[Baek Youngran's History Bookstore] Louisiana Purchase and High Finance

President Thomas Jefferson's most brilliant achievement was purchasing Louisiana in 1803 for 15 million dollars. He bought Louisiana, which stretched from the Mississippi River to the Rocky Mountains and was twice the size of the then United States territory, at 5 dollars per square kilometer. This deal led to the creation of most of the current 15 states in the United States.

In the mid-18th century, France controlled more of America than any other European country, from New Orleans to the Great Lakes. If France had occupied New Orleans and blocked American passage, it would have been a disaster for the United States. Jefferson offered France up to 10 million dollars to secure the port city of New Orleans. In response, Napoleon requested the purchase of the entire Louisiana territory. Unable to suppress the slave revolution in Haiti and economically strained by the British naval blockade, France was in financial difficulty. To continue the war, Napoleon needed cash above all else, so he wanted to sell Louisiana to the United States.

The intermediary role between France and the United States was taken by Barings Bank of London and Hopes of Amsterdam. These two banks persuaded the French government to lower the asking price for the territory from 100 million French francs to 80 million French francs. They also proposed that the transaction financing could only be done through a large bond issuance by the U.S. government. These bonds were soon issued by the U.S. government, which assumed the debt and guaranteed it.

The negotiations proceeded swiftly, and it was decided to purchase the Louisiana territory for 15 million dollars. The bonds issued to France were the first U.S. bonds listed on the international market. The bonds paid 6% interest and were to be redeemed between 15 and 20 years from the issue date. Needing cash, Napoleon transferred the bonds to the two banks at about 86.5% of face value and immediately received a lump sum in cash to prepare for war. Meanwhile, the two banks advertised the bonds in the secondary market and sold them to general investors in London, Amsterdam, and elsewhere. By brokering the deal between the U.S. and France, the two banks stood at the center of international finance at the time.

The Louisiana Purchase was a remarkable success in itself. It doubled the size of U.S. land, and the European threat to American sovereignty was resolved without war. Because the U.S. federal government paid interest on its bonds flawlessly, general investors from Amsterdam to London and Philadelphia trusted the U.S. debt repayment guarantee. U.S. bondholders gained a new level of confidence that the government could repay its debts even when the War of 1812 against the British Empire began.

The 15 million dollars was 40% more than the annual federal government revenue at the time. How could the U.S. afford the purchase cost? The total final interest payment was 27 million dollars, and the annual interest alone was 675,000 dollars. Since the U.S. government then had limited debt repayment capacity, relying mainly on import tariffs, paying interest annually was a challenging task. The United States was a young nation without a fixed budget or tax system. The 1803 issuance of bonds by the federal government on the international stage was an event in itself. It is no exaggeration to say that modern American high finance was born then.

The federal government sold land and collected tariff revenues at ports to pay interest annually. When the first interest payment matured in 1804, the U.S. operated on a small budget but successfully settled into the increasingly complex world of international finance. Thanks to the wise budget management of Treasury Secretary Albert Gallatin, there was no need to impose additional taxes on citizens to repay the bonds. The U.S. faithfully fulfilled its obligations to bondholders and gave confidence in national credit.

In the world of bonds, "full faith and credit" is especially important. Because the U.S. government unconditionally guaranteed and paid interest and principal on time, U.S. government bonds were considered "risk-free" bonds. For over 210 years thereafter, investors became accustomed to the full faith and credit guarantee provided by the U.S. government. The guarantee endured recessions, panics, civil war, two world wars, and numerous changes in the constitution and political landscape.

It is historically ironic that President Thomas Jefferson and Treasury Secretary Gallatin issued federal government bonds for the Louisiana Purchase. They were advocates of an agrarian society and hostile to federalism, banks, and debt. They constantly clashed with Alexander Hamilton, who argued for a stronger federal government and banks for economic development. Jefferson criticized Hamilton, who said "a national debt, if not too great, is a national blessing," and even claimed "national debt is a national curse."

Yet they accepted a considerable amount of national debt for the Louisiana Purchase. Also, unlike most Federalists, Alexander Hamilton, who was a political opponent of the Republicans, supported the Louisiana Purchase. However, Hamilton called it "a stroke of luck" rather than a "planned measure."

Federalists and Republicans continuously competed with differing opinions about America's future. Various opinions on economic development competed but also had to accept each other. The Louisiana Purchase and the successful emergence of international finance was the world Alexander Hamilton dreamed of more than anyone else.

Baek Youngran, Director of History Bookstore