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Debt Reduction, Old Style

The Gallatin plan: When Jefferson became President in 1801, "The debt stood at $80 million in 1801, and [Secretary of the Treasury] Gallatin devoted 3/4 of federal revenues to reducing it."
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Discussions - 23 Comments

...um, he failed

...um, he failed

He was doing pretty well until the embargo hit, even with the additional cost of the Louisiana purchase. Of course, the embarge was necessary because Jefferson gutted the Navy, partly to save money and partly because he (and Madison even moreso) was an ideologue on this issue, who wanted to prove that navies could be replaced with commercial coercion.

If you can immagine a fame: influence ratio, Gallatin might be the founder with the highest score.

He opposed tax that gave rise to the Whiskey Rebellion, but acted as a moderate voice justifying the tax as necessary to paying off the deficit.

Is the longest serving Secretary of the Treasury.

He helped found the House commitee on Finance.

He more or less created t-bills.

He funded the Lewis&Clark expedition.

Negotiated an end to the war of 1812.

Formulated the idea of Manifest Destiny.

Helped develop the idea of assimilation with a focus on the indian tribes of north america.

Theoretically I am not sure there is any reason we have to pay the Federal Reserve back.

The government sells t-bills and the federal reserve monetizes the debt.

Taxes are simply usefull because we don't want to punish those who hold large amounts of dollars by depreciating them.

What if the united states simply announced that it was going to fund government by selling treasuries and that the fed was going to buy them back.

Taxation thru monetization.

Seriously, Debt Reduction "New Style":

Gov borrows money by issuing treasuries on the open market, that it sells to investors. The fed prints money and uses this money to buy the treasuries from the investors.

No more Whiskey Rebellions. We can become the first country to do away with voluntary taxation and all the under reporting and distortions caused by taxation, simply by using the monetization powers of federal reserve.

While novel, I am not yet smart enough to realize why it is a bad idea. Indeed my sense of congressional will power is that tax increases and spending cuts are off the table, which means that to some degree my policy will be adopted, and the only argument is the extent to which it should or will be adopted.

One must not lose sight of the fact that taxes must be administered by an accountable authority. There are four general requirements for the efficient administration of tax laws: clarity, stability (or continuity), cost-effectiveness, and convenience. tax laws: clarity, stability (or continuity), cost-effectiveness, and convenience.

Clarity: My second paragraph vs. the IRC (I report you decide...by the way what is congress going to do about section 68?)

Stability: Well the experts say that our current spending is unsustainable. Malthus taught me that 6 billion human beings was unsustainabe, the world wildlife foundation agrees, peak oil is also comming, and at a dead sprint I could win the Boston Marathon.

Cost effectiveness: well there are quite a few lawyers who will charge you $250 an hour to figure out if you have had an accession to wealth if you catch a barry bonds Home Run baseball(you have, don't pay them, sell the ball and pay your taxes sucker!)

Conveniance: Hum...at about 11 am this morning did you stop what you were doing and fill out paperwork because the fed bought some treasuries? If so, say hi to rick santelli for me.

Look if folks want to complain about lawyers, they have got a serious grievance. Administrative considerations and inadequate administrative resources seriously hinder small business with both compliance and administration costs.

If you are a tax lawyer with a CPA and an LLM in taxation, have associates who keep you briefed on Revenue Rulings and get twitter feeds from congress, you probably have a good feel for where everything lies in the tax world.

If not, well then... ever roll a 4 while standing on Go?

1) So look, we can cut government spending...I say this theoretically, because if it is on the table, then it is on the platonic idea of a table.

2) Or we can increase the tax rate...duck...I dodged that not so platonic rotten apple.

3) Or we can manipulate the tax base by calling more things accessions to wealth, by manipulating a few credits, encouraging strict revenue rullings, move lines around and keep the twitter feeds open to the LLM's....

4) Or the Federal Reserve can do quantitative easing.

1 and 2 won't happen in the short-run, 3 is an ongoing constitutional convention on the longest statute in the history of mankind. 4 is rumored to be occuring.

