its organization. Of

the government shares, five million dollars at par, two thousand four

hundred and ninety-three shares were sold in 1796 and 1797 at an advance

of 25 per cent., two hundred and eighty-seven in 1797 at an advance of

20 per cent., and the remaining 2220 shares in 1802, at an advance of 45

per cent., making together, exclusive of the dividends, a profit of

$671,680 to the United States. Eighteen thousand shares of the bank

stock were held abroad, and seven thousand shares, or a little more than

one fourth part of the capital, in the United States. A table of all the

dividends made by the bank showed that they had on the average been at

the rate of 8-3/8 (precisely 8-13/34) per cent. a year, which proved

that the bank had not in any considerable degree used the public

deposits for the purpose of extending its discounts. From a general view

of the debits and credits, as presented, it appeared that the affairs of

the Bank of the United States, considered as a moneyed institution, had

been wisely and skillfully managed. The advantages derived by the

government Mr. Gallatin stated to be, 1, safekeeping of the public

moneys; 2, transmission of the public moneys; 3, collection of the

revenue; 4, loans. The strongest objection to the renewal of the charter

lay in the great portion of the bank stock held by foreigners. Not on

account of any influence over the institution, since they had no vote;

but because of the high rate of interest payable by America to foreign

countries. If the charter were not renewed the principal of that

portion, amounting to $7,200,000, must at once be remitted abroad; but

if the charter were renewed, dividends equal to an interest of about

8-1/2 per cent. per annum must be remitted. Mr. Gallatin's report closed

with the following suggestions:--

I. That the bank should pay an interest to the United States on the

public deposits above a certain sum.

II. That it should be bound to lend the United States a sum not

exceeding three fifths of its capital.

III. That the capital stock of the bank should be increased to thirty

millions of dollars, to be subscribed for, 1, five millions by citizens

of the United States; 2, fifteen millions by the States; a branch to be

established in each subscribing State; 3, payments by either individuals

or States to be in specie or public stock of the United States at rates

to be fixed by law; the subscribing States to pay in ten annual

installments.

IV. That some share should be given in the direction to the general and

state governments by appointment of directors in the general direction

and branches.

The result of this plan would be, 1st, that the United States might,

from the interest on the public deposits, accumulate during years of

peace and prosperity a treasure sufficient to meet periods of war and

calamity; 2d, that they might rely on a loan of eighteen millions of

dollars in any sudden emergency; 3d, that by the payment in ten

installments the increase in capital would be in proportion to the

progressive state of the country; 4th, that the bank itself would form

an additional bond of common interest and union amongst the several

States. But these arguments availed not against the blind and ignorant

jealousy of the Republican majority in the House. The days of the bank

were numbered. Congress refused to prolong its existence, and the

institution was dissolved. Fortunately for the country, it wound up its

affairs with such deliberation and prudence as to allow of the

interposition of other bank credits in lieu of those withdrawn, and

thus prevented a serious shock to the interests of the community. In the

twenty years of its existence from 1791 to 1811 its management was

irreproachable. Its annual dividends from 1791 to 1809 were 8-2/3 per

cent., and its stock, always above par, from 1805 to 1809 ranged from 20

to 40 per cent. premium.

In its numerous and varied relations to the government it had been a

useful and faithful servant, and its directors had never assumed the

attitude of money kings, of which the Jeffersonian democracy pretended

to stand in hourly dread. To the general and important nature of its

financial service Mr. Gallatin gave his testimony in 1830; after his own

direct participation in public affairs had ended.

"Experience, however, has since confirmed the great utility and

importance of a bank of the United States in its connection with

the Treasury. The first great advantage derived from it consists in

the safekeeping of the public moneys, securing in the first

instance the immediate payment of those received by the principal

collectors, and affording a constant check on all their

transactions; and afterwards rendering a defalcation in the moneys

once paid, and whilst nominally in the treasury, absolutely

impossible. The next, and not less important, benefit is to be

found in the perfect facility with which all the public payments

are made by checks or treasury drafts, payable at any place where

the bank has an office; all those who have demands against

government are paid in the place most convenient to them; and the

public moneys are transferred through our extensive territory at a

moment's warning without any risk or expense, to the places most

remote from those of collection, and wherever public exigencies may

require."

