Philipp M Hildebrand: Albert Gallatin, one of the financial founding
fathers - what can we learn from him today?
Speech by Mr Philipp M Hildebrand, Vice-Chairman of the Governing Board of the Swiss
National Bank, at the Swiss-American Chamber of Commerce, Geneva, 10 September 2008.
I would like to thank Signe Krogstrup for her valuable support in drafting this speech. I also thank Rita Kobel and
Urs Birchler for their very helpful comments and discussions.
* * *
1. Introduction
As always, it is a great pleasure to be in Geneva. I want to thank the Swiss-American
Chamber of Commerce for its kind invitation.
My remarks today are unusual in the sense that I will not structure them around monetary
policy, the ongoing financial turmoil, or any other current monetary topic. Instead, I have the
privilege to step aside temporarily from my day-to-day preoccupations and indulge in a little
bit of history about a remarkable man whose origins are firmly rooted in Geneva's beautiful
"vielle ville". Ladies and Gentlemen, it is an honor for me to pay homage to Albert Gallatin -
the Geneva-born fourth - and to this day longest - serving United States Secretary of the
Treasury.1
Those of you who enjoy economic history will be familiar with the extraordinary
accomplishments of Alexander Hamilton, the first Secretary of the Treasury, appointed by
President George Washington in 1789. Hamilton built the foundation of the U.S. federal
financial system in the late 18th century.2 Albert Gallatin's efforts to solidify the Hamiltonian
structure and to establish fiscal discipline in the early years of the United States are less well
3
known. As you will see, they clearly merit attention.
The story of Albert Gallatin provides a wonderful example of how Swiss and American
politics and economics have nourished each other for centuries through the exchange of
ideas and people. Moreover, Albert Gallatin's legacy arguably provides some valuable
lessons which remain relevant in the present time. Today, I would like to focus on a crucial
part of Gallatin's legacy - his strong adherence to fiscal discipline. But first, let me take you
on a brief tour of Gallatin's fascinating life story.
2. The life and achievements of Albert Gallatin
For the sake of clarity, allow me to divide Albert Gallatin's life into four distinct periods.
1761-1788: Youth
The first period covers Gallatin's life prior to becoming politically active in the United States.
Gallatin was born into a wealthy merchant family in Calvinist Geneva in 1761. He became an
orphan when he was only nine. He was raised by his relative, Catherine Pictet.4 At the age of
nineteen, Gallatin obtained a university degree in Latin and Greek. His classic education was
not the only early influence on his future political convictions. He was deeply affected by the
strict Calvinist attitudes to debt and savings that would have prevailed in Geneva at the time.
Moreover, he was privy to and would have actively participated in the rich debates about
politics and philosophy that took place in his social circles. These debates were inspired by
the French Enlightenment and the influence and presence of the likes of Voltaire and
Rousseau during those years.5 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. As he put it, he wanted to "drink in a
love for independence in the freest country of the universe".6
Gallatin spent his first years in the US in New England, trying to earn a living. Eventually, he
taught French at Harvard. With his early savings, he purchased some land in Fayette
County, Pennsylvania and in 1784, he settled there.7
1788-1801: Politics
Once established in Pennsylvania, Gallatin became politically active at the local and later at
the federal level. This marked the beginning of a second distinct period of Albert Gallatin's
life. This period lasted from approximately 1788 to 1801, when the newly elected president,
Thomas Jefferson, appointed Gallatin as his Secretary of the Treasury.8 These final few
years of the 18th century were an extraordinary period in American history and politics.
During the second half of the 1780s, the Constitution was written, adopted and eventually
ratified; the first federal government under the Constitution was formed and George
Washington, who had presided over the Constitutional Assembly, was elected first President
of the United States - in 1789.
President Washington appointed 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.9
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
4
Albert Gallatin's father died when he was four, and his mother when he was nine. His mother sent him to be
brought up by his aunt, Catherine Pictet, just after his father died, as she had to attend to the family's financial
affairs. For more on Gallatin's Geneva background see, for example, William Emmanuel Rappard, Albert
Gallatin, citoyen de Genève, ministre des Etats-Unis (Impr. Centrale, Genève, 1917) or John Austin Stevens,
Albert Gallatin, An American Statesman
(Univ. Press of the Pacific, Honolulu HI, 1883).
5
Voltaire arrived in Geneva in 1755, and moved to Ferney in 1758, where he stayed to his death in 1778.
