America's Fiscal Constitution (12 page)

General Jackson’s regular army consisted of seven hundred soldiers, and he enlisted various residents in the New Orleans area—including free blacks and a gang of pirates—to form a militia. Volunteers from Tennessee and Kentucky arrived daily to join them. His makeshift force prepared for battle by building a dirt wall along the banks of a dry canal that crossed the British approach to New Orleans. General Pakenham planned a frontal assault to break the American line and panic the volunteer militia.

On January 8, 1815, Jackson rose from bed at one a.m. and told his subordinates to prepare for battle. Columns of British redcoats fell before volleys from American cannons and rotating lines of fire from frontier soldiers whose marksmanship had been honed by hunting. Eight hundred Scottish Highlanders, the royal regiment whose bagpipes and discipline under fire had struck fear in the hearts of Napoleon’s veteran armies, advanced steadily toward the American line despite heavy losses. American cannon fire cut down General Pakenham and his staff just as they saluted the Highlanders, who then retreated. When the smoke cleared, Jackson’s army had suffered seventy-one casualties, while the British force had lost more than two thousand soldiers.

Word of the astonishing victory in New Orleans arrived on the East Coast at the same time as news of the peace treaty. Suddenly Mr. Madison’s War became everyone’s victory. In Gallatin’s words, the war’s final outcome made citizens feel “more American.” Jackson’s parting words to his victorious troops summarized the new spirit of nationalism: “Natives of different states, acting together, for the first time, in this camp; differing in habits and in language, instead of viewing in these circumstances the germ of distrust and division . . . have reaped the fruits of an honorable union.”
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The reputation Jackson earned from the brief but decisive battle made him the nation’s foremost hero since Washington.

In 1815 Treasury Secretary Dallas found it easier to sell bonds.
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He raised $9.3 million by selling bonds for 95 percent of their face value, or par, yielding 7 percent.
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National debt peaked at $127.3 million, and the Treasury rapidly paid off notes issued during the war as imports and tax collections soared.
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Madison and Monroe—and a younger generation of congressional war leaders including Henry Clay, John C. Calhoun, and William Crawford—emerged from the conflict with enhanced stature and a new conception of federal taxation and responsibilities. They resolved to strengthen the federal tax system and the nation’s army and navy.

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REATER
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EDERAL
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OMMITMENTS AND
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AXATION

The war forged a new consensus about the responsibilities of the federal government. Deprivation caused by wartime British trade embargoes spurred support for a stronger federal role in economic development. Pennsylvania writer and economist Mathew Carey sold more than ten
thousand copies—a huge number at the time—of a tract that called for Jefferson’s party to endorse a more professional peacetime army, improved transportation, a sound currency, a central bank, and a tax system that encouraged domestic manufacturing.

The Treasury Department reached similar conclusions in its 1814 “Report on Manufacturing.” The report’s author, Tench Coxe, had attended the fateful Mann’s Tavern gathering in 1786 that spawned the Constitutional Convention. He later worked for Alexander Hamilton at the Treasury Department, where he helped research Hamilton’s celebrated 1791 “Report on Manufactures.” Coxe respected Hamilton’s intellect but ultimately left the Treasury to support financial policies championed by Gallatin. In his 1814 report Coxe described how mechanized looms could allow a population less than half the size of New York City or Philadelphia, the nation’s biggest cities, to produce enough textiles to clothe the nation’s eight million residents. “To neglect, in our country, the due use of such an advantage, would evince a destitution of common sense.”
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Modern machines could help “every farmer and hamlet” to participate in the “profits of the woolen branch” of commerce. Domestic distilleries could likewise produce enough whiskey to eliminate the need for imports. Like Mathew Carey, Coxe advocated investing in roads and canals to transport raw materials to the Atlantic Coast and manufactured goods to the country’s interior.

Madison’s annual message to Congress in December 1815 proposed federal programs along the lines outlined by Carey and Coxe. Madison’s nationalist message echoed some of Hamilton’s themes, though the nation could now afford the cost of a standing army and public infrastructure without additional debt.