To a very great extent I think it is good that 4 is occuring, theoretically as I now understand it, 2 and 3 are worse than 4, and a good deal of 1 isn't as wasteful as rhetoric might suggest. In fact the over production of lawyers and political scientists and washington lobbies to deal with 1 and 3 are worse than allowing some excess, and some un-narrowly tailored tax incentives. That is even the attempt to chop wasteful spending in washington feeds washington, which is seen clearly if you ask concretely what the proximate cause of the Glenn Beck rally was.(drawing people from Ohio to D.C. to end up contributing to a charity, that supports the troops, i.e. government workers.)

One problem is that the CBO is not legally allowed to take quantitative easing into consideration. Alternatively it is forced into considering quantitative easing as "defaulting", and "defaulting" magically becomes "Greece". But greece had to make payments in Euro's which it does control. The United States has to make payments in dollars which it only does not control as a legal fiction. That is outside of the prudential legal fiction that seperates the Federal Reserve from congressional pork dreams, there is nothing the United States cannot afford to buy that is denomiated in dollars.

I don't know if I am legally allowed to have such thoughts, but so far as I can tell rejecting the legal fiction of seperation between the gov and the federal reserve is the most realistic viewpoint.

That is there is a sort of rules of the game based reason, for taking the CBO seriously, and in such a rules based game there is a logic to lock boxes and accounting gimmicks that ignores the general budget, and thus causes some talk radio panic when congress doesn't pass a budget.

But there is no rational fear that the government can't make payments on debts denominated in dollars.

That is my theoretical possibility that government could run without taxes is an actuality. Death and its long run certainty(in the long run we are all dead) is thus the only certainty that continues to exist(of course I think of monetizing the debt as the most efficient and equitable form of taxation.), so it is debateable if taxes are a certainty(in terms of the federal government).

It is a fact that Government pays Social Security benefits by crediting bank accounts.

Mechanically the same stream of zero's and ones bouncing in packets from server to server, are more dependent on our electrical grid, and internet servers than the existance of a payroll tax.

That is I am tempted to counter digress into Peabody Energy(BTU) and Cisco(CSCO) as a riposte if I hear non-sense about social security being insolvent. It isn't that there isn't a logic that supports the contention..if for some reason you have a loyalty to "balancing the budget"(as the CBO does) then perhaps you can suggest uncapping the social security tax base. It is a logic that asks a policy question, how should it be paid for, but forgets that the question is already decoupled from the mechanics of how it is paid for.

The payment is nothing more than an entry on the balance sheet of the Social Security recipient's bank.

There is no such thing as a free lunch, monetization would cause more dollars to chase after some finite quantity of goods, but in some sense tax breaks cause the same sets of problems(and lead to monetization).

It intrigues me for example that the Hayward carbon tax would go to funding government spending on energy.

The Carter carbon tax, or tax and dividend would go back to individuals. A more modern incarnation the Clear Act splits the baby and sends 75% back to individuals.

Proceeds from the clear act would probably count as gross income(or taxed at special dividend rate?), so once you do the accounting and figure out where you come out...you still end up with something that is the functional equivalent of a tax break, minus the increase in higher energy costs.

Compared to higher government spending, no functional tax break, minus a less drastic increase in energy costs.

In any case the EPA will step in and start regulating carbon because nothing will get passed quickly enough, of course there will be legal challenges which add to the deficit and figure into the cost equation as well, and all the EPA regulations, even if they make for very good climate-energy-externality policy(which they probably don't) lead to complex compliance costs....

What is really going on? I don't know...maybe a whiskey rebellion follows a teaparty. The EPA governs volatile organic emmisions from whiskey warehousing. Whiskey is so much more conbustible, if you distill it further and don't age it in wood, it becomes ethanol. Of course the EPA recently lifted its ban on the E-15 blend, but as it turns out it was a hollow ban since no one except the corn industry actually wanted to use the stuff and no infrastructure was in place. Who can keep track of what is being pushed? So it is at least possible that EPA regulation is better than climate legistlation.

No one can keep track of all that is being pushed.

Gallatin needed a better revenue stream. Sale of land in the Western territory provided that; the Louisiana Purchase did better than pay for itself. We needed Manifest Destiny to clear that debt; we could manage without serious taxation not just until our federal government, but until land sales, an alternate revenue stream, began to run out. Gallatin didn't really fail to lay aside the debt; it just took a while. By 1825 and JQA we were nearly clear of that debt.

