Albert Gallatin: Enigma Furioso

Appalachia

Abraham Alphonse Albert Gallatin was born to a rich, famous and noble family in the French part of Switzerland in 1761, but was orphaned a rich orphan and fled to America in the 1780s to escape overbearing and grasping relatives. He started out teaching French at Harvard, but soon purchased Friendship Hill, a 600 acre estate south of Pittsburgh along what was to become the National Road. At first, he ran a busy general store, but soon branched out into successfully buying and selling real estate. Although Uniontown now seems a lonesome hermitage in Appalachia, it was part of the area disputed between Pennsylvania and Virginia, coveted by both states because it seemed like the main route to Ohio at a time when Ohio was the Golden Frontier. Friendship Hill is now a National Park, near Fort Necessity, near General Braddock's grave, and the birthplace of George Catlett Marshall. So it has its attractions, but Gallatin led such a frenzied life it is hard to believe he spent much time there.

albert gallatin

Almost immediately after his arrival in America, Gallatin threw in his lot with Thomas Jefferson in resistance to the Federalist qualities of the new Constitution. Both of them were looking for more liberty than the Constitution offered. The movement became the anti-Federalist party and would have been the anti-constitution party except for reluctance to oppose the towering figure of George Washington. Gallatin's French origins seem to have overcome his aristocratic family background in supporting what the French Revolution had called Jacobin (or "Republican") notions. His Swiss background gave him a credibility in high finance in backwoods America. In spite of being rather out of place among Virginia gentlemen politicians, his personal qualities seem to have made him a natural politician. He hated Hamilton's idea of the National Bank, arguing against it effectively in unsophisticated company. The issue was not opposition to banking, but to the government role in this one which conferred control of the nation's wealth to an elite, and created constant risk of inflation from yielding to political demands. Gallatin later played a role in the chartering of both the Second and the Third Banks, although his motives here were somewhat different. (Government caps on interest rates induced the Banks to lend to only the best risks, which amounted to favoring Philadelphia over the frontier, which was Gallatin's constituency.) He was appointed U.S. Senator for Pennsylvania at the age of 32, but was evicted on a straight party vote on the ground that he had not been an American citizen for the required nine years. It seems likely that accusation was correct. He was soon elected a Congressman, becoming Chairman of Finance (later called Ways and Means), then majority leader after five years. In retrospect, it seems perplexing that a sophisticated financier would oppose a central bank, although his opposition may have been mainly against having politicians operate one, a rather unavoidable consequence of government control. Hamilton's idea that deliberately going into debt was a way to establish "credit worthiness" was denounced as particularly offensive to those who disdained indebtedness as the most dangerous sin of commercial life. The anti-Federalists were clearly wrong on this point, but it is possible to sympathize with their stubbornness. Even today, the unwillingness of banks to lend money to someone who has no history of previous borrowing is one of those things which seem so natural to bankers, and so irritating to apostles of thrift.

