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1833: GALLATIN TO HORSLEY PALMER. - Albert Gallatin, The Writings of Albert Gallatin, vol. 2 [1879]

Edition used:

The Writings of Albert Gallatin, ed. Henry Adams (Philadelphia: J.B. Lippincott, 1879). 3 vols.

Part of: The Writings of Albert Gallatin, 3 vols.

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GALLATIN TO HORSLEY PALMER.

New York, May 1, 1833.

Dear Sir,—

I received about three months ago, without knowing to whom I was indebted for the favor, a copy of the “Evidence taken by the committee on the subject of the renewal of the charter of the Bank of England.” Your very acceptable letter of 12th December last reached me much later, the ship having been compelled to put back in distress in an Irish port, where she was detained several weeks. I return you my thanks for both. The first contains a body of invaluable information, and you need not have claimed indulgence for your evidence, which is not less luminous in the exposition of facts than correct in the principles it sustains. Your letter throws additional light on the subject, and the questions you propose embrace every essential branch of that complex inquiry. For that very reason I hesitated whether I should attempt to enter into the discussion or do anything more than to acknowledge the receipt of your favor. I feel some confidence in the soundness of my opinions on the subject of currency as applied to the United States; but I am not competent to judge for other countries. Some general principles must, if true, be indeed applicable everywhere, but they are few, and must, in most cases, be modified by the situation, and perhaps as much by the habits, of every country respectively.

Thus, for instance, we have, from the necessity of the case, uniformly departed from that which is in Europe considered as an essential banking principle. The increase of our population and the unparalleled spirit of enterprise of this nation have always been far in advance of the accumulation of capital. That of the banks has always been required for the immediate aid of commercial undertakings. That of the Bank of the United States, as well as that of the State banks, is, in addition to the issues and deposits, applied almost exclusively in discounting private bills and promissory notes. The portion vested permanently in public stocks and real estate is so inconsiderable that it need not be taken into consideration. I believe that at this moment those private discounts by incorporated banks amount to about 250 millions of dollars, of which less than one hundred rest on issues and deposits, or, in other words, on the principle of borrowing with one hand and lending with the other.

The residue is, in fact, the loan of the capital itself of the banks; and it could not be withdrawn from that employment without bringing universal ruin and arresting the progress of our commercial and manufacturing industry. That credit has in too many instances been far too much extended (particularly in the interior) is indubitable; but it is not less true that capital was drawn in that direction because it could not be employed as profitably in any other way; and that more is still wanted for the same purpose is proved by the fact that there is not enough to discount good short paper at 6 per cent.

Another important difference between the United States and Great Britain arises from the peculiar form of our government. Our paper system, and therefore our currency, is under the control of twenty-four different legislative bodies, which, although forbidden to issue paper money in the name and on the credit of the individual States, authorize its issue by the joint stock companies they incorporate, and even in some cases do it on their own credit through the medium of nominal banks, which are only subordinate offices of their treasury. But even when acting on sounder principles, it is impossible to expect, from so many independent legislatures, any uniformity, any system that will bring every description of paper currency under the same regulations and restrictions. The Bank of the United States must not be considered as affording a complete remedy, but as the best and most practicable which can be applied. Its object is not to substitute its paper for that of the several State banks, which cannot either legally or in fact be done to any considerable extent, but so to control by its operations those of the other institutions as to keep their issues within reasonable bounds, and thereby give solidity and an uniform value to the whole mass. In order to do this it is, of course, necessary that the issues of that bank should be extremely moderate and its treasure considerable. It had acted on that principle and had been irreproachable in that respect as late as November, 1830, when I wrote the essay on our currency which you have seen. The inconsiderate subsequent extension of their loans and issues, and consequent diminution of their treasure, has not escaped your observation; and their conduct in that circumstance has been attended with worse consequences to the bank than you could be aware of, by affording a strong argument against the renewal of the charter.