Late in life, in a letter to John M. Botts, June 14, 1841, Mr. Gallatin

expressed the same opinions with regard to the usefulness of a

government bank as an aid to the Treasury Department, but limited his

approval to that use. "Except in its character of fiscal agent to the

general government I attach much less importance to a national bank than

several of those who are in favor of it." "Did I believe," he adds in

the same letter, "that a bank of the United States would effectually

secure us a sound currency, I would think it a duty at all hazards to

promote the object."

The reason for his doubts in 1841 is easily seen in the impossibility of

annihilating or controlling the three hundred distinct currencies of as

many banks, each nominally convertible into specie at its point of

issue; a financial puzzle which Mr. Chase solved in the device and

organization of the present national banking system, which, without

involving the government in banking operations, affords to the people a

homogeneous currency of uniform value, and secures its convertibility by

reasonable but absolute restrictions, upon conformity to which the

existence of the banks depends. The exigencies of war compelled an

acquiescence in the plans of Mr. Chase, which, at the time when Mr.

Gallatin expressed his doubts, could not have been had in any system

whatever which involved the subordination of the banks.

The wide spread of the state bank system, with its irresponsible and

unlimited issues, occurring subsequent to Mr. Gallatin's withdrawal from

the Treasury, was a consequence of the failure to renew the charter of

the Bank of the United States; and if ever there were a system by which

the inhabitants of States whose floating capital was small were placed

at the mercy of moneyed corporations of the States where it was

abundant, it was the state bank system. The experience of the old

confederation had not taught this lesson. The colonial system was

continued by the several States, and bills of credit were issued on

their faith. The continental system was a compound of the main features

of this plan. The bills were issued by the Congress, but the States were

relied upon for their ultimate redemption.

The collapse of the entire fabric of finance led to the establishment of

the Bank of North America, the notes of which were redeemable and

redeemed at the bank counters. The article in the Constitution of 1787,

prohibiting the issue of bills of credit by the States, was evidently

intended to secure a uniform currency to the people of the United

States, and it has been by a strange perversion of this manifest

intention that the power has been conceded to the States to charter

corporations to do that which was forbidden to themselves in their

sovereign capacity; namely, to issue bills of credit, which bank-notes

are. It is idle to say that, because such bills were not a "legal

tender," they were therefore not of the character which the Constitution

forbade. Necessity knows no law, and in the absence of any other

currency the people were perforce compelled to take what they could get.

Experience later showed that large amounts of paper money manufactured

in one State were easily put in circulation in far distant communities,

and considerable sums, through the operations of wear and tear and the

vicissitudes incident to its fragile nature, never returned to plague

the inventor.

At the time of the organization of the National Bank by Hamilton, there

were but three banks in the United States: the Bank of North America,

the Bank of New York, and the Bank of Massachusetts. Their added capital

amounted to two millions of dollars, and their issues were

inconsiderable.

Mr. Gallatin estimated that in January, 1811, just before the expiration

of the bank charter, there were in the United States eighty-eight state

banks with a capital of $42,612,000.

--------------------------+-------------+---------------+------------

| | Notes in |

| Capital. | Circulation. | Specie.

--------------------------+-------------+---------------+------------

Bank of the United States | $10,000,000 | $5,400,000 | $5,800,000

Eighty-eight State Banks | 42,610,601 | 22,700,000 | 9,600,000

--------------------------+-------------+---------------+------------

| $52,610,601 | $28,100,000 | $15,400,000

--------------------------+-------------+---------------+------------

Over the local institutions the Bank of the United States always

exercised a salutary control, checking any disposition to overtrade by

restraining their issues and holding them to a proper specie reserve;

and this by no other interference except its countenance or ill favor,

as such banks severally observed or disregarded the ordinary rules of

financial prudence. The immediate effect of the refusal of Congress to

recharter the Bank of the United States was to bring the Treasury to the

verge of bankruptcy. The interference of Parish, Girard, and Astor alone

saved the credit of the government, and this interference was no doubt

prompted by self-interest. That Mr. Astor was hostile to the bank is

certain. Gallatin wrote to Madison in January, 1811, that Mr. Astor had

sent him a verbal message, "that in case of non-renewal of the charter

of the Bank of the United States, all his funds and those of his

friends, to the amount of two millions of dollars, would be at the

command of government, either in importing specie, circulating

government paper, or in any other way best calculated to prevent any

injury arising from the dissolution of the bank," and he added that Mr.