It is now unclear whether Gallatin had really never believed what he was saying, or had gradually changed his mind as he gained experience, or had suddenly realized his error as the War of 1812 approached while he was Secretary of the Treasury. In any event, he found himself charged with organizing the finance of a war with no way to do it. What was worse, Jefferson relentlessly pursued the closure of the National Bank for ideological, even fanatical, reasons; and Jefferson was the boss. The resolution of this conflict was to enrich Stephen Girard even further, while forcing Gallatin to a humiliating public reversal of stance. Nevertheless, America simply had to have a bank to fight a war. It is greatly to Gallatin's credit that his frenzied and obviously sincere entreaties to Jefferson and Madison then saved the Nation from a disaster of stupidity. In a larger sense, the dramatic reversal of stance also played a role in shifting American sympathies from France to England. It was a time in our history when American sympathies were wavering. On one side, there was gratitude to the French for bankrupting themselves with unwisely large loans to our struggling revolution, and for allying themselves with our revolution, soon imitating it with one of their own against the common foe of oppressive monarchy. True, there was more than a little hankering for annexation of Quebec as well as the rest of Canada. That was one side of it, which Lafayette, Girard, Gallatin and Jefferson labored to enhance. On the other hand, there was that appalling genocide of the Jacobin guilloutine, which Napoleon soon threatened to extend to all European monarchies within his reach. The Seven Years War, which we called the War of the French and the Indians, had left memories that French ambition could extend from Quebec to Louisiana and include Haiti, they once even occupied Pittsburgh, and their Indian allies had scalped settlers in Lancaster. That was not so long ago. Furthermore, the English invention of the Industrial Revolution was pretty attractive to Americans. Ultimately, we made our choice for steady prosperous commerce of the British sort, rather than glittering glorious conquest, of the French style. By 1813, Gallatin had served longer as Secretary of Treasury than anyone before or since, and earlier had a more distinguished career as both Congressman and Senator than all but a few have ever achieved. When he was offered the position as a commissioner to negotiate the Treaty of Ghent ending the War of 1812, it was natural to expect that it would be the final act of his long political career. It was, however, only the beginning of a ten-year diplomatic career as Ambassador first to France and then to England. Following that with still another new career, he took up academic work, returning to America to found New York University, personally establishing the academic discipline of study in Indian Affairs and language, and founding the American Ethnological Society. Gallatin wrote two books about Indian language patterns, and first suggested that the similarities between the languages of North and South American Indians probably meant they were related tribes. In another sphere, Gallatin is credited with originating the American doctrine of manifest destiny.

While skipping from one distinguished career to several others, Gallatin never forgot he was a banker. He wrote the charter for the Second National Bank ("Biddle's Bank"), plus the Third Bank of Pennsylvania, and founded the National Bank of New York, which was named Gallatin's Bank for a while, before gradually evolving into what is now called J.P. Morgan Chase Bank. As a diplomat, he negotiated many boundary disputes, including Oregon, Maine and Texas. He bitterly opposed the annexation of Texas.

When it comes to writing about Gallatin, there is so much to say it is hard to say anything coherent. He was such a virtuoso of public life that he defeats his biographers in their central task, of telling the world what he was like. There haven't been many, if there were any, enough like him to offer a comparison.

Gallatin, Part 1

Albert Gallatin

William Shakespeare died two centuries before the Whiskey Rebellion of 1794, but he left us a clear outline of his style. Tragedies end with everyone getting killed, comedies end with everyone getting married, but histories have no clear beginning or end. The Holingshead chronicle underlying this particular effort is the excellent history by Robert E. Wright and David J. Cowen, called Financial Founding Fathers. The story of the young Swiss aristocrat Albert Gallatin, plonked into the backwoods of Pennsylvania only to be relentlessly pursued by his arch enemy General Alexander Hamilton, ends in 1804 when Hamilton is killed in a duel by the Vice President of the United States, Aaron Burr.

Act 1. Ex-Senator Gallatin.

Aged 33, Gallatin was young to be a U.S. Senator, but his Swiss background in finance made him one of only five or six Americans who knew anything about banks. Unfortunately, his passionate Swiss frugality immediately made him the arch enemy of Secretary of the Treasury Alexander Hamilton who wanted to combine state debts from the Revolutionary War into a national debt. This thorn in Hamilton's side was removed by evicting Gallatin from the Senate on the grounds that he had not been a citizen for the ten years required by the Constitution. Unfortunately, that was true. It was nevertheless galling that Robert Morris, the other Pennsylvania Senator, would vote against him. The humiliation of being forced to leave Philadelphia and ride horseback to his home in Fayette County, right on the Indian frontier among the semi-barbarian Scotch Irish, was extreme.

Act 2. Caught in the Middle.

