By the time the United States entered the European war, the Jeffersonians had completed their reorganization of the national fiscal and monetary system. However, this reorganization left the nation unprepared for war. The abolition of internal taxes made the Treasury dependent on the tariff for most of its funds, and these shrank as trade with Europe declined. The failure to recharter the bank depleted specie reserves and made it impossible to support an expanding currency with safety. The reduction in Navy and Army expenditures left the country unprepared militarily. Moreover, the war was altogether unpopular in New England, the only section where pocketbooks were thick. Hence, the War of 1812, which was ill-managed militarily, was even more bungled financially.
Gallatin's Principles of War Finance . From the beginning, both Jefferson and Madison tried to keep the United States out of war and ignored the possibility of involuntary involvement. In his first annual message Jefferson said, " . . . sound principles will not justify our taxing the industry of our fellow-citizens to accumulate treasure for wars to happen we know not when." At first, he had the full agreement of Gallatin, who thought that there was no reason for imposing taxes too early, since the people would be more than willing to pay them if war actually came. But in time, Gallatin became more concerned over financial preparedness, and in his annual report of 1807 he presented his principles of war finance.
He proposed to provide revenue "at least equal to the annual expenses on a peace establishment, the interest of the existing debt, and the interest on the loans which may be raised." But believing that the "losses and privations caused by the war should not be aggravated by taxes beyond what is strictly necessary," and despite his aversion to public debts, he favored borrowing from banks to cover the expenditures of the war itself, believing that "the return of peace . . . will afford ample resources for reimbursing whatever may have been borrowed during the war."
Estimating peacetime expenditures and interest on the existing debt at less than $7 million and not expecting the current revenue of $14.5 million to fall more than 50 per cent in case of war, he thought new revenue would be required only for interest on the war loans. He therefore recommended the revival of the duty on salt, the revival of the Mediterranean Fund, and, if war did occur, an increase, perhaps a doubling, of existing tariff duties. However, he did not press these recommendations, for he