Bentson, Mr. Astor's son-in-law, in communicating this message said,

"that in this instance profit was not Mr. Astor's object, and that he

would go great lengths, partly from pride and partly from wish, to see

the bank down." In 1813, when the bank was "down," Mr. Gallatin was no

longer master of the situation. He offered to treat directly with

Parish, Girard, and Astor for ten millions of dollars, but finding some

hesitation, he opened the loan for subscription. When the subscription

failed, he was at the mercy of the capitalists.

Another immediate effect of the dissolution of the bank was the

withdrawal from the country of the foreign capital invested in the bank,

more than seven millions of dollars. This amount was remitted, in the

twelve months preceding the war, in specie. Specie was at that time a

product foreign to the United States, and by no means easy to obtain.

Specie, as Mr. Gallatin profoundly observed, does not precede, but

follows wealth. The want of it nearly destroyed Morris's original plan

for the Bank of North America, and was only made up by the fortunate

receipt of the French remittances. In 1808 the specie in the vaults of

the treasury reached fourteen millions of dollars, but during the

operation of the Embargo Act, the banks of New England had gradually

accumulated a specie reserve, and that of Richmond, Virginia, pursued

the same policy. Together they held one third of the entire specie

reserve of the banks. The amount of specie in the Bank of the United

States, January 1, 1811, had fallen to $5,800,000, which soon found its

way abroad.

The notes of the Bank of the United States, payable on demand in gold

and silver at the counters of the bank, or any of its branches, were,

by its charter, receivable in all payments to the United States; but

this quality was also stripped from them on March 19, 1812, by a repeal

of the act according it. To these disturbances of the financial

equilibrium of the country was added the necessary withdrawal of fifteen

millions of bank credit and its transfer to other institutions. This

gave an extraordinary impulse to the establishment of local banks, each

eager for a share of the profits. The capital of the country, instead of

being concentrated, was dissipated. Between January 1, 1811, and 1815,

one hundred and twenty new banks were chartered, and forty millions of

dollars were added to the banking capital. To realize profits, the

issues of paper were pushed to the extreme of possible circulation.

Meanwhile New England kept aloof from the nation. The specie in the

vaults of the banks of Massachusetts rose from $1,706,000 on June 1,

1811, to $7,326,000 on June 1, 1814. This was a consequence of the New

England policy of opposition. Mr. Gallatin estimated that the proceeds

of loans, exclusive of treasury notes and temporary loans, paid into the

treasury from the commencement of the war to the end of the year 1814

were $41,010,000: of which sum the Eastern States lent $2,900,000; the

Middle States, $35,790,000; Southwestern States, $2,320,000.

The floating debt of the United States, consisting of treasury notes

and temporary loans unpaid, amounted, January 1, 1815, to $11,250,000,

of which nearly four fifths were loaned by the cities of New York,

Philadelphia, and Baltimore, and the District of Columbia. The

suspension of the banks was precipitated by the capture of Washington.

It began in Baltimore, which was threatened by the British, and was at

once followed in Philadelphia and New York. Before the end of September

all the banks south and west of New England had suspended specie

payment. In his "Considerations on the Currency," Mr. Gallatin expressed

his--

"deliberate opinion that the suspension might have been prevented

at the time when it took place, had the Bank of the United States

been in existence. The exaggerated increase of state banks,

occasioned by the dissolution of that institution, would not have

occurred. That bank would _as before_ have restrained them within

proper bounds and checked their issues, and through the means of

its offices it would have been in possession of the earliest

symptoms of the approaching danger. It would have put the Treasury

Department on its guard; both, acting in concert, would certainly

have been able, at least, to retard the event; and as the treaty of

peace was ratified within less than six months after the suspension

took place, that catastrophe would have been avoided."