Of course, JQA's response to that was to propose a national spending program.

Today, when our federal government is borrowing more than 1/3 of every dollar it spends -- how would it increase taxes enough to cover even current spending much less lay aside its debt? Since the stimulus package was passed it has seemed evident to me that inflation was the only democratic and politically acceptable means of laying aside the debt incurred. The Fed as been in an inflationary mode, printing money like crazy. It is expected to buy back its notes,

Yesterday, WSJ: "The U.S. government sold new two-year notes at a record low yield for the sixth month in a row Tuesday, a sign of the strong demand for Treasurys amid expectations the Federal Reserve will unveil another large-scale bond-buying program next week. "

Today all the speculation is about how big that will be given signs of international inflation to come.

The whole world is going into debt reduction mode? It is tempting to use the word "depressing" except it is not suitable at the moment. Scary, maybe?

Most of this is over my head, but I don't find anything "depressing" or "scary" about the idea of "The whole world is going into debt reduction mode".
It sounds like it is an idea that's time has come.

Except the debt reduction mode being discussed is inflation, which means valueless money all around. The debt reduction comes because the $1 China loaned us last year has an equivalent value of, say, $.50 or even $.05 at the end of an inflationary spiral. The monetary debt they hold becomes easier for the US to pay. Big deal? Whatever money you have saved loses its value, too.

Debt reduction is a very welcome idea, but not on just any terms.

Richard,

Great post on Gallatin, an unfortunately-obscure-yet-brilliant statesman. But I would quibble with your characterization of Jefferson and Madison as "ideologues" who used the Embargo as a way of proving the theory of commercial coercion. By 1807, the Royal Navy had pressed hundreds (and eventually thousands) of American sailors into service against their will, while both the British and the French made war on American trade through competing systems of arbitrary and tyrannical blockades. Madison's 1812 war message makes clear these legitimate grievances--impressments and gross violations of neutral rights--either of which, alone, might constitute a casus belli. Yet, it is to Jefferson's and Madison's eternal credit that they experimented with economic coercion in the form of an embargo, under which ALL would suffer some pecuniary hardships, before--and as a last resort--opting for a war in which the burdens would fall overwhelmingly upon those who did the actual fighting. Rest assured that I'm perfectly aware of the theoretical basis for economic coercion, but I would argue that there was nothing at all ideological about the course pursued by the Jefferson and Madison administrations between 1807 and 1812.

Not sure I agree with you Michael. Madison, even more than Jefferson, wanted to prove that war could be done away with, and replaced by economic coercion, from as far back as the early 1790s. That's why they thought that it was reasonable to gut the navy and army. Having cut the navy back to gunboats and ships in drydock, embargo was the only option. The goal was perpetual peace, and they thought it was a reasonable goal.

As for impressments, my impression is that, even though they were, in principle, a major issue, neither the Jefferson nor the Madison administration made a big deal about the issue unitl later on. It might just be that, as Southerners, they did not take naval issues seriously. Recall that in one letter from the 1790s Jefferson write "Southern" and crossed it out and wrote "Republican" party.

Richard,

Your reference to the early 1790s (twice) is very telling, for it is upon that ground that the entire Neo-Federalist interpretation of the Jefferson and Madison administrations rests. If the Embargo really was nothing more than the logical extension of Madison's commercial discrimination plan from the First Congress, then I would agree with you that its implementation amounted to little more than a theoretical trial. But already by 1793 Madison's discrimination plan seemed far too tame to effect meaningful changes in British policies that were, after all, explained away in London as exigencies of war with revolutionary France. Certainly those policies took on an even greater importance after 1803, when the fight against Napoleon assumed the character of a war for national survival. Under these circumstances, then, the Madisonian arguments of the early 1790s had little relevance. Furthermore, the Jeffersonians' principal objective in advancing economic coercion, both in the 1790s and during the Napoleonic Wars, was not to validate economic coercion for its own sake. Neither was it to render war obselete; these two men had plenty of executive and administrative experience in peacetime and war; they were practical statesmen, not airy French philosophes. Their purpose was--first, foremost, and always--to effect changes in British/European trade policies and win respect for American rights.