When, therefore, you ask whether I think a single bank of issue preferable, I must answer that it would be altogether impossible to resort to that plan here, and ask whether it is practicable with you. Will the country interest permit it? You were not even allowed to extend to Scotland the beneficial provision which suppressed small notes. Still, as the power does exist, as the authority of Parliament is paramount, there is, at least, no absolute impossibility to adopt the plan which your own experience must have taught you to be the best adapted to your circumstances. Sir H. Parnell’s opinions are entitled to the highest respect. No legislation is better than a bad, and, on most subjects connected with economy, than any legislation. Yet, with respect to currency, to the power of issuing that which is the standard of the value of every other commodity and regulates every contract, our experience in the United States is decisive against allowing the privilege to every one indiscriminately. Such were the evils of that system that, without concert, and almost simultaneously, every State in the Union passed restraining laws. I have not disguised how imperfect those are in many of the States; but still our present situation is better than when every one issued paper as he pleased.

Having promised so much, I will, though with unfeigned diffidence, give you my opinion on the several points alluded to in your letter.

Judging from analogy, I believe with you that joint stock companies, though affording generally more security to the holders of notes, will have a tendency to increase the amount of issues, to lessen that of specie or money assets in the interior, and be liable to greater fluctuations in the expansion and contraction of the currency and of the calls on London for specie than under the existing system.

Under any system of paper money, a single bank of issue, such as that of England was sixty years ago, such as that of France now, is to me the beau idéal. The evils that might arise from the monopoly must be prevented by adequate positive restrictions, by publicity, and the consequent effect of public opinion, and, above all, by the omission in the new charter of any provision binding government not to grant any other at any time or place and in any shape it may think proper; this check alone, with publicity and the evident interest of the bank, seems sufficient to prevent any gross abuse; and I believe the advantages of unity in the control of issues of paper to be incontestable. The mode you have lately adopted to supply country bankers with notes at a moderate rate of interest appears to me excellent. It would be impossible here to separate entirely a bank of issue from ordinary banking business, viz., discounting private paper and receiving private deposits. But if the Bank of England can do without either, it would be a great improvement, remove many well-founded objections, lessen the great power which must necessarily be given to the bank, and leave the banking business proper where it ought to be,—to the natural competition of private bankers.

It may, I think, be demonstrated by our experience, contrasted with that of the London bankers and of those of the Continent of Europe, that banking proper, detached from the power of issuing notes, may be and is conducted much better and more profitably by private individuals than by joint stock companies. If it becomes necessary to resort to these for the purpose of issuing a paper currency in the interior, it appears to me absolutely necessary to place them under certain restrictions, amongst which the principal (according to our experience, which on that point is more extensive than that of any other country) would seem to be the obligation of investing their capital, or a considerable part of it, in unalienable public securities; the limitation of their issues to one-half or two-thirds of their capital; that of their private loans or discounts to an amount not greater than that capital; the obligation to discharge on demand their issues and deposits (current accounts) in legal coin or notes of the Bank of England, under penalty of a higher rate of interest than that at which they are permitted to lend or discount, and of forfeiture of their charter, as well as of summary attachment of the whole of their property in such cases of presumed fraud or gross neglect as may be defined by law.

I do not think it necessary to dwell on such of your observations as refer to my opinions on certain points on which it is very possible that I was mistaken. In theory, the principle of a single metal for standard cannot be denied. I think it erroneous in practice, at least in the United States, but have nothing to add to the reasons I have adduced in support of my opinion. If only one metal is adopted, which should be preferred seems doubtful. At present, whenever the relative value of gold is greatly increased in the rest of Europe, the demand for it presses with great inconvenience on England. Silver being our standard, we are immediately affected by a contrary state of things and whenever there happens to be an extraordinary demand for that metal. Ricardo’s plan appears to be a proper remedy against an internal panic, but could not, I think, prevent the exportation of bullion, when the pressure arises from external causes, otherwise than by the fall of prices caused by the contraction of the currency.

My observations on the silver coinage of England applied to the system as established by law. This provided no remedy against a superabundant issue, and my objection would have proved well founded had not the bank spontaneously interfered, and, at its own risk and expense, redeemed the superfluous quantity. It will be altogether removed if government provides by law for that redemption whenever applied for by the holders.