On April 27, 1816, Congress increased the level of import taxes to 20 percent on most goods and 25 percent on cotton and wool textiles. Congressman John C. Calhoun vigorously defended these higher taxes in the House, arguing that strong domestic manufacturing benefited even agricultural centers like his own state of South Carolina: “The farmer will find a ready market for his surplus produce . . . and . . . a certain and cheap supply of all of his wants.”
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Calhoun, a forceful speaker, explained that without domestic production and internal transportation, the nation could be victimized again by a foreign-imposed embargo. Calhoun also joined the majority in Congress who voted to charter a new Bank of the United States.

Interest and principal payments on debt absorbed at least half of tax revenues during Madison’s administration after the war. In the last full fiscal year of Madison’s presidency, the Treasury collected $36 million in import fees—roughly $15 million more than budgeted—and applied a $20 million surplus to debt reduction.
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Secretary of the Treasury Dallas adeptly refinanced debt after the war. Treasury gold reserves rose, as cotton prices and production soared in response to demand from British textile mills. A few days before the end of the Madison administration, Dallas resumed the prewar requirement that Treasury funds be deposited solely in banks that paid depositors gold on request. By then the nation’s credit and currency had recovered from their 1814 collapse.

Madison concluded his presidency in 1817 by quietly vetoing a bill, sponsored by Calhoun, that created a new trust fund to finance roads and canals. Though Madison cited constitutional reasons for the veto, he had signed earlier legislation to fund roads. As a result, his veto of Calhoun’s bill is best interpreted as an attempt by the president to draw a line on spending. Until later in the century, presidents cited constitutional issues in their veto messages as a means of trying to sidestep the question of whether a president should veto legislation simply because of a policy difference with an elected majority in Congress.

James Madison left the White House almost three decades after his work to retire Revolutionary War debts had culminated in the adoption of the Constitution. He and Jefferson had carefully justified each exceptional new use of federal debt. Though Madison’s intellectual detachment at times seemed ill-suited for a wartime leader, he emerged from the War of 1812 with a reputation for perseverance and the ability to withstand criticism—traits one might expect from the author of the First Amendment. In 1817 John Adams mused to Jefferson that history would judge Madison’s administration as greater than all of the previous administrations combined. Madison’s success in defending national honor during the War of 1812 virtually ended organized opposition in the form of a Federalist Party.

In contrast, the public held Congress in low regard shortly before Madison left office. Voters who had accepted higher taxes to reduce debt and pay for defense were outraged when House members converted their pay from $6 a day during sessions to an annual stipend of $1,500.
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The
backlash from this raise swept 70 percent of incumbent House members out of office in the election of 1816.

Great Britain emerged from the Napoleonic Wars with an enormous national debt, high interest and tax rates, and a paper currency trading at a discount to its official value in gold and silver coin. American political, business, and academic leaders kept abreast of issues that arose during heated British budget debates of the time, including the ideas of Member of Parliament David Ricardo, who had made a fortune trading in British debt during the Napoleonic Wars. Ricardo’s influential 1817 treatise on economics and public finance,
On the Principles of Political Economy and Taxation
, employed mathematical rigor to prove a point familiar to Jefferson, Madison, Gallatin, and most people in business: high tax revenues required to service high debts inhibit investment and economic growth. Ricardo asserted that the use of debt rather than taxes to finance public spending ought to cause citizens to save more money in anticipation of higher taxes to follow. However, he later clarified that concept by noting that people would likely fail to save more because their tendency to think of the expense of debt “only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes.”
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Parliament rejected Ricardo’s plan to retire debt by purchasing it at market value—an almost 50 percent discount from face value—with funds provided by an immense, one-time tax on all national wealth. For the first half of the nineteenth century, debt service consumed half of the British budget and provided a salient reminder concerning the risks of excessive public debt.