Gallatin's grandparents visited Voltaire in Ferney and Albert Gallatin was often taken there for visits.
Rousseau was born in Geneva, left at a young age but returned there in 1754. He published Du Contrat Social
(and other writings) in 1762, a year after Gallatin was born. He was subsequently forced to flee from Geneva,
so there was no direct contact, but definitely an influence on the intellectual climate of the city.
6
Stevens, op.cit., p. 10, quotes Gallatin as having used this phrase to explain his departure.
7
In Pennsylvania, Gallatin also founded the colony "New Geneva".
8
Contrary to what the party's name suggests, the Republican Party established by Jefferson in the late 18th
century was in fact the forerunner of today's Democratic Party.
9
Hamilton only served as Treasury Secretary until 1795, after which Wolcott, a fellow Federalist, took over until
1801. But Wolcott is generally perceived as having continued and completed the policies of Hamilton until
Dexter took over, for a few months only. Gallatin took office in May 1801.
BIS Review 106/2008
and, finally, the creation of the first Bank of the United States.10 The Bank of the United
States gave the federal government a tool to manage short-term credit and cash flow and to
influence - and thereby help safeguard - the stability of the emerging financial system of the
United States.11 The Bank also significantly extended access to credit for private enterprise.
During these extraordinary years, Gallatin first served as a representative in the state
legislature of Pennsylvania. He was involved in the adoption and ratification of the state
constitution. After a brief period as a senator, Gallatin became a member of the House of
Representatives in 1795, where he served until 1801.12 As a congressman, he established
himself as a leading figure in the emerging Republican Party led by Thomas Jefferson.
Gallatin quickly gained the reputation of being the member of his party with the most
profound understanding of public finance. In line with the state-based agricultural outlook of
Jefferson and the Republican Party, he challenged Hamilton's federalist financial institutions
and policies.13 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". This resolution stated that tax collectors would be treated with the
"contempt they deserve."14 Later, the enmity between Gallatin and Hamilton was further
fueled when Gallatin actively supported Republican attempts to discredit Hamilton and force
him to resign from the Treasury over wide-ranging charges of corruption and
mismanagement.
As a member of Congress, Gallatin acquired a solid reputation as a fiscal conservative. He
relentlessly demanded a high level of fiscal transparency and consistently challenged all
decisions by the government to spend in excess of its current revenues.
1801-1814: The Treasury
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.15
Thus began a third distinct period in Gallatin's life. Remarkably, instead of dismantling
Hamilton's financial system, Gallatin opted to preserve the most important parts of it. In some
cases, he even strengthened Hamilton's system. Most notably, he made extensive use of the
Bank of the United States to conduct the government's day-to-day fiscal operations. Gallatin
also kept Hamilton's system for keeping the public debt more or less intact. Other parts of
Hamilton's financial system were modified to serve Republican causes. Gallatin's early
10
See, for example, Chernov's description of Hamilton's achievements while Secretary of the Treasury
(Chernov, op.cit., ch. 17-20).
11
Using the Bank of the United States for the maintenance of financial stability was done both through
lendingof-last-resort type operations and through the restriction and extension of credit in response to market
Financial Founding Fathers: The Men Who Made America
conditions. Robert E Wright and David J. Cowen,
Rich (Univ. of Chicago Press, Chicago IL, 2006), ch. 1, provide a thorough exposition of Hamilton's ideology,
achievements, and financial system, as well as his skilled use of the Bank of the United States for the
purposes of maintaining financial stability.
12
At the end of 1793, Gallatin won the election to the United States Senate, but was removed shortly thereafter
from the Senate on the grounds that he did not have the minimum nine years of United States citizenship.
13
Alexander Balinky, Albert Gallatin: Fiscal Theories and Policies (Rudgers Univ. Press, New Jersey NJ, 1958)
gives a very thorough introduction to the fiscal ideology of the Republican Party and how Gallatin's fiscal
theories and policies were shaped by this. Wright and Cowen, op.cit., p. 103, point out how Gallatin had more
of a problem with the Federalist domination of Hamilton's bank than with the bank itself.
14
Quoted in Chernov, op.cit., p. 469.
15
Jefferson was elected president in 1800, but did not appoint Gallatin until 1801 - even though it had been his
intention from the start. See for example Wright and Cowen, op.cit., p. 93, for details.