I fear that I may not have fully apprehended your observations on the only pecuniary advantage derived from the substitution of paper for a metallic currency; at least I do not understand on what is founded the distinction you draw. It seems to me that, in every case, the annual gain is equal to the interest on the amount of paper substituted, and it is thus stated on pages 18 and 19 of my pamphlet; but this is a point susceptible of doubt, and I regret my inability to understand your objection. This probably arises from my not being sufficiently versed in the doctrine of high and low prices.

I pray you to excuse the erasures and inaccuracies of this letter, which has been too long delayed and which I have not time to correct.

I have the honor to be, with high consideration, dear sir, your very obedient and faithful servant.

GALLATIN TO LA FAYETTE.

New York, May 12, 1833.

My dear Friend,—

I have been very remiss of late in writing to you. The cholera drove us out of town shortly after the receipt of your last communications; and, since our return, my answer has been delayed from time to time under an expectation of collecting the information necessary for a satisfactory reply to your inquiries. I hope that Mr. Livingston will be able to obtain better materials than were within my reach. On an important and the most difficult branch I can offer nothing better than conjectures, and you will easily understand my reluctance to hazard a vague opinion on a subject of that kind. As I have, however, no hope of adding for the present anything to my stock of information, you have my estimate, which I give only as such, and distinguishing those items on which most reliance may be placed, I arrange them under the following heads: 1. Revenue of the general government. 2. General expenses of the State governments, or sums paid into and expended by their several treasuries. 3. Local or municipal taxes. 4. Militia charges. 5. Miscellaneous charges, generally voluntary, and neither collected as taxes nor falling on the whole community.

1. The revenue of the general government is now confined to three objects: 1, the post-office, which, as it yields nothing, is no tax, the whole proceeds being applied to the acceleration and extension of the mails, and the community paying therefore, for the benefit received, no more than the money actually expended for that purpose; 2, the proceeds of the sales of the public, viz., of uninhabited, uncultivated, and unproductive, lands. The annual amount varies from two to three millions of dollars, and is not a tax. Every purchase is voluntary, and advantageous to all the parties: to the purchaser, who, on the most easy terms, becomes a freeholder and secures for life an independent existence; to the community at large, which is enriched by the annual conversion of unproductive into most productive land; to every individual of that community, whose taxes are lessened in proportion to the amount received; 3, the customs or duties on importation, the only productive tax now raised by the general government. This, before the late reductions, amounted to 21 millions, and is by those intended to produce fifteen. The United States had never, in time of peace, expended more than thirteen millions beyond the payments on account of the public debt, and including about one million for internal improvements. It is therefore probable, and it may be assumed, that, though the existing laws should produce more than 15, the revenue will be ultimately reduced to that amount.

2. The annual memorandum of the general expenses of fifteen out of the twenty-four State governments, and amounting together to 2,912,000 dollars, may be considered as substantially correct; and the expense of all together, and of so much of that of the District of Columbia and of the three Territories as is not defrayed by the general government, calculated at the same rate, cannot exceed four millions. A portion of their expense is, in some of the States, defrayed by other funds than taxes, such as sales of public lands, dividends on bank stocks, &c.; but, on the other hand, there is a portion of debt incurred, particularly by Pennsylvania, for internal improvements, not yet provided for; and, until better informed, the excess of the interest beyond the tolls (requiring a tax for the deficiency) may be assumed as equivalent to the portion of the said four millions which is not raised by taxes.

