January 10 1812: Gallatin Letter

Abraham Gallatin (January 29, 1761–August 12, 1849) was the United States Secretary of the Treasury in 1812. He had been Secretary of the Treasury under Jefferson and Madison. He was to become the longest serving Secretaries of the Treasury in U.S. history serving from 1801 to May 1813.                

Gallatin had been born in Geneva, Switzerland. He had risen to prominence with the Whiskey Rebellion of the 1790's after which he was elected to the U.S. House of Representatives for three terms from 1795 to 1801. Gallatin had opposed Hamilton's whiskey tax of 1791. The tax had been imposed to raise money to pay for the national debt. 

In January 1812, Gallatin had to deal with the troubled government finances that had been further harmed by the expiration of the charter for the Bank of the United States. Gallatin had tried to save the bank. This represented a great change from Gallatin's earlier opposition to Hamiltons' financial programs and national bank. In office, Gallatin had retained the main parts of Hamilton's program despite Jefferson's republican rhetoric.

Gallatin thus embodies many of the tensions of the time. He had to deal with the urgent demands of the national government for funds to pay for national expansion, internal improvements and, above all else, a military that was hopelessly underfunded as war loomed. To do so, he had to overcome his own Republican party that viewed the national debt as a form of corruption that led inevitably to taxes, the tyranny of a standing army and ultimately to the end of American liberty. 

As talk of war grew, Gallatin had to come up with innovative ways to pay for government finances. The letter of January 10, 1812 was addressed to Ezekiel Bacon, Chairman of the House's Ways and Means Committee. The letter was written to provide some answers as to how funds would be raised if war came. 

Gallatin estimated that the federal government had fixed expenses of $9.6 million, would receive $2.5 million from existing custom duties. If war came, Gallatin calculated with the Committee that a loan of $10 million would be needed. Gallatin proposed to double existing duties, reimpose an old duty on salt and new taxes on variety of items including "ardent spirits". The budgetary assumptions were widely off. The request for new taxes on alcohol adds a nice irony given Gallatin's role in the Whiskey Rebellion.

The complete letter can be found here with some excerpts below:

             [GALLATIN TO EZEKIEL BACON, M. C.]

Treasury Department, January 10, 1812.

Sir, - In answer to the first inquiry of the Committee of Ways and Means, relative to the interest arising on the proposed loan of 1,200,000 dollars, necessary to supply the deficiency in the receipts of the year 1812, I beg leave to observe that that item was not included amongst the expenses of that year, because, the estimate being made with reference to the expenses alone, which had previously been authorized by law, and a considerable proportion of those on account of the public debt falling on the first day of the year, it would not have been necessary, in that view of the subject, to borrow that sum previous to that day, and the interest would not, therefore, have become a charge till the year 1813.

With respect to the second inquiry of the committee, it was certainly contemplated, in conformity with the recommendation of the President, whose expressions were adopted in the report, to raise a revenue "sufficient at least to defray the ordinary expenses of government and to pay the interest on the public debt, including that on new loans which may be authorized." The sura of about nine millions of dollars was assumed as answering that description for the present, and the expression of " fixed revenue," which had been used in reference to existing circumstances, was inadvertently applied to the case of war. It will undoubtedly be proper, as remarked by the committee, to provide annually an additional and gradually increasing revenue, sufficient to pay the interest on loans required in the event of war. If, therefore, the loan for the present year will, according to the suggestion of the committee, amount to ten millions of dollars, the receipts into the Treasury to be provided for the year 1813 should, on those data, amount to about 9,600,000 dollars.

The committee ask, in the next place, the best opinion which I am able to form of the probable amount of receipts from duties on tonnage and merchandise in the event of war.

As that amount will depend on the extent of the commerce between the United States and nations at peace with them, and on the number of the captures respectively made by our privateers and by the enemy, it is a matter of conjecture, and not a subject of calculation ; for which reason it was stated in the report that the amount could not at present be determined. Considering the rigorous restrictions laid by France on the commerce of the United States with her own dominions and other countries under her influence, the dangers to which our commerce with the Baltic and with China will be exposed, the relations of England with Portugal and with Spain, and also that no inconsiderable part of the captures made by our privateers will be sent into foreign ports, a great defalcation in the receipts on duties on imported merchandise must be expected. The amount, under existing laws and circumstances, has, from correct data, been stated in the annual report at six millions of dollars. It would in my opinion be unsafe, in an estimate of ways and means intended to be relied on with certainty, to calculate, in the event of a war, on more than 2,500,000 dollars at the present rate of duties.

