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.

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). 4  BIS Review 106/2008  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.