3. The local and municipal taxes consist of the poor tax, the road tax, and such as are necessary for defraying certain portions of the expenses of the administration of justice and other lesser objects, which vary in the several States, such as the building and preservation of court-houses, jails, and offices for the safe-keeping of records, the prosecutions for public offences, the pay of jurors when they are paid, &c. In some States a certain portion of the expense of primary education is also defrayed by a tax on the town or township; and a great additional expense is incurred in all our cities for paving, lighting, watch, preservation of health, and whatever of police is necessary for the preservation of order and consistent with our institutions. There are in the United States several thousand counties, towns, townships, cities, boroughs, or other subdivisions, most of which make no report of the taxes raised in each. It is utterly impracticable for any private individual to obtain a sufficient number of returns to form, even by analogy, a correct estimate. Those which may be collected by the Secretary of State will afford materials for that purpose, provided they are digested by a competent person. This is the point on which I have but imperfect and vague notions. The maximum in our largest cities is about 3½ dollars per head. In many interior agricultural districts of the Northern, Middle, and Western States the amount does not exceed half a dollar. It is generally less in the Southern than in the other States. Their roads are not kept in as good repair; the greater part of what would, where labor is free, become a poor tax is, in a slave country, a part of the expense of supporting the slaves; and various public services which are paid for in the North are rendered gratuitously by the planters of the South. The nearest conjecture which I can form, on a view of the whole subject, is, that all the expenses under this head exceed half a dollar and cannot amount to a dollar for each free individual. The enclosed memorandum contains a condensed view of our population in June, 1830, by the last census, and also the rate of increase of each description of persons during the period of ten years,—1820-1830. Three years having since elapsed, our population for this year must be about fourteen millions, of whom less than 2,200,000 are slaves. According, therefore, to my vague estimate, the aggregate of the local taxes is more than six and less than twelve millions, and till better informed I set them down at nine millions.

4. Militia charges. The enrolled militia may amount to near 1,500,000. The muster-days are nowhere less than two, and sometimes three, a year. Taking the average at two days and a half, and that of the price of labor at two-thirds of a dollar, which is too high and will cover some incidental expense, the annual necessary charge must be about two millions and a half. The expense incurred by the uniform voluntary companies is a matter of their own choice, and cannot be considered as a tax.

5. The miscellaneous expenses, which by some persons have been considered as taxes, consist principally of that for schools and the clergy, tolls on artificial roads, and fees paid by individuals to certain officers, who are compensated in that way instead of receiving salaries. The portion of the expenses for schools which is defrayed by taxes has already been included under the head either of State expenses or local taxes. Some States have accumulated permanent funds, which defray another portion. The school fund of Connecticut consists chiefly of mortgages, and yields about fifty thousand dollars a year. The pay of schoolmasters, so far as it is not derived from those sources, is not a tax, but a spontaneous expense incurred by individuals for the benefit of their children. The compensation of the clergy (with perhaps the single exception of Massachusetts) is precisely of the same description. It is only because the clergy in France is paid by government that writers who made the comparison between the two countries have been induced to consider the voluntary offerings of the American citizens for what they believe to be an object of first-rate importance, as a tax imposed upon them. In that view of the subject, the attendance on theatres, the use of wines and spirits, and everything not necessary to sustain physical existence, might be called a tax. This is not certainly one; and those are certainly correct who, in order to institute the comparison, strike out that item on both sides.

It is otherwise with the tolls on roads, and particularly the fees to officers, which, though paid only by those, must necessarily be paid by all those who use the first and want the services of the others. But neither roads of that description nor fee officers are numerous; and, although this must also be a vague estimate, I think that I make a large allowance in rating both together at one million and a half.

Recapitulating the whole, we have:

United States government,$15,000,000
State governments,4,000,000
Local or municipal charges,9,000,000
Militia,2,500,000
Tolls and fees,1,500,000
In all,$32,000,000

Which, on our present population of 14,000,000, is less than 2 dollars, or francs 12, per head. But I am quite willing to allow 25 per cent. more to the gentlemen who may wish it, and to admit that we pay 15 francs a head. And pray what inference is intended to be drawn from that fact, supposing it could be proved? That fact alone is altogether insufficient either to establish a comparison of the relative effect of taxation on the prosperity, wealth, or happiness of two nations, or to draw any correct conclusion with respect to the influence which their respective forms of government have on the general result. The people of Russia pay much less per head than those of France, and the Turks still less in proportion than the British subjects. Would it not be absurd to infer that the Turks and Russians are less oppressed by taxation, more prosperous and happy, than the inhabitants of France and England? or that the forms of government of the two first countries were preferable to the institutions of the two others? In order to show that the weight of taxation depends on other causes than the nature of the government, it may be sufficient to observe that prior to the French revolution the two freest countries on the Continent of Europe—Holland and Switzerland—both were federative republics, and that taxes were heavier (in proportion to the population) in Holland and lighter in Switzerland than in any other country in Europe.