When Gallatin arrived home in the back woods, the incensed local farmers instantly rallied around him as the perfect leader of a rebellion they wanted to start. A four-year war with the Indians in nearby Ohio had shut off all hope of marketing their grain to the West, and the Allegheny Mountains made it unprofitable to ship it to the East. Their response was to distill it into whiskey, which would not spoil with storage, and was more compact to transport. Assisted in part by Quakers' horror at selling whiskey to the Indians, Hamilton had pushed through a tax on whiskey which rendered it impractical to make it at all. Gallatin was already Hamilton's enemy, and Gallatin the European knew how to talk to those swells in the East. Gallatin did make rousing speeches about injustice, but always cautioned the wild men to behave peacefully. That wasn't exactly what the angry farmers wanted, so Gallatin soon became the enemy of both sides of the dispute when the western Pennsylvanians organized a rebellion. Both sides made threats to assassinate him.

Act 3. The Lion Roars

President George Washington didn't know much about banks or taxes, but he knew a lot about law and order, and he wasn't having any rebellions. Ordering up an army of fifteen thousand men, he and General Hamilton led it across the state of Pennsylvania to hang 'em. Meanwhile however, General "Mad" Anthony Wayne had defeated the Indians along the Miami River in Ohio, thus removing the main reason for whiskey manufacture, and finally proving to the anti-Constitution Jeffersonians that the federal government really was a useful thing to have. Washington dropped out at Bedford and went back to running the country, allowing the relentless Hamilton to charge forward to Pittsburgh. By that time, the farmers had pretty well dispersed, but to Hamilton they were traitors and that particularly included Gallatin.

Act 4. Local Hero

Two ringleaders were convicted of treason, everyone was threatened and interrogated. Hamilton was particularly anxious to include Gallatin in the net, but no one in that frontier culture would accuse Gallatin of participating in the call to violence, or testify to any treasonous speech by him. In the midst of the uproar, Washington rose to the occasion and pardoned them all. Every last one of them.

Act 5. Secretary Gallatin

In a surge of jubilation, western Pennsylvania elected Gallatin as their congressman, sending him back to Philadelphia where he could do them some good. And indeed he quickly assaulted all of Hamilton's policies, both good and bad, as well as just about every other Federalist program. He quickly rose to the effective leadership of Congress, and swung the crucial 1800 election from Aaron Burr to Thomas Jefferson. Since Jefferson was another Virginia Cavalier who knew nothing about finance, it was a foregone conclusion that President Jefferson would appoint Gallatin to be Secretary of the Treasury. Finally, in 1804 Burr removed Hamilton from public affairs on the flats of Weehauken. At the news of the death of his enemy, Gallatin shed not a tear. His memorial was the statement that "a majority of both parties seemed disposed.....to deify Hamilton and to treat Burr as a murderer. The duel, for a duel, was certainly fair."

Gallatin Part II

Act 1 Gallatin Triumphantly Returns to Congress.

When Washington pardoned the Whiskey Rebels, Gallatin was immediately elected to Congress. It was his payback time for Hamilton and all his works. The desperate Federalists tried to oust him a second time with a Constitutional Amendment, which failed before the force of Gallatin's oratory. Gallatin then threw his influence behind Jefferson's deadlocked congressional contest with Aaron Burr, electing Jefferson and earning his own reward as Secretary of the Treasury. Although elected Vice President, Burr's fury is turned against Hamilton, foreshadowing the coming duel.

Act 2 The Virtuoso Financier.

Jefferson proves hopeless in domestic affairs, so Gallatin essentially takes over that role, just as Hamilton had taken over from Washington, who was another Virginia cavalier adrift in these matters. Gallatin promptly repealed the whiskey tax, cut government expenses, in particular the million dollar annual tribute to the Barbary pirates, and almost performed magic in financing the Louisiana Purchase together with Stephen Girard and William Bingham.

Act 3 Burr Kills Hamilton

After his Vice President kills the leader of the opposition party, Jefferson's party was on the political defensive. But not Gallatin, who spits out his famous remark, "A majority of both parties seem disposed to deify Hamilton and treat Burr as a murderer. The duel, for a duel, was certainly fair." It is an all-time low moment in the politics of the young nation.

Act 4 Diplomacy or War?