BIS Review 106/2008
priorities included a change in Hamilton's tax structure in order to better reflect the
Republican Party's ideology and its constituencies. He also focused on the need to increase
transparency in fiscal policy. He progressed rapidly on both fronts. Internal taxes were soon
abolished. The federal government came to rely almost exclusively on import tariffs, which
Gallatin saw as luxury taxes that did not burden his farming constituency.16 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. To
compensate, he allowed foreign coins to circulate along with the dollar. These measures
were not taken because Gallatin was opposed to the Mint. Rather, the Mint proved to be very
costly for the federal purse. Therefore, Gallatin saw the reduction of its operations as a way
for the government to save money, in line with his primary objective of fiscal consolidation.17
For Gallatin, a reduction of the United States' federal debt burden "was the end toward which
all other fiscal policy was designed."18 He argued forcefully that the federal government
should spend tax revenues on new public services, goods or investment only when tax
revenues were freed from having to service a large public debt stock.19
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. The most prominent
example, of course, is Gallatin's arrangement to finance the Louisiana Purchase in 1803. He
quickly managed to raise the necessary amount - nearly USD 15 million - through a bond
issue arranged by the British merchant bank Barings.20
With hindsight, some scholars have questioned whether public debt reduction should be the
main fiscal policy objective of an emerging country with high growth potential.21 But, given
Gallatin's debt reduction objective, his efforts were extraordinarily successful. 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.22 This was a remarkable effort
16
Balinky, op.cit., provides a detailed description of the tax structure of the early United States and its changes
under Gallatin.
17
See Balinky op.cit., pp. 101-103, for an account of the United States Mint under Gallatin.
18
Quoted from Balinky, op.cit., p. 39.
19
This is not to suggest that Gallatin was opposed to government-sponsored infrastructure projects. Indeed, in
1808, he presented the Gallatin Report on Roads and Canals. As he put it at the time, the vision of roads and
canals to link up the young nation "could not be left to individual exertion."
20
The federal debt stood at approximately USD 83 million when Gallatin took office in 1801. By 1808, Gallatin
had succeeded in reducing it to USD 57 million, including the extra USD 15 million added by the Louisiana
Purchase. United States nominal GDP has been estimated at approximately USD 520 million in 1800 (see
Susan B. Carter, Scott S. Gartner, Michael R. Haines, Alan L. Olmstead, Richard Sutch, and Gavin Wright
(eds.), Historical Statistics of the United States, Volume Three: Economic Structure and Performance.
Cambridge University Press, New York NY, 2006). Hence, almost doubling the size of the United States
through the purchase of the Louisiana territory from Napoleon in 1803 cost approximately 3% of the GDP of
the existing territory.
21
Balinky, op.cit., for example, comes out strongly against Gallatin's debt reduction strategy, arguing that it was
a narrow-minded and short-sighted fiscal policy for a country in need of economic development.
22
More precisely, the United States debt-to-GDP ratio was reduced by an estimated 56 percent between 1801
and 1808. This estimate is based on nominal GDP estimates for the US in the early 1800s provided in Carter
et. al, op.cit., who provide nominal GDP figures for 1800 and 1810 (but not for the intervening years). These
have been used here as proxies for 1801 and 1808. The possible error caused by this approximation is
mitigated by the fact that growth in 1809-10 is likely to have slowed considerably due to the increasing
prospects of war with Britain. Data on federal debt are obtained from the United States Treasury Department,
Public Debt Historical Archives (http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo1.htm).
These data closely match those reported by Gallatin himself in State of the Finances, 1801-1802 (American
State Papers, Finance, 1832, Vol 1, pp. 701-705; http://memory.loc.gov/ammem/amlaw/lwsplink.html).
and cannot be attributed solely to the fact that Gallatin's service at the Treasury coincided
with a prosperous and peaceful period.
To put Gallatin's debt reduction efforts into perspective, it is worth comparing them to more
recent developments in OECD public-debt-to-GDP ratios. For instance, growth in OECD
economies was also relatively robust between 1994 and 2000.23 But only one OECD country
- Ireland - saw a similar reduction in its debt-to-GDP ratio during that period. Arguably, in the
case of Ireland, debt reduction was easier. During the second half of the 1990s, Ireland
enjoyed roughly three times the economic growth the United States is estimated to have
experienced in the early 1800s. Ireland essentially grew out of its debt, while Gallatin had to
save his way out of the debt burden of the United States.24
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. By 1809, the first deficit emerged since Gallatin had taken office.