The magnitude of taxes is not caused by the extravagance alone of governments or by the effects of a profligate or unskilful administration. It depends in a great degree on the expenses to which nations are liable on account of their political and geographical situation. Where these do not essentially differ, the amount must necessarily be limited by the national wealth and ability to pay of the individuals. That wealth and ability to pay are always eminently increased under governments which, abstaining from the exercise of every species of arbitrary power, govern by equal laws and, without favoring or oppressing any particular class of people or species of occupation, afford complete security to persons, industry, and property. To infer, when that result has been obtained, that because the people are able to pay and may pay more than those of other countries, they are more oppressed and less happy, is an obvious absurdity. Much depends also on the nature of the taxes, which may be more or less oppressive and partial, and, which is if possible still worse, may strike at the sources of national wealth and industry; and much also on the nature of the public expenditure, on its being applied to beneficial or productive objects, or to the support and increase of the unproductive and idle members of society. All these considerations have been long familiar to those who have paid the least attention to the subject. To discuss them and to examine and compare the effects produced in that respect by the respective institutions, mode of administration, and state of society of France and the United States, would require more knowledge and labor combined than have yet been brought in the field of discussion. Having only suggested some of the elements necessary to be investigated, I will conclude this long letter with some cursory observations relating to the United States.

I find two striking illustrations of what I have said respecting a beneficial or productive [expenditure] in our own recent history. From the accession of Mr. Jefferson to the Presidency to this day, the United States have applied from seven to ten millions of dollars a year to the payment of the interest and principal of the public debt. They have been thereby enabled to discharge the whole of the principal, amounting to 160 millions of dollars, the aggregate expenditure of the Revolutionary war and that of 1812-1815. This payment having set free a revenue of ten millions, the taxes have been reduced six millions, reserving four millions for internal improvements, a more rapid increase of our navy, or some other useful purpose. Had that revenue of seven to ten millions, or so much of it as was not necessary to pay the interest, instead of being applied to the discharge of the principal, been expended on an unnecessary expansion of our military establishment in time of peace, or any other useless and unproductive object, the people of the United States would to this day remain burdened with ten millions of annual taxes for the payment of the interest alone, and with the prospect of an indefinite increase of the principal whenever emergencies rendered a resort to loans necessary. The other instance is found in the State of New York. That State borrowed about eight millions, and applied the money to those splendid and eminently useful and productive works, the Erie and the Champlain Canals. Those are completed, and the tolls alone are sufficient to pay the interest and discharge [the capital] in a few years, whilst the expense of transportation has been reduced to one-third of what it was, and an inland water communication has been opened from this city to the St. Lawrence, to the further extremity of the great Western Lakes, and (through the Ohio Canal, undertaken on the same principles and now completed) to New Orleans and the Gulf of Mexico. If, instead of being applied to an object so useful, so productive, so highly calculated to shorten distances and to cement our Union, the money borrowed had been lavished in unnecessary pensions, high salaries, sinecures, or even on ill-digested and unproductive plans of improvements, there would have been so much capital actually destroyed, and the people of the State would have now half a million of additional taxes to pay for the interest, without receiving the least compensating benefit.

The combined effect of the state of society in the United States and of their democratic institutions on the public expenditure and the system and extent of taxation, may be traced in many particulars.

The price of manual labor, and the compensation of what is purely mechanical, such as the salary of ordinary clerks, is much higher than in Europe. This is the simple result of the comparative state of supply and demand for those objects, arising principally from the superabundance of land compared with the present population. On the other hand, our democratic institutions prevent the salaries of the higher offices from being paid more than, on that same principle, they are worth, and in some instances keep them below that point. There is still a great difference between the salaries of the several occupations, but a much greater equality than in Europe. The common laborer earns three hundred dollars a year in our large cities, one hundred and fifty in the country; a common transcribing clerk in the public offices at Washington receives eight hundred dollars; the Minister of Foreign Affairs, or that of one of the other great Departments, six thousand. Thus we have none of the abuses generally complained of in Europe, no civil pensions, no sinecures, no extravagant salaries given to courtiers or officers of a high grade; but the privates in all our several establishments, military or civil, in our army, navy, and public offices, cost much more in proportion to their number. So far as respects civil employments at least, I may assert that, on the other hand, we perform the same labor with a much less number of persons, whether officers or clerks, than in France.

