Chapter Three THE FEDERALIST ERA The system of debt management installed by Hamilton worked well in terms of consolidating the debt and permitting the government to make payments of interest as they came due. Hamilton proposed on May 8, 1792, and Congress accepted, a sinking fund policy as a means to meet this obligation. Revenues from Post Office operations, duties and public land sales would be vested in a group of commissioners, comprised of the President of the Senate, the Speaker of the House, the Chief Justice, the Secretary of the Treasury and the Attorney General. They would use these funds to pay off the debt, either through payment to bondholders at face value of the bonds or through purchase from individual holders on the open market. 1 This fund, which specifically earmarked monies for debt retirement, was little used in actual practice. The First Bank of the U.S. As the government's financial affairs were so widely scattered, Hamilton and others favored the formation of a national bank to supplement the activities of the Treasury. The few state banks that existed were too small and too widely dispersed to coordinate the financial operations of the new government. Despite the opposition of some influential persons, notably Jefferson and Madison, and with doubt about the constitutionality of Congress' power to so charter, the First Bank of the United States opened its doors in 1791 with a total capital of $10 million, which included $2 million supplied by the government. The bank issued paper notes which were widely accepted as money for all legal payments within the United States. The general 1 David F. Swanson, The Origins of Hamilton's Fiscal Policies, (Gainesville FL: University of Florida Monographs, Winter 1963), 50-51. public regarded these notes as equivalent to gold. The national government did not issue paper money at this time. Instead, until the Civil War it followed a policy of using only gold coins. The bank acted as disbursing agent for the Treasury by accepting payments on account of the public debt, receiving subscriptions for new issues of government securities, and paying the salaries of public officials. It also maintained a degree of control over the nation's money supply by preventing state-incorporated banks from issuing excessive amounts of notes which they might not be able to convert into gold. During the twelve years of Federalist administration, annual government expenditures exceeded receipts by about a million dollars. As a result, Hamilton's sinking fund plan was not able to operate properly, and the public debt grew by about $6 million dollars to a total of $83 million by 1801. Some of the increase was offset by cash in the Treasury and by the value of the stock in the Bank of the United States. Interest on the debt was the largest item in the budget, amounting to almost half of all expenditures at the time. Military Expenses Military expenses associated with fighting Indians, and external conflicts with France, Spain and Algiers also contributed to the deficit. To meet this deficit, the Treasury borrowed heavily from banks within the United States, as well as in Europe. In 1791, $2 million was borrowed from the Bank of the United States to pay for the government's stock subscription in the bank. This loan hampered the Bank's ability to make private loans, so it asked the government to reduce its debt. After several disappointing efforts at selling new bonds, in 1796 the Treasury began to issue noncallable, long-term securities. This policy would later cause some difficulties for the Treasury, because it would not always be able to match its revenue collection with the periods when debt became payable. 2 This would create special problems in the 1820s, as will be discussed in Chapter 4. Hamilton's Treasury By 1795 Hamilton had made too many political enemies to remain effective, and he resigned. By maintaining close personal ties with 2 Paul Studenski, and Herman E. Kroos, Financial History of the United States, 2nd ed., (New York: McGraw-Hill Book Co., 1963), 54-56. his successor, Oliver Wolcott, he still remained influential in the banking policies of the U.S., even though his political opponents regarded Wolcott as Hamilton's tool. 3 Hamilton's main contribution was in successfully setting up a debt management system and securing faith in the credit of the government. Conversely, Hamilton was accused by his enemies of not being particularly interested in the detailed aspects of Treasury operations, and it was not possible to get a clear statement of the public debt from the accounts he presented to Congress. The mundane details involved in the day-to-day operations of the Treasury Department were sadly neglected during the Federalist era. To some extent this lack of clarity resulted from the budgeting procedure used by the government. Appropriations were lumped into a small number of categories, and until 1809, the Executive could transfer unspent funds to different categories at will. Since Hamilton never sent regular reports to Congress on the government's finances, it was easy to assign him fault. Still, it should be noted. that when Wolcott resigned in 1800, at his request a Committee of the House examined Wolcott's conduct and found no discernible problem. The Act of May 10, 1800, required the Secretary of the Treasury to prepare an annual report to Congress. 4 These annual reports became a concise summary of activities at the Treasury and provided Congress with sufficient information to judge how the government's finances were being handled. Under Hamilton's overall guidance the Treasury Department established itself as the preeminent administrative agency of the government. By controlling the purse, the Treasury exercised a degree of fiscal authority over other agencies and departments. This growing authority was matched by a growth in the number of employees in the central office of the Treasury Department. In 1790 there were 70 employees. By 1792 that figure rose to 90. By 1801 when the seat of government moved from Philadelphia to Washington, the Treasury employed 78 persons in the Capitol and 1,615 in the field, mostly in the Customs Service. At the time, this was considered an exceptionally large department to administer. 5 The organizational system by which this entire fiscal system was managed, basically the product of Hamilton's genius, remains an out 3 Dewey, Financial History, 117. 4 Dewey, Financial History, 115-117. 5 Leonard D. White, The Federalists, (New York: The Free Press, 1965), 122-123. 6 standing achievement of the Federalist period. “ Because Hamilton resigned under political pressure, it is important to note that in 1794 his operations as Secretary were investigated by the House of Representatives. He was absolved of any wrongdoing and was declared innocent of any misuse of power. 7 Perhaps the greatest testament to Hamilton's administrative achievements came from his successors and former enemies. Thomas Jefferson once lamented about Hamilton's policies, "We can never get rid of his financial system." 8 Albert Gallatin, Jefferson's Secretary of the Treasury, was more complimentary, asserting in 1801 that under the previous administration less abuse in government had been practiced because "it has been most closely watched." These men would establish equally high standards within their own administrations. 6 White, Federalists, 126. 7 White, Federalists, 352-354. 8 Leonard D. White, The Jeffersonians, (New York: The Free Press, 1965), 146–147. White, Jeffersonians, 146-147. Chapter Four THE JEFFERSONIAN PERIOD The reins of government were turned over in 1801 to a group of politicians having a totally different philosophy. Jefferson and his followers were less concerned with industrial growth than the Federalists. As agrarians, the Jeffersonian Democrats were distrustful of concentrations of wealth, especially in banks. They were also fiscally conservative. Albert Gallatin Albert Gallatin, the Secretary of the Treasury under Jefferson, had been the chief critic of Hamilton's methods of debt management. However, Gallatin operated in a manner similar to Hamilton, using his position to guide the fiscal policies of the entire administration. 1 Moreover, the thrust of that policy changed, for Gallatin assumed as his chief responsibility the reduction of the public debt. He recognized that a sinking fund built from surplus revenues could not be consistently relied on to pay off the debt. He devised a plan whereby $7.2 million would be appropriated annually to pay off the debt. The money would be derived from reductions in expenditures. He was able to carry out this plan for the first six years of his term of office, and by 1811 the total debt had been reduced to $45.2 million. During that year, interest payments on the debt amounted to less than one-third of government expenditures, down from one-half under Hamilton in 1801. The Louisiana Purchase The Jefferson administration was not totally concerned with fiscal prudence. In 1803, Jefferson and Gallatin both supported the 1 White, Jeffersonians, 135. |