But within fifteen months the bank issues increased from forty-five and

a half to sixty millions.

----------------------+-------------+--------------+------------

| Capital. | Circulation. | Specie.

----------------------+-------------+--------------+------------

Banks of New England. | $15,690,000 | $5,320,000 | $8,200,000

Other Banks | 66,930,000 | 44,730,000 | 8,600,000

----------------------+-------------+--------------+------------

1815. 208 State Banks.| $82,620,000 | $50,050,000 | $16,800,000

1816. 246 State Banks.| 89,822,422 | 68,000,000 | 19,000,000

----------------------+-------------+--------------+------------

The depression of the local currencies ranged from seven to twenty-five

per cent. In New York and Charleston it was seven to ten per cent. below

the par of coin. At Philadelphia from seventeen to eighteen per cent. At

Washington and Baltimore from twenty to twenty-two, and at Pittsburgh

and on the frontier, twenty-five per cent. below par. The circulating

medium, or measure of values, being doubled, the price of commodities

was doubled. The agiotage, of course, was the profit of the bankers and

brokers; a sum estimated at six millions of dollars a year, or ten per

cent. on the exchanges of the country, which McDuffie, in his celebrated

report, estimated at sixty millions annually.

In November the Treasury Department found itself involved in the common

disaster. The refusal of the banks, in which the public moneys were

deposited, to pay their notes or the drafts upon them in specie deprived

the government of its gold and silver; and their refusal, likewise, of

credit and circulation to the issues of banks in other States deprived

the government also of the only means it possessed for transferring its

funds to pay the dividends on the debt and discharge the treasury notes.

Mr. Dallas found himself compelled to appeal to the banks by circular to

subscribe for sufficient treasury notes to secure them such advances as

might be asked of them for the discharge of the public obligations.

"In the latter end of the year 1814," says Mr. Gallatin, "Mr. Jefferson

suggested the propriety of a gradual issue by government of two hundred

millions of dollars in paper;" commenting upon which Mr. Gallatin

remarks that Mr. Jefferson, from the imperfect data in his possession,

"greatly overrated the amount of paper currency which could be sustained

at par; and he had, on the other hand, underrated the great expenses of

the war;" but at "all events," he adds, "the issue of government paper

ought to be kept in reserve for extraordinary circumstances." But here

it may be remarked that the evolution of the systems of American finance

seems to lead slowly but surely to an entire divorce of banking from

currency, and the day is not far distant when the circulating medium of

the United States will consist of gold and silver, and of government

issues restricted, according to the English principle, to the minimum of

circulation, and kept equivalent to coin by a specie reserve in the

treasury; while the banks, their circulation withdrawn and the

institutions freed from any tax, will be confined to their legitimate

business of receiving deposits and making loans and discounts.

On October 14, 1814, Alexander J. Dallas, Mr. Gallatin's old friend, who

had been appointed secretary of the treasury on the 6th of the same

month, in a report of a plan to support the public credit, proposed the

incorporation of a national bank. A bill was passed by Congress, but

returned to it by Madison with his veto on January 15, 1815. In this

peculiar document Madison "waived the question of the constitutional

authority of the legislature to establish an incorporated bank, as being

precluded, in his judgment, by repeated recognitions, under varied

circumstances, of the validity of such an institution in acts of the

legislative, executive, and judicial branches of the government." But he

objected for reasons of detail. Mr. Dallas again, as a last resort,

insisted on a bank as the only means by which the currency of the

country could be restored to a sound condition. In December, 1815,

Dallas reported to the committee of the House of Representatives on the

national currency, of which John C. Calhoun was chairman, a plan for a

national bank, and on March 3, 1816, the second Bank of the United

States was chartered by Congress. The capital was thirty-five millions,

of which the government held seven millions in seventy thousand shares

of one hundred dollars each. Mr. Madison approved the bill. This

completed the abandonment of every shred of principle claimed by the

Republican party as their rule of action. They struggled through the

rest of their existence without a political conviction. The national

bank, and the system of internal taxation which had been scorned by

Jefferson and Madison as unconstitutional, were accepted actually under

Madison's administration. Gallatin's success, owing to the development

and application of Hamilton's plans, was a complete vindication of the

theory and practice of the Federalists which they abhorred; Jefferson's

plan of a government issue of paper money was a higher flight into the

upper atmosphere of implied powers than Hamilton ever dreamed of.

