4/30/12 - paying for louisiana

In today's excerpt - very early in its national life, the United States had the opportunity to purchase a vast tract of land from Napoleon and France. Some consider it the greatest real estate deal in history. However, the U.S. didn't have the funds -- the price was $15 million and the U.S. still had $82 million in unpaid war debts -- and Napoleon needed cash for his wars, including his war with Britain. In an ironic development that reflected the claustrophobic and incestuous banking industry of the time, it was a British banker, Alexander Baring, who raised the funds for the America to pay Britain's archenemy Napoleon for the land:

"The second budget shock [for the U.S. after the expenditures needed to fight the Barbary pirates] was the Louisiana Purchase in 1803, probably the greatest real estate deal in history. Great for the U.S., that is, which doubled its size for a mere $15 million, about 4 cents an acre. Overnight, the upstart nation acquired land physically larger than France, Spain, Portugal, Italy, Holland, Switzerland, and the British Isles combined. Crowning the vast territory was the magnificent port city of New Orleans, which gave western farmers a much-needed water outlet to world markets. The country could now grow westward without fear that trans-Appalachian states would secede to gain cheap access to the sea.
"Napoleon sold the Louisiana Territory because he was waging war with Britain and was strapped for cash. He wrongly believed the area a wasteland and hence strongly preferred to retain instead the French colony of Saint-Domingue, which occupied the western half of the island of Hispanola (the eastern half being the Spanish colony of Santo Domingo). Saint-Domingue boasted a population of 500,000 and plantations of sugar cane, indigo, coffee, and cocoa rich enough to fill 700 ships a year. The French then promptly lost the colony when, in 1804, a successful revolution by black slaves led to the independence of the new nation of Haiti.
"Jefferson was not certain, however, that the purchase was Constitutional. Recall that Jefferson interpreted the Constitution strictly, or at least publicly purported to do so. The Constitution made no specific provision for purchasing new territory, so Jefferson was inclined to believe that a Constitutional amendment might have to be passed before the nation could take title to the territory. Madison and most other cabinet members were inclined to agree. [Secretary of the Treasury Albert] Gallatin, however, took a page from Hamilton and persuaded the president and the cabinet that the Constitution contained certain implied powers, including the inherent right to acquire territory. The movement to begin the lengthy process of amending the Constitution was dropped, and Congress quickly approved the purchase.
"Hamilton cast an even larger shadow over the proceedings because the Republicans were about to start borrowing. To pay the purchase price and acquire good title, Gallatin had to pay Napoleon the full price in cash up front. As a distressed dictator desperate for cash, the little Corsican was not about to 'hold the mortgage.' And Gallatin had on hand only about one quarter of the cash needed to make the purchase. He therefore floated a bond issue through the Dutch banking house of Hope and Company, which promptly sold it to Baring Brothers, a British investment bank. Alexander Baring worked closely with Gallatin for five months in Washington to finalize the details. Although the two financiers formed a friendship, the price tag of the bond issue bothered Gallatin. He realized, however, that the port of New Orleans would increase federal revenues some $200,000 a year. Moreover, Gallatin and other Republicans must have savored the irony of British investors lending money to vastly increase the power of their former colonies and to replenish the coffers of Britain's arch enemy, Napoleon Bonaparte."



Robert E. Wright and David J. Cowen


Financial Founding Fathers: The Men Who Made America Rich


University of Chicago Press


Copyright 2006 by Robert E. Wright and David J. Cowen


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