In addition, and against Gallatin's advice, Congress opted not to renew the charter of the
Bank of the United States in 1811, just one year before war broke out. Congress thereby
removed the main tool for arranging war financing that Gallatin would have relied on.
Foreseeing financial disaster and unable to prevent it in his capacity as Secretary of the
Treasury, Gallatin resigned from the Treasury in 1814.
1814-1849: Diplomacy
This brings me to the fourth distinct period of Gallatin's life, covering his post-treasury years.
In 1814, Gallatin went to Russia to represent the United States and help settle hostilities at
the peace conference with England and France. The conference ended successfully the
same year with the signing of the Treaty of Ghent. Much of this success has been credited to
Gallatin.25 Before returning home, Gallatin made his first visit to Geneva since he had left his
birthplace 35 years earlier. Geneva received him with great honors. According to his son,
who accompanied him at the time, the visit was very emotional. Gallatin remained deeply
attached to his native city throughout his life.26
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.
23
Real growth averaged 3.1 percent in OECD countries between 1994 and 2000, as compared to an average
growth rate of 2.8 for the period 1980 to 2006. During the more recent seven-year period between 2000 and
2006, growth has averaged 2.5 percent, and no OECD country has reduced its debt-to-GDP ratio by more
than Gallatin's record.
24
Ireland experienced an average real growth rate of nine percent during the years in question. This compares
to an estimated average growth rate for the United States between 1801 and 1808 of just over three percent.
Source: Author's own calculations based on data provided in Carter et. al, op.cit., and the IMF World
Economic Outlook.
25
See, for example, Rappard, op.cit.
26
Rappard, op.cit. recounts Gallatin's post-treasury diplomatic career as well as his travels in Europe and time
spent in Geneva.
BIS Review 106/2008
3. The legacy
Let me now briefly turn to the legacy of Albert Gallatin's extraordinary life. It seems to me that
there are two major achievements to point to. First, there is Gallatin's singular success in his
pursuit of debt reduction. Gallatin took advantage of prosperous and relatively peaceful times
to reduce the public debt of the emerging United States. The second key legacy of Albert
Gallatin's efforts is the way in which he reinforced the financial institutions set up by
Alexander Hamilton and made skilful use of them.
Hamilton's financial system consisted of newly established institutions, which encountered
fierce political opposition. They lacked the robustness that only the test of time can provide.
Gallatin spent the next 13 years successfully using Hamilton's system to ensure fiscal
prudence and continuous sound financial management. Without this, it might not have
survived its infancy. This is particularly true of the Bank of the United States. It is possible to
argue that Gallatin's strong support for Hamilton's bank furthered the process of setting up its
successor, the Second Bank of the United States, in 1817. Two recent authors have gone
further. They refer to Gallatin as the "Savior" of Hamilton's financial system.27
This second legacy is remarkable, given the long-standing animosity between Alexander
Hamilton and Albert Gallatin. How are we to explain Gallatin's transformation from a
prominent critic of the Hamiltonian system to its guardian and perhaps savior? One possible
answer, of course, is that when Thomas Jefferson became President in 1801, he quickly
realized that the economic consequences of dismantling Hamilton's financial structure would
be dramatic for his presidency, his party and the country. Moreover, there is evidence that
Jefferson may have indirectly given a commitment to the Federalists to preserve at least part
of the Hamiltonian financial system in order to break the political deadlock during the
Presidential election. What is perhaps most remarkable, however, is that Gallatin seems to
have come to appreciate the genius of Hamilton's system and advised Jefferson accordingly.
In an attempt to firmly discredit Hamilton, Jefferson - shortly after becoming President -
asked Gallatin to examine the archives and uncover the "blunders and frauds of Hamilton".
After searching "with a very good appetite", Gallatin went back to Jefferson with the following
remarkable assessment: "I have found the most perfect system ever formed. Any change
that should be made in it would injure it. Hamilton made no blunders, committed no frauds.
He did nothing wrong." Indeed Gallatin went on to say that Hamilton had done such an
outstanding job as the first Secretary of the Treasury that he had turned the post into a
sinecure for all future occupants. As for the Bank of the United States, Gallatin proclaimed
that "it had been wisely and skillfully managed".28
4. What can we learn from Gallatin's financial achievements today?
What lessons can we draw today from Gallatin's economic policies? Let me limit my
observations to the value of fiscal prudence and sustainability. Arguably, the most important
lesson of Gallatin's achievements is that public debt reduction requires unwavering political
commitment to fiscal discipline. This lesson is certainly relevant in the context of today's
fiscal challenges.