As for the impressment business, do you think it unimportant that Jefferson scuttled the Monroe-Pinckney Treaty because it did not address this issue? I would argue that, when considering the state of U.S.-British relations, Jefferson regarded impressment as issue #1. Madison, too, mentioned it as grievance #1 in his war message--that is, if we can infer primacy from the ordering of arguments. Finally, this notion that as southerners they didn't take maritime issues seriously strikes me as a Neo-Federalist corollary to the "They're Southerners; What Do They Know about Finance?" argument. The latter, while constantly exaggerated, has some merit, but the former simply doesn't square at all with their actual behavior, which, beginning in 1783, reveals an almost constant advocacy for American maritime rights, the principal threat to which, to be sure, they always identified as Great Britain.

In any case, I appreciate the discussion. In academic circles, no matter where I go, I'm accustomed to being the only Jeffersonian in the room. Liberals and conservatives alike, albeit for very different reasons--slavery on one hand, and Jefferson's oft-presumed-but-wildly-exaggerated affinity for French principles on the other--tend to regard Jefferson with some combination of suspicion and disdain. At least for conservatives, I'm hoping to change that perception, even if I've not managed to persuade you.

Thanks again and best wishes,
Mike

Michael. I'm not sure what historians you're hanging out with, but I often find myself with fans of Jefferson. Of course, it might be that those who study politics tend not to be fans, but few historians study politics seriously anymore. That makes them, in a sense, Jefferson's children.

Madison's a more complicated case. He wrote Federalist 51, but also was a believer in embargo as a substitute for war.

Not long after his Presidency ended, Jefferson had to convince Madison that UVA law students ought to read the Federalist. By then, Madison had soured on it. Perhaps it was only because there was too much Hamilton in it.

On the other hand, Jefferson did not think that history was essential to the curriculum of UVA. Why? The future would be so different from the past, the study of history was not useful to prepare statesmen. History was only useful at lower levels of education, he thought.

"But already by 1793 Madison's discrimination plan seemed far too tame to effect meaningful changes in British policies that were>
But did Madison realize that? We might also consider whether that was left of his larger goal, given opposition to his preferred policy. After all, the myth went, it worked in the 1760s.

The evidence I have seen does not support the old schoolbook history that impressment was a big issue all along. It has been read backward into TJ's Presidency. It was only in final run-up to 1812 that impressment became an important issue to Madison.

Support for trading rights is different from support for impressed sailors.

And don't forget, among other things, their opposition (and Gallatin's) to opening trade with Haiti during the Quasi-war.

Had the U.S. had the same navy in 1807 as it had in 1801, embargo may not have been the only option. The reason why the cut the navy back so far was that they had embargo to use instead. Similarly, given the evils of France and Britain, both at war, increasing the size of the military would have been reasonable. It would have allowed to consideration of an armed neutrality--Anderson's suggestion as I recall.

Monroe's treaty said that the U.S. would not disciminate against British goods for ten years. Jefferson and Madison did not want to give up embargo before they tried it. It was not impressment that killed the treaty.

Other than running his plantation, what executive experience did Madison have before he became President? Perhaps his cabinet post, but I'm not sure that qualifies.

In his first letter to Adams in 1812, Jefferson wrote: "if science produces no better fruits than tyranny, murder, rapine and destruction of national morality, I would rather wish our country to be ignorant, honest and estimable as our neighboring savages are." Jefferson thought it was essential to end war. Absent that, given what powers science was likely to give man, he thought it was not worth it. There was a certain realism in that, but it was a truncated realism. A deeper realism would begin with the reality that we have modern science and that war is not going away, and then consider how best to minimize the inevitable evils that will result.

On the other hand, when in office Jefferson was willing to overlook his own theories sometimes. Hence, among other things, he stood down on an Amendment to justify the Louisiana Purchase, even after having said that we ought not to make the constitution "a blank paper by construction." (Interestingly, John Quincy Adams also supported an amendment, but whereas Jefferson wanted an amendment to justify the acquisition of territory, JQA wanted one to deal with the transfer of French citizens to American citizenship. To chance their nationality without there consent, he realized, was a gross violation of the principles of 1776)

Jefferson did not want to end the embargo, but he knew that he lacked the votes to continue it as his presidency ended.