The second national bank of the United States was also located at

Philadelphia, and chartered for twenty years. The manner in which it

performed its financial service is admirably set forth in Mr. Gallatin's

"Considerations on the Currency," already mentioned. It acted as a

regulator upon the state banks, checked excessive issues on their part,

and brought the paper currency of the country down from sixty-six to

less than forty millions, before the year 1820.

In April, 1816, Mr. Dallas having signified his intention to resign the

Treasury, Mr. Madison wrote to Gallatin, offering him his choice between

the mission to France and the Treasury Department. Mr. Gallatin's reply

was characteristic. He declined the Treasury, but with reluctance, since

he thought he would be more useful at home than abroad, and because he

preferred to be in America rather than in Europe. One of his

preponderating reasons was that, although he felt himself competent to

the higher duties of the office, there was, for what he conceived "a

proper management of the Treasury, a necessity for a mass of mechanical

labor connected with details, forms, calculating, etc., which having

lost sight of the thread and routine, he could not think of again

learning and going through." He was aware that there was "much confusion

due to the changes of office and the state of the currency, and thought

that an active young man could alone reinstate and direct properly that

department."

In June of the same year, while waiting for the Peacock, which was to

carry him across the sea, Gallatin wrote Mr. Madison an urgent letter,

impressing upon him the necessity of restoring specie payment, and his

perfect conviction that nothing but the will of the government was

wanted to reinstate the country in its moral character in that respect.

He dreaded the "paper taint," which he found spreading as he journeyed

northward.

In January 1817, delegates from the banks of New York, Philadelphia,

Baltimore and Virginia met in Philadelphia and agreed to a general and

simultaneous resumption of specie payments. The Bank of the United

States proposed a compact which was accepted by the state banks and

ratified by the secretary of the treasury. That institution engaged, to

a reasonable extent, to support any bank menaced. This engagement and

the importation of seven millions of specie from abroad by the Bank of

the United States secured a general restoration of specie payment. In

1822 Mr. Gallatin was tendered and declined the office of president of

the Bank of the United States.

In 1829 he prepared for Mr. Ingham, then secretary of the treasury, a

masterly statement of the relative value of gold and silver. In 1830 Mr.

Gallatin wrote for the "American Quarterly Review" his essay,

"Considerations on the Currency and Banking System of the United

States." Appearing at the time when the renewal of the charter of the

Bank of the United States was an absorbing question, this essay was

equally sought for by both the friends and opponents of the bank. It is

not confined, however, to this subject, but covers the entire field of

American finance. His treatment of the currency question was novel. He

analyzed the systems of Europe, compared them with those which prevailed

in the United States, and reached the conclusion, the general

correctness of which has been justified by the experience of all other

nations, and sooner or later will be accepted by our own; namely, the

necessity of a currency strong in the precious metals, and the

restriction of paper money to notes of one hundred dollars to be issued

by the government. This limit is higher than that adopted in France and

England, but the general principle that a circulating medium is sound

only as it is strong in gold and silver, and that gold and silver can

only be retained permanently by making a place for them in the

circulating medium by a restriction of paper issues, will yet find

favor even in this paper-loving country.

In 1832 Mr. Gallatin accepted the presidency of a bank in New York, the

subscription to the stock of which, $750,000, was completed by Mr. John

Jacob Astor on condition that Mr. Gallatin should manage its affairs.