As the Napoleonic wars engulf the whole world, both England and France harass our merchant ships, and cries go up for war. Partly out of desire to annex Canada in the process, Gallatin sneers at proposals to restrain the fighting Europeans with mere sanctions. His prediction proves dismayingly correct that nothing would come of it except to make our own citizens into smugglers.

Act 5 War It Is.

The First Bank's charter was to expire in 1811, and the bank closed, creating an opportunity for Girard to buy it out and finance the coming war himself. Gallatin was desperate to end the war as quickly as possible, especially after the British burned Washington. To speed matters up, Gallatin took a leave of absence and went off to the peace conference in St. Petersburg himself.

Epilogue in front of the curtain.

Gallatin finally announces his resignation from the longest term of Treasury Secretary in our history. He is seventy years old, three score and ten. Rather than play golf, he was to spend the last eighteen years of his life in three more careers. As a diplomat, he negotiated both our permanent northern and southern borders. As an academic, he founded the discipline of ethnology with the study of native Indian languages, meanwhile founding New York University. And as a banker, he founded a bank which has since evolved into JPMorgan Chase. After all, a man has to find something to keep himself busy.

Virginia Invades Pennsylvania

Pittsburgh is situated at a water gap, where a prehistoric North-South river broke through the mountain to the West. Thus, the southerly Monongahela river joined the northerly Allegheny to form the Ohio river at the "Golden Triangle". Virginian explorers saw the Monongahela as their path to the mid-West, the French in Canada saw the Allegheny as their path from the Great Lakes to the Mississippi, while William Penn had an awkward charter saying he owned the whole territory. To make matters worse, the region was largely settled by semi-barbarian Scotch-Irish squatters, while the equally fierce Indian tribes were pretty outraged by the white men. Benjamin Franklin added his bit to uproar by buying the territory from the Iroquois at the 1754 Albany Conference, when it belonged to the Delaware tribe, who promptly became the main exterminators of General Braddock's army. Lord Dunmore also bought the Ohio territory from the Iroquois, in spite of the fact that it traditionally belonged to the Shawnees. The whole region was a seething cauldron of massacres and assassinations, betrayals and vengeance. Not exactly a place to welcome pacifist Quaker governance.

It would be interesting to know George Washington's later thoughts about this region, since he was the young officer who started the French and Indian War in 1753. The Governor of Virginia had learned the French were fortifying Fort Duquesne at the forks of the Ohio, and sent Washington to warn them to desist. He barely escaped with his life, and soon accompanied General Braddock's English troops to their own disaster in 1755. In 1758 the British sent General Forbes with a British army to wipe out Fort Duquesne, which he did, establishing Fort Pitt on the ashes. Fort Pitt somehow remained under the control of -- Virginia -- until 1777.

The Penn proprietors were vigilant, but patient when they had to be. Presumably through influence with the British crown, the Penns gave their consent to the Forbes expedition only on condition their ownership rights were recognized. Their argument was a difficult one to maintain in the face of military realities, since their charter read that the western boundary of Pennsylvania was to be five degrees west of the Delaware River, a rather vague concept in the wilderness of Appalachia. It was maintained that such a boundary would naturally parallel the twists and turns of the Delaware, at a distance of several hundred miles west. Such a preposterous boundary was soon abandoned for the cubist idea of several straight lines with bends at major levels of the Delaware River. With all disputants rather befuddled, it was finally established that any possible variation of language and interpretation would still put the boundary at least six miles west of the forks of the Ohio. Seeing the main point of the sophistry was lost in any event, Virginia gave up.

It might be possible to be sympathetic with Virginia's claim, except for Lord Dunmore the Governor. After all, Virginia had shed blood for the area, surveyed it, built roads, and persuaded the British Ministry to support them militarily. The Pennsylvanians only had a piece of parchment, carelessly engraved with an unworkable depiction of vague boundaries in the woods which totally ignored the most important natural landmark. But Lord Dunmore was too clever by half.