Gallatin was more level-headed on most issues than TJ and JM.

The critique might echo that of the Federalists. That does not mean that Fisher Ames and his ilk were any more reaonable.

Perhaps I should put it this way: if embargo justified war in 1812, it certainly justified it long before that. The difference was that embargo had failed. Experience had shown that nations needed armies and navies.

Now, I am no expert on this subject, but it at least seems to me as an outside observer that there is a kind of false dichotomy at work here. Richard says,

"In his first letter to Adams in 1812, Jefferson wrote: "if science produces no better fruits than tyranny, murder, rapine and destruction of national morality, I would rather wish our country to be ignorant, honest and estimable as our neighboring savages are." Jefferson thought it was essential to end war."

It does not seem to follow that "Jefferson thought it was essential to end war" because he hoped for something better than "tyranny, murder, rapine," and so forth. It reminds of Shakespeare's Vienna, where each woman is either a prostitute or a nun, unaware of the possibility of being a wife!

Owl. I'm not sure I follow. Jefferson did not think war could be civilized. He is the one who saw no middle ground. Had the wars of the French Revolution been conducted chivalrously, his comment would have been exactly the same.

He was saying that if we are no more civilized with modern science than we were before modern science was invented, it's better not to have modern science.

Hence it was essential, as Jefferson saw it, that it be possible to change human nature, or, to put it more concretely, that war cease to be a necessary tool of statecraft.

After all, war had often been conducted chivalrously in the past. Jefferson was objecting to war per se as an evil, not to uncivilized modes of war. The context of his letter is the Napoleonic wars. They seemed to indicate that the human tendency for evil was no different in the early 19th century than it had been in the 13th century. Were that the case, it threatened Jefferson's hope for Progress.

To put it differently, had Jefferson not had a manichaean point of view, he would have realized that his differences with moderate Federalists like John Marshall and John Adams were small beer, and that there was no "Revolution of 1800."

Or perhaps he knew it was all sloganeering designed to get himself, and his friends into office.

That all may well be, but then it seems odd that such a man could author a Declaration of Independence in which he and his fellows "acquiesce in the necessity, which denounces our separation, and hold them, as we hold the rest of mankind, enemies in war, in peace friends." It seems pretty difficult to get at TJ's heart of hearts on that count.

You don't think his thinking could have changed or modified through 20 and more years of experiences such as he had?

I'm just saying it is a difficult issue. Do you think Jefferson still held his conviction after the Missouri Compromise in 1820, as he wrote to John Holmes?

Says Jefferson, "I had for a long time ceased to read newspapers, or pay any attention to public affairs, confident they were in good hands, and content to be a passenger in our bark to the shore from which I am not distant. But this momentous question, like a fire bell in the night, awakened and filled me with terror. I considered it at once as the knell of the Union. It is hushed, indeed, for the moment. But this is a reprieve only, not a final sentence. A geographical line, coinciding with a marked principle, moral and political, once conceived and held up to the angry passions of men, will never be obliterated; and every new irritation will mark it deeper and deeper."

Doesn't that comment confirm the reading of Jefferson. He was always surprised to find that statesmen will always be faced with insoluable problems. His politics did not begin with the realization that the world always will be, in many ways, the scence of tragedy

That is a good point, Richard. But I mean, Jefferson was one of the leading men whose forecast of civil war quite preceded that of others. Think of his Notes on Virginia, too: "Indeed, I tremble for my country when I reflect that God is just...that His justice cannot sleep forever." If Jefferson entertained any thoughts of peace, they are so easily shattered that it at least cannot be called a dogmatic or ideological position. All it takes is a friggin' line drawn on a map to dash his hopes?

Jefferson was not the only one. What set him apart was that he thought the MO compromise was what made the civil inevitable. Prior to that, Jefferson wasn't worried. What planet was he on?

It is interesting to note that the one time the term "statesman" appears in the Notes is in the discussion of slavery.

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