Federal Debt Reduction under Jefferson

Jefferson and Gallatin inherited a national debt of $83 million. Annual interest payments on the debt averaged about $3.1 million a year under President Adams, thus accounting for about 42 percent of all federal expenditures during those years. Jefferson and Gallatin believed that continuing to discharge these high interest payments just to maintain the debt diminished their flexibility in spending money on legitimate national purposes, such as buying foreign territory, and created upward pressure on federal taxes. They also believed that having a large outstanding debt would be a serious financial handicap should the country go to war in defense of its territory or citizens. Interest payments for the previous debt would still have to be made, the principal would be further augmented by new borrowing, and many sources of loanable capital already would be invested in government stock.

Accordingly, Jefferson and Gallatin proposed creating an annual sinking fund of $7.3 million to be used for the dual purpose of paying interest on the debt and reducing the principal by retiring maturing bonds and buying still outstanding bonds in the market. If this plan were adhered to by Jefferson and his successors, and if no new debt were created, the national debt would be retired in sixteen years. Congress passed this measure in April 1802.

Jefferson’s purchase of Louisiana from France in 1803 for $15 million threatened his debt reduction program. However, federal revenue was so great that he and Gallatin had little difficulty paying for the purchase, all the while maintaining their debt reduction plan. Gallatin proposed to pay for the purchase by selling $11.25 million in new 6 percent federal stock, which 6 percent was added to the long-term federal debt; by borrowing $1.75 million in a temporary loan, to be paid from future Treasury surpluses; and by appropriating $2 million in cash from the current Treasury surplus. In the immediate aftermath of the purchase of Louisiana, the administration decided to increase the sinking fund to $8 million a year. In eight years, Jefferson and Gallatin managed to redeem $37.2 million of the principal of the federal debt and bring the total amount outstanding down from $83 million in 1800 to $57 million at the end of 1808.[12]