To the next inquiry of the committee, respecting the increase of those duties which is thought practicable and advisable, it is answered, without hesitation, that the rate of duties may, in the event of war, be doubled without danger or inconvenience. There will, in such an event, be less danger of smuggling at that rate than there is now with the existing duties. With that increase, the duties will still be much less on an average than those paid on importations in England, France, and most other countries. And they will be collected with more ease to government and less inconvenience to the people than could be devised to the same amount in any other manner...

…In proportion as the ability to borrow is diminished the necessity of resorting to taxation is increased. It is therefore also proper to observe that at that time the subject of the renewal of the charter of the Bank of the United States had been referred by the Senate to the Secretary of the Treasury, nor had any symptom appeared from which its absolute dissolution without any substitute could have then been anticipated. The renewal in some shape, and on a more extensive scale, was confidently relied on, and accordingly, in the report made during the same session to the Senate, the propriety of increasing the capital of the bank to $30,000,000 was submitted, with the condition that that institution should, if required, be obliged to lend one-half of its capital to the United States. The amount thus loaned might, without any inconvenience, have been increased to twenty millions ; and with $20,000,000 in hand, and loans being secured for $20,000,000 more, without any increase of the stock of the public debt at market, internal taxation would have been unnecessary for at least four years of war, nor any other resource been wanted than an additional annual loan of five millions, - a sum sufficiently moderate to be obtained from individuals and on favorable terms.

These observations are made only in reference to the finances and resources of the general government. Considerations of a different nature have on both these subjects produced a different result, which makes a resort to internal taxes now necessary, and will render loans more difficult to obtain, and their terms less favorable. …

 ...There is not any more eligible object of taxation than ardent spirits ; but the mode of taxation is liable to strong objections, particularly with respect to persons who are not professional manufacturers, and who only occasionally distill the produce of their farms. It is therefore proposed that the duties on the quantity of spirits distilled should be levied only on spirits distilled from foreign materials, at the rate of ten cents per gallon distilled ; and on other distilleries employing stills the aggregate of which shall contain more than four hundred gallons, at the rate of three cents per gallon distilled ; and that instead of a duty on the spirits, or of licenses in proportion to the time employed, all other distillers should only pay an annual tax of five dollars for each still solely employed in the distillation of fruit, and of fifteen dollars for each still otherwise employed. This tax may also, still, without reference to time, be made to vary according to the size of the stills. At those rates this class of duties is estimated to produce at most 400,000 dollars ; and it is intended in that case that another duty should be levied on the same article, in the shape of licenses to retailers. By the adoption of that mode the expenses of collection will be considerably diminished, penalties for not entering stills will be unnecessary, and they will be confined, with respect to country stills, to the case of clandestine distilling without paying the tax.

2. Duties on refined sugar. - A duty double of that heretofore laid, viz., at the rate of four cents per pound, is estimated to produce 200,000 dollars. The drawback both of that duty and of that on the importation of the raw material to be allowed.

3. Licenses to retailers. - These are believed to be susceptible of considerable and very proper augmentation and extension. The following rates are estimated to produce 700,000 dollars...

...Tavern-keepers licensed under the authority of any State, and not living in any city, town, village, or within five miles thereof, to be excepted. Every other person who sells wines, foreign spirits, or foreign merchandise, otherwise than in the vessel or package of importation, or, in the case of dry goods, otherwise than by the piece, and every person who sells domestic spirits in less quantity than thirty gallons, to be considered as a retailer.

4. Duties on sales at auction. - These confined to the sales of articles of foreign produce or manufacture, and at the same rate as heretofore, may produce about 50,000 dollars.

5. Duties upon carriages for the conveyance of persons. - Those duties, adding at the rate of fifty per cent, on the duties formerly raised, are estimated to produce 150,000 dollars.

6. Stamp duties. - An association of ideas which connects those duties with the attempt of Great Britain to tax America, and which might with equal propriety attach odium to the duty on the importation of tea, has rendered their name in some degree unpopular. The great extension of post-roads and the facility of distribution have, however, removed the most substantial objection to which they were liable. They do not appear to be more inconvenient than any other internal tax, and the expenses of collection are less than on any other, being only a commission on the sale and the cost of paper and stamping. At the same rate as heretofore, with the exception of bank-notes, on which an increase appears proper (with an option to the banks to pay -- part of their dividends in lieu thereof), they are estimated to produce 500,000 dollars….