The direction of its concerns, without absorbing his time, kept him in

the financial current. The bank was called the National Bank of New

York. But not in this modest post was he to find the financial path

smooth. It is true he had lived in the flesh to see the financial

millennium. The rapid growth of the country and the faithful adherence

of his successors in the Treasury Department to the funding principle

had at last realized his dream. The national debt was extinguished. The

last dollar was paid. Louis McLane, secretary of the treasury, on

December 5, 1832, in his report on the finances, said that the dividends

derived from the bank shares held by the United States were more than

was required to pay the interest, and that the _debt_ might therefore be

considered as substantially extinguished after January 1, 1833.

On December 3, 1833, Roger B. Taney, secretary of the treasury, reported

to Congress that he had directed the removal of the deposits of the

government from the Bank of the United States and placed them in banks

of his own selection. He gave a number of reasons for this extraordinary

exercise of the power which he obtained by his appointment on September

23, 1833. He received his reward in June, 1834, being then transferred

by President Jackson to the seat of chief justice of the Supreme Court.

In his annual report Taney named, among his elaborate reasons for the

removal, that the bank had used its money for electioneering purposes,

and that he "had always regarded the result of the last election of

President of the United States as the declaration of a majority of the

people that the charter ought not to be renewed." He further expressed

the opinion "that a corporation of that description was not necessary

either for the fiscal operations of the government or the general

convenience of the people." It mattered little to him that Mr. Gallatin

had only recently pointed out that from the year 1791 the operations of

the Treasury had, without interruption, been carried on through the

medium of banks; during the years 1811 to 1814, by the state banks, with

a result which no one had as yet forgotten; before and since that brief

interval through the Bank of the United States. Enough for Taney, that

it was the will of his imperious master, 'the pugnacious animal,' as

Gallatin aptly termed him.

In October, 1834, Taney's successor in the Treasury, Levi Woodbury, gave

notice that the remaining debt, unredeemed after January 1, 1835, would

cease to bear interest and be promptly paid on application to the

commissioners of loans in the several States. On December 8, 1835, Mr.

Woodbury reported "an unprecedented spectacle presented to the world of

a government virtually without any debts and without any direct

taxation." The surplus revenues, about thirty-seven and a half millions

of dollars, had by an act of the previous session been distributed among

the several States. But the secretary and the country soon found that

they were on dangerous ground. In December, 1837, the same secretary,

alarmed at his responsibility, said to Congress, in warning words, "We

are without any national debt to absorb and regulate surpluses, or any

adequate supply of banking institutions which provide a sound currency

for general purposes by paying specie on demand, or which are in a

situation fully to command confidence for keeping, disbursing, and

transferring the public funds in a satisfactory manner."

The Bank of the United States, on the expiration of its charter in

March, 1836, accepted a charter from the State of Pennsylvania; but,

though its influence continued to be as great, its direction was no

longer the same. Abandoning its legitimate business, it speculated in

merchandise, and even kept an agent in New Orleans to compete with the

Barings in purchases of the cotton crop as a basis for exchange.

Precisely as in 1811, after the withdrawal of the control of the Bank of

the United States, the state banks ran a wild career of speculation.

From 1830 to 1837 three hundred new banks sprang up with an additional

capital of one hundred and forty-five millions, doubling, as twenty

years before, the banking capital of the country. This volume the

deposits of the Treasury continued to swell. Mr. Woodbury was the first

to take alarm. In December, 1836, he reported the specie in the country

to have increased from thirty millions in 1833 to seventy-three millions

at the date of his report, and the paper circulation, in the same

period, to have advanced, since the removal of the deposits from the

Bank of the United States, from eighty millions to one hundred and

twenty millions, or forty millions in eighteen months; and the bank

capital, in the same period, to have increased from two hundred to three

hundred millions. Importation augmented; the balance of trade suddenly

turned against the United States to the extent of one hundred and fifty

millions, and coin began to flow abroad to liquidate the account. There

was no debt to attract foreign investment and arrest the export of

specie. Added to this was the withdrawal of the government deposits from

the pet banks, which compelled an immediate contraction. The result was

inevitable. On May 10, 1837, the New York banks suspended, Mr.