It would appear that his scheme was to make the region uninhabitable by stirring up the Indians and settlers into ferocious massacres. With these competing claims eliminated, it would be far easier to negotiate with other competitive claimants. Virginia was by far the largest of the thirteen colonies, and Pennsylvania was notoriously the most unwilling to meet force with force. It would be interesting to see studies of the inside pressures and negotiations which eventually made Virginia back off. But it seems safe to believe that the necessity for the colonies to unite in their common struggle for independence was in one form or another, the definitive force.

At any rate, at the end of a long career, in 1794 President George Washington personally led an army into Pennsylvania's Appalachia to suppress the Whiskey Rebellion at a town called Monongahela. It would be immensely revealing to know what his thoughts and reflections were, as he jiggled along on his horse.

Premature Solutions to the Credit Crisis of 2007

One of the things being said in Academia in 2008 is that the 1929 crash was the result of many futile attempts to preserve the gold standard. That's the first time that particular formulation has surfaced in eighty years. It may not be correct at all, and even if correct it doesn't say what should have been done about it. Life is short and the Art is long, but somebody must do the best he can with the information available. Unemployment was over 30% in those days, and hundreds of Americans froze to death in the Depression because they could not afford to heat their rooms. Right or wrong, there are times when some action must be taken. But if you can possibly sit tight and figure out a sensible thing to do, it's certainly better.

So, we hear proposals from Henry Kaufman to create a separate Federal Reserve for big institutions alone, while others say banking oversight is already too fragmented between the Fed, the Controller of the Currency, the Secretary of the Treasury, the FDIC, state banks and national banks, the SEC, the Bureau of Management and Budget, and on and on. This line of argument takes the formulation that we should regulate mortgages, no matter who is involved in them, rather than banks, on non-bank institutions. On one point everyone is in agreement, that we need more information more quickly, more transparency, less asymmetry of information. At the same time, everyone is aware that it probably will eventually be possible to describe this whole mess on one sheet of paper; the truth is totally hidden by information overload. Don't talk so much; say something.

At the GIC (Global Interdependence Center) recently, a brilliant professor of the Wharton School gave a magnificent summary of the situation, now nine months old, enumerating a number of insights which had not even occurred to an audience of bankers and businessmen. They applauded enthusiastically, and then someone asked how Credit Default Swaps fit into this picture, since they had not been mentioned. It immediately became embarrassingly evident that the professor knew almost nothing about that topic beyond a couple of pat sentences. But Credit Default Swaps now total trillions and trillions of dollars, more than doubling in a year. Since they are private transactions unreported to regulators, no one has measured the matter or will divulge what has been measured. But since they represent a volume several time the size of the underlying debt market, and every swapper swaps with someone else, it seems inevitable that huge imbalances exist somewhere. It would be nice to have a general idea out of whose pockets the excesses come, and into whose pockets they go. Maybe all this is irrelevant to the present crisis, but it isn't irrelevant to the distrust and fear in the markets. If someone proposes a law about this situation, he had better have divine guidance.

An example of what causes markets to freeze up because people are afraid to buy, comes from an anonymous person in an elevator. Speeding between floors, he remarked earnestly to a friend, that when he worked for Goldman Sachs his department churned out dozens of innovative debt instruments. If one of them happened to get popular, then and only then did they set about devising ways to measure them, and adjust the prices. It's impossible to stop rumors of this type because they sound so plausible. In fact they may even be true.

In fact, some of the most incisive comments come from people with no insider information at all. Such as a businessman who listened intently to the lecture and then called out, "Where were the accountants in all this? Aren't they paid to know what is going on?" The answer was that FASB rules should be tightened up. Maybe so, but it sounds a little thin.

The political risk is considerable. Only 6% of the population is old enough to remember 1929 and its aftermath, only 25% more can remember 1973, and 25% more can remember 1991. That means that nearly fifty percent of the public can never remember a severe recession at all. A politician running for office could tell them anything, and they would have no reason to challenge it. Or put it this way: the advisors who elected a young President could tell him anything, and it isn't certain he would fire them for it.