Gallatin faced an unexpected fiscal time bomb in the form of a war with Great Britain. The
developed world now faces a predictable and rapidly ticking fiscal time bomb in the form of
aging populations. The demographic strains on government budgets in the developed world
are already visible. Pressures will almost certainly intensify in coming years. The implication
is that in the not-too-distant future, spending on public goods and services will have to
contract. Alternatively, taxes could be raised in an attempt to maintain the level of public
goods and services we currently enjoy. Given these longer-term fiscal strains, we should be
building up a fiscal cushion rather than becoming more indebted.
Allow me to review very briefly some trends in budget deficits and debt levels in the
developed world. Historically, government budget deficits have been typically used to finance
wars. War time deficits have then been compensated by surpluses in times of peace. This
cycle of deficit finance and subsequent debt reduction is illustrated in fig 1. It shows historical
deficits for G7 countries excluding Germany.29 Every major period of deficits prior to 1950
has coincided with a time of war. After the Second World War, deficits essentially returned to
normal. As you can see, after 1970 there was a significant change - all 6 countries
represented in the graph started running sustained budget deficits, and this in times of
relative peace.30 Now take a look at graph 2. It shows public debt for the OECD, as a
percentage of GDP, since 1970. Since the mid-1970s, the accumulation of fiscal deficits has
led to a near doubling of public debt, as a percentage of GDP, in the OECD area.31 While
public debt can be desirable for many reasons, it is very difficult to argue that the appropriate
debt-to-GDP ratios should be this high. Admittedly, the average OECD debt-to-GDP ratio has
fallen somewhat since the late 1990s. The Maastricht convergence criteria for EMU countries
and robust growth have clearly contributed to this trend. However, fiscal positions in the
United States and in Europe have deteriorated again more recently.32 For a long time,
Switzerland stood out as an exception in the pattern of deteriorating OECD debt-to-GDP
ratios. But with the economic slowdown of the early 1990s, Switzerland's public debt
increased rapidly, and exceeded 50% of GDP in 2003. Fortunately, it has since been brought
back down. It stood at roughly 44% last year.
How would Albert Gallatin view such unprecedented increases in public debt-to-GDP ratios?
Presumably, he would be dismayed. Moreover, I suspect he would conclude that the political
commitment to fiscal discipline should have been much more pronounced during the last few
years when the global economy enjoyed broadly robust growth. As the world is entering what
looks like a protracted period of lower growth, it will be extremely difficult to keep public
debtto-GDP ratios constant, let alone reduce them.
5. Conclusion
After this very brief fiscal detour let me conclude by returning to Albert Gallatin. Anyone who
loves the city of Geneva has many reasons to be proud of the achievements of Albert
Gallatin. To my knowledge, he is the only son or daughter of Geneva who is honored in the
form of a prominent statue in Washington D.C. He stands at the entrance of the Treasury
building, and only a few steps away from the White House. On the statue, he is described
simply as a "Genius of Finance". As Secretary of the United States Treasury, he made a
crucial contribution to the stability and development of the nascent United States financial
system. Above all, he was deeply committed to reducing the size of the federal public debt
during his first seven years in office. Only when tax revenues declined, as the threat of war
loomed, did he allow debt reduction to be relegated to a secondary objective.
Gallatin's debt reduction efforts look even more remarkable when viewed through the prism
of current fiscal developments throughout the developed world. If Albert Gallatin had been in
charge of OECD public finances during the decade prior to the onset of the current financial
turmoil, we might be in a more comfortable fiscal situation today. As it stands, our
longerterm fiscal challenges are formidable and will demand courageous political and fiscal
leadership. Albert Gallatin's adopted home country is no exception. Regardless of who
moves into the White House in January 2009, the new President's longer-term fiscal policy
options will be constrained by the legacy of the past.
To close, let me thank the Swiss-American Chamber of Commerce for providing me with the
opportunity to honor this extraordinary Genevan-American. Albert Gallatin would find much to
enjoy in present day Geneva. He would be particularly pleased to discover an international
city with excellent Swiss-American relations. Thank you for your attention.
Fig 1.33
Gross debt as a percentage of GDP, OECD, 1970-2007.
Source: IMF
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0