Gallatin's institution being of course dragged down with the rest. It is

idle to suppose that any single bank can hold out against a general

suspension. It may liquidate or become a bank of deposits, but it cannot

maintain its relations with its sister institutions except on a basis of

common accord.

A general suspension followed. Mr. Woodbury proved himself equal to the

emergency, and recommended a plan of "keeping the public money under new

legislative provisions without using banks at all as fiscal agents."

This was the beginning of the sub-treasury system, a new departure in

treasury management, and a further evolution in American finance. It

still remains, and will no doubt be permanent. Its establishment was

necessary because of the absence of a national bank.

Mr. Gallatin at once turned his attention to bring about first a

liquidation and then a resumption. It was a favorite maxim with him,

that "the agonies of resumption are far harder to endure than those of

suspension," as it is easier to refrain from lapse of virtue than to

restore moral integrity once impaired. But in resumption the suffering

falls where it belongs, on the careless, the improvident, and the

over-trader.

On August 15, 1837, the officers of the banks of New York city, in a

general meeting, appointed a committee of three to call a convention of

the principal banks to agree upon a time for a resumption of specie

payments. This committee, of which Mr. Gallatin was chairman, on August

18 addressed a circular to the principal banks in the United States,

inviting the expression of their wishes as to the time and place for a

convention, suggesting New York as the place, and October, 1837, as the

time. They said, in addition, that the banks of New York city, in view

of the law of the State dissolving them as legal corporations in case

of suspension for one year, must resume at some time between January 1

and March 15, 1838. The circular committed the New York banks to no

definite action, but expressed the opinion that the fall in the rate of

exchanges indicated an early return of specie to par, when resumption

could be effected without danger. The banks of Philadelphia held a

meeting on August 29, and adopted resolutions declaring it inexpedient

to appoint delegates to the proposed convention. Aware of the reasons

for this action, the chief of which was the extended and perhaps

insolvent condition of the United States Bank of Pennsylvania, the New

York committee invited the banks in the several States to appoint

delegates to meet on November 27, 1837, in New York. Delegates from

banks of seventeen States and the District of Columbia appeared. On the

30th resolutions were brought in recommending a general resumption on

July 1, without precluding an earlier resumption on the part of such

banks as might find it necessary. The Pennsylvania banks opposed this

action with resolutions condemning the idea of immediate resumption as

impracticable, and also, in the absence of delegates from the banks of

Louisiana, Mississippi, Alabama, and Tennessee, as unwise. The

convention met again on December 2, when an adjournment was carried to

April 11, 1838, when delegates from the banks not represented were

invited to attend. Mr. Gallatin saw that the combination of the

Philadelphia and Boston banks, under the lead of Mr. Biddle, would

certainly force a further postponement. Exchange on London, which had

been as high as 121, the true par being about 109-1/2, nominal, had

fallen to 111-1/2, which, considering that the city bank paper was at a

discount of five per cent., was at the rate of 2-1/2 per cent. below

specie par. The exportation of specie had entirely ceased.

On December 15 Mr. Gallatin and his committee appointed at the general

convention submitted a report which he had drafted, which, though

addressed to the New York banks, covered the whole ground. Meanwhile the

highest authority in Pennsylvania had given it as his opinion "that the

banks of Pennsylvania were in a much sounder state than before the

suspension, and that the resumption of specie payments, so far as it

depends on their situation and resources, may take place at any time."

On February 28, 1838, Mr. Gallatin's committee made a further report

showing that the liabilities of the New York banks had been reduced more

than twelve millions and a half, or fifty per cent., and asserting that

with the support of the community and the state authorities they could

resume on an equal footing on May 10. This declaration was welcomed with

great satisfaction by a general meeting of the citizens of New York. On

April 11 the general convention again met in New York. The Philadelphia

banks declined to attend. A letter from Mr. Woodbury promised the

support of the Treasury Department. A committee of one from each State

was appointed, which recommended the first Monday in October as the

earliest day for a general resumption. The convention could not,

however, be brought to fix upon so early a day, but finally fixed upon

January 1, 1839, and adjourned. The New York banks would have accepted

July 1, 1838, but this being refused they resumed alone on May 10, and

the force of public opinion compelled resumption by nearly all the banks

of the country on July 1.