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ORROWING
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URING A
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ECESSION

A surprisingly slim majority of the congressional caucus endorsed James Monroe as Madison’s successor. Monroe had the aura of authority conferred on those considered Founding Fathers. Nonetheless, many members of Congress instead supported Secretary of the Treasury William Crawford in order to signal their weariness of Virginia’s perceived monopoly on the presidency.

Since the controversies that marked the tension between Jefferson and Hamilton had ended, Monroe believed that the United States had
outgrown its need for political parties. He sought to achieve unity by appointing to federal offices both former supporters and opponents of Jefferson’s coalition. He asked his rival, Crawford, to continue to serve as secretary of the treasury—a decision President Monroe would eventually regret.

Crawford attempted to fill the vacuum of leadership in the Jeffersonian party organization. The handsome and personable politician exploited his powerful office to build a national political base outside his home state of Georgia. Crawford courted an older generation of political power brokers, including Thomas Jefferson, by extolling the virtues of limited government. At the same time, he endorsed higher spending for frontier fortifications, a stronger navy, an expanded postal service, and new pensions for veterans.

Early in the Monroe administration, rising revenues from import taxes helped Secretary Crawford juggle conflicting commitments to higher spending and limited government. Various branches of the new Bank of the United States extended easy credit, especially for the purchase of federal lands. The official books of the bank showed a substantial net worth until 1819. But, as in 2008, the bank had a low amount of liquid reserves in relation to its liabilities. It would prosper only so long as its loans were repaid and nothing prompted depositors and note holders to demand immediate payment in gold and silver.
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Easy bank credit fueled an enormous boom in the sale of federal lands. Buyers stood in lines extending beyond the doors of many US Treasury Land Offices; the phrase “land office business” came to be used as a synonym for any boom. Some land purchasers planned to plant cotton for export, while others sought to resell their new land for a profit. In Jefferson’s first term, the president and Gallatin had set a minimum price of $2 an acre and allowed payment over four years.
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That policy continued through Monroe’s first term. Buyers could pay the Treasury by tendering bank promissory notes. Debt owed to the federal government for land purchases soared from $3 million in 1815 to $23 million in 1819.
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Cash receipts for land sales in 1819, however, amounted to less than $4 million.
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From 1816 through 1818 the federal government sold tens of millions of acres of land, principally in Alabama, Mississippi, Louisiana, Arkansas, Missouri, Illinois, and Indiana. The mass migration of Americans
into these territories resulted in the admission of a new state to the Union during each of six consecutive years after 1815. One action by these new state governments—expanding the right to vote to white males regardless of land ownership or wealth—would soon make national politics more popular.

The land rush during 1816–1818 in certain respects resembles the real estate bubble preceding the Great Recession of 2008. In each period, citizens borrowed vast amounts to purchase real estate based on the assumption of ever-rising values, while politicians relaxed credit in support of greater home ownership. When land prices fell in 1819, the federal government and the Bank of the United States were left with a large portfolio of uncollectible loans.

Crawford’s friend William Jones ran the second Bank of the United States. Jones had a fondness for hard drink and an aversion to detail. He did not understand the role of the Treasury and Bank of the United States in managing credit to prevent excessive monetary expansion.

In December 1818 the federal government asked to withdraw $2 million in gold from its deposits at the bank in order to pay the final installment on the bonds issued for the Louisiana Purchase.
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When Jones could not find sufficient funds in the bank’s vaults, he had to borrow gold from European banks. Audits revealed more problems after Jones resigned. The reserves of the bank’s Baltimore branch had disappeared. Its cashier, James W. McCulloch, had lent to Western land speculators, to bank officers, to himself, and to a business owned by the bank’s patron and Gallatin antagonist, Samuel Smith—then chairman of the House Ways and Means Committee. McCulloch also made history by refusing to pay state taxes on federal bank notes. His refusal led to the Supreme Court’s decision of
McCulloch v. Maryland
, which established the supremacy of federal law and the right of the federal government to undertake actions necessary and proper to discharge its duties.