Gallatin: A forgotten financier

A lot of you who have an interest in economist history have probably heard of Alexander Hamilton, the first Treasury Secretary appointed by Washington, but many of you have probably never heard of Albert Gallatin and today I just wanted to pay homage to him.

Gallatin was born into a wealthy merchant family in Calvinist Geneva in 1761. He became an orphan when he was only nine and was raised by his relative. At the age of nineteen, Gallatin obtained a university degree in Latin and Greek. Nonetheless, by the time he completed his studies, Gallatin was disenchanted with his prospects in Geneva as either a civil servant, merchant or member of the officer corps. In 1780, without saying a word to his family, he decided to leave for the newly independent United States of America. Eventually, he taught French at Harvard, and with his early savings, he purchased some land in Fayette County, Pennsylvania and in 1784, he settled there.

President Washington appointed Alexander Hamilton, whom he had relied on greatly during the War of Independence, as his Secretary of the Treasury. From 1789 to 1800, Hamilton built the foundation of what was to become the federal financial system of the United States. Hamilton’s system rested on four pillars:

• The creation and extension of sources of federal tax revenues;
• The funding and management of the federal public debt;
• The increased use of the U.S. dollar as a medium of exchange through the establishment of the United States Mint;
• The creation of the first Bank of the United States

During this time, as a congressman, Gallatin established himself as a leading figure in the emerging Republican Party led by Thomas Jefferson, and he quickly gained the reputation of being the member of his party with the most profound understanding of public finance. Also at this time, Gallatin and Hamilton became enemies, both politically and personally. Part of the personal enmity was rooted in the Whiskey Rebellion of 1792, when Gallatin served as a member of the Pennsylvania Assembly. He is believed to have been the author of an aggressively formulated resolution opposing Hamilton’s efforts, as Secretary of the Treasury, to collect a “whiskey tax”.

Thomas Jefferson had already relied on Gallatin’s financial advice during his time in opposition. After becoming President, he chose Gallatin as his Secretary of the Treasury. Thus began a distinct period in Gallatin’s life. Remarkably, instead of dismantling Hamilton’s financial system, Gallatin opted to preserve the most important parts of it.

Gallatin’s early priorities included a change in Hamilton’s tax structure in order to better reflect the Republican Party’s ideology and its constituencies. Gallatin also convinced Congress to pass the law of 1801, which required an annual report by the Secretary of the Treasury to the President. He submitted the first of these reports later that year. Moreover, the minting of dollars was somewhat scaled back under Gallatin.

For Gallatin, a reduction of the United States’ federal debt burden “was the end toward which all other fiscal policy was designed. Gallatin’s cautious management and reduction of the public debt during his first years in office was crucial. It gave the United States Treasury the necessary credibility to access financial markets and therefore finance extraordinary expenses. By 1808, Gallatin had managed to reduce the federal debt-to-GDP ratio by an estimated 50 percent or so, including the additional debt from the Louisiana Purchase.

Unfortunately for Gallatin, history took a turn for the worse in 1808. A second war of independence with Britain was looming. A trade embargo with Britain was imposed and led to a steady drop in import tax revenues over the coming years. At the same time, Gallatin needed additional revenues for war preparations. This left him with next to nothing to sustain his debt reduction strategy. Foreseeing financial disaster and unable to prevent it in his capacity as Secretary of the Treasury, Gallatin resigned from the Treasury in 1814.

Albert Gallatin never returned to Treasury. But he stayed involved in U.S. diplomatic, political and financial matters. Until his death in 1849, he served as a diplomat in Paris, and later in London. He also directed the Bank of New York, and indulged in economic, financial and ethnographic research. He was laid to rest in the Trinity Church cemetery on Wall Street. Years earlier, Trinity Church had already become the final resting place of Alexander Hamilton. If you visit Trinity Church, you will find that the two are buried at opposite ends of the cemetery, perhaps fittingly so in light of their difficult personal and political relationship.

Sources/Further Reading:
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