It is sufficiently obvious that the other general expenses, either of the general or State governments, are on a very moderate scale. The local taxes alone can be considered as heavy in many places in proportion to the value of the property which is taxed. The tax in this city solely for local purposes was nominally 46 cents per hundred dollars of the nominal valuation, which was equal on the real property to about per cent. of the actual value. For this year it will be about ½ per cent. on the real value. I pay about the same rate for houses in Baltimore, and I understand that the rate in Philadelphia, where there is hardly any tax on personal property, is still higher on the actual value of the real estate. But that city is better administered than this, and the people get the worth of their money. They have provided much more ample funds for common schools, and an ample supply of water. The tax on personal property is here, on account of its inequality, on a still worse footing. No one, indeed, can be made to pay more than his rate; but the assessment is left to the caprice and arbitrary decision of ignorant assessors, and three-fourths of the wealthy inhabitants pay much less than their share, which falls on others less fortunate or skilful. Whatever is arbitrary is odious, and this, much more than the amount, is objectionable. I have before me the precise amount of purely local taxes for twelve years on property in Fayette County, Pennsylvania, which I have since sold for twelve thousand dollars. The average is 55 dollars a year, or about ½ per cent. on the real value. I compared carefully, whilst living there, the rate of my assessment with that of the other lands in the same township, and found it perfectly equitable and that this was the general rate. I have found nearly the same result (of ½ per cent. a year, on the actual value of improved real estate, for local charges) in my taxes in the State of Ohio; and I have already observed that about the same rate is paid for the same purposes in the cities of New York, Philadelphia, and Baltimore. But this tax is in reality much heavier in the country than in the cities. For the net rent of land in Pennsylvania is less than 3 per cent. on the value, whilst that of houses is on an average 6 per cent. here and in Baltimore, and more than 5 in Philadelphia. The local taxes in the country, at least where I am acquainted, amount to at least one-sixth of the income, and that on houses here to not more than one-twelfth part.

This, merely for local disbursements, is certainly a heavy charge, particularly in the country, and arises partly from local wants, which for some objects, such as roads, are very great in proportion to our wealth. But it is also due in a great degree to our democratic institutions; and the burden, which was extremely light, specially in the country, fifty years ago, has been gradually and is still increasing. The reason appears to me obvious enough; government is in the hands of the people at large. They are an excellent check against high salaries, extravagant establishments, and every species of expenditure which they do not see or in which they do not participate. But they receive an immediate benefit from the money expended amongst themselves, either as being employed in opening roads, the erection of buildings, &c., or as being more interested in the application of public money to schools, the payment of jurors and other petty offices, and even prospectively in the provision for the poor. They in fact pay little or no portion of the direct tax (occasionally enough in towns, but indirectly by the increase of rents), and receive the greater part of its proceeds.

You perceive that I do not disguise what I think to be the defects, and I know no other of any importance, in our system of taxation. I do not know any remedy for it here but in the exertions to obtain the best men we can for our municipal officers. But where institutions are yet to be formed, I may say that I have not discovered any evil to arise from universal suffrage in the choice of representatives to our legislative bodies, but that for municipal officers who have no power over persons, but only that of applying the proceeds of taxes, those who contribute to such payment ought alone to have the privilege of being electors.

I have neither paper nor time left to write to you on a far more absorbing subject, that of our unfortunate Southern difficulties. This will be the subject of another communication. I have only room to convey to you and to your family the most affectionate remembrances of every member of mine. We are all well. Frances has two children, James still but one, Albert still unmarried, my wife always enjoying excellent health. I am growing old and weak. So long as life remains I will be, with equal respect and sincere attachment, your old affectionate friend.