The terrible contraction was fatal to the United States Bank of

Pennsylvania, which after a vain struggle closed its doors in October,

1839, and carried with it the entire banking system of the Southern and

Southwestern States. Although in no way similar to the semi-governmental

institutions which preceded it, yet, from its similarity of name and

identity of location, its disastrous failure added to the blind popular

distrust of its predecessors, which narrow-minded politicians had

fostered for their own selfish purposes. Fortunately the sub-treasury

plan of Mr. Woodbury supplied the need of a safe place of deposit which,

since the refusal of Congress to renew the charter of the old bank, had

been sorely felt.

In 1838, on the foundation of the Bank of Commerce under the free

banking law of the State of New York, the presidency of it was first

tendered to Mr. Gallatin. The directors of this bank were among the most

distinguished financiers of the city, and its object was to provide a

conservative institution with sufficient power and capital to act as a

regulator upon the New York banks. Profit to the stockholders was

secondary to the reserve power for general advantage.

In June, 1839, Mr. Gallatin resigned his post as president of the

National Bank of New York. In 1841 he published a financial essay, which

he entitled "Suggestions on the Banks and Currency of the United

States," a paper full of information, but from the nature of the subject

not to be compared in general interest with his earlier paper, which is

as fresh to-day as when it was written. Mr. Gallatin condemned paper

currency as an artificial stimulus, and the ultimate object of his

essays was to annihilate what he termed the "dangerous instrument." He

admitted its utility and convenience, when used with great sobriety, but

he deprecated its tendency to degenerate into a depreciated and

irredeemable currency. This tendency the present national banking law

arrests, but the law rather invites than prohibits the stimulus of

increased issues. The last word has not yet been said on national

currency, which, though the basis of all commercial transactions, has

necessarily no other relation to banks than that which it holds to any

individual in the community.

Economic questions have interested the highest order of mind on the two

continents. Sismondi published a paper on commercial wealth in 1803, and

in 1810 a memoir on paper money, which he prepared to show how it might

be suppressed in the Austrian dominions; Humboldt made a special study

of the sources and quantity of the precious metals in the world, in

which Mr. Gallatin aided him by investigation in America. Michel

Chevalier was interested in the same subjects; surviving his two masters

in the art and witnessing the marvelous effects of the additions made by

America to the store of precious metals, he continued the study in the

spirit of his predecessors, and favored the world with instructive

papers. Mr. Gallatin's contributions to this science are remarkable for

minute research and careful deductions.

In 1843 President Tyler tendered the Treasury portfolio to Mr. Gallatin.

The venerable financier looked upon the offer as an act of folly to

which a serious answer seemed hardly necessary. Yet as silence might be

misconstrued, he replied that he wanted no office, and to accept at his

age that of secretary of the treasury would "be an act of insanity." He

was then in his eighty-third year. The offer of the post was but an

ill-considered caprice of Mr. Tyler.

FOOTNOTES:

[Footnote 10: Cents are omitted as confusing figures.]

[Footnote 11: The first Annual Report of the Secretary of the Treasury.

This was under the Supplementary Treasury Act.]

[Footnote 12: Excess of receipts, notwithstanding the purchase of

Louisiana and payments on account of principal and interest of the

debt.]

[Footnote 13: These were the banks of New York, Boston, Philadelphia,

and Baltimore. Seven presidents formed the committee. John A. Stevens of

New York was chairman, by request of the Secretary of the Treasury. The

other members were named by him. The sum advanced to the government was

one hundred and fifty millions of dollars in coin.]

[Footnote 14: At Portland, $120,000; Salem, $183,600; Boston, $75,300;

Providence, $67,800; Richmond, $49,000; Norfolk, $103,000; Charleston,

$354,000.]

[Footnote 15: Report of Secretary Dallas, September 20, 1816.]

[Footnote 16: Act of March 3, 1817.]

[Footnote 17: _Democratic Review_, xii. 641.]

[Footnote 18: Chairman of the Committee of Ways and Means.]