In 1804, the United States of America were only 28 years young. Its third president purchased one third of current US territory from France. Paying a mere $15 million, the “Louisiana Purchase” is often seen as the best deal in history – if not outright steal. But was the outcome really a one sided victory? And if it was, why did the French say oui in the first place? A deconstruction of why the Louisiana Purchase is, in fact, a balanced transaction – and if we have to declare any winner at all, it is probably a third party nobody ever mentions…
In the early 1800s, the port city of New Orleans – situated at the mouth of the Mississippi River – was the focal point of American interest. Control of this port meant control of growing American commerce flowing down the Mississippi to global markets. U.S. president Thomas Jefferson was well aware of New Orleans’ importance to the economy of the young nation, which at that time consisted of 13 states East of the Mississippi. It was a major concern, because the U.S. did not control New Orleans.
France originally founded La Nouvelle-Orléans in 1718 out of geopolitical and commercial considerations. At that time had already laid claim to the entire Mississippi valley hinterland, naming it Louisiana in honor of their sovereign Louis XIV. The French didn’t have big territorial ambitions in Louisiana, but it serves as a supply and support base for the more important French Caribbean colonies with their sugar plantations, especially Saint-Domingue (present-day Haiti). Louisiana was expected to provide foodstuffs, timber, and other raw materials that the plantation islands could not produce in sufficient quantity. Because the region wasn’t strategic top priority, France ceded it to Spain in 1762, as compensation for losses Spain incurred supporting France in the Seven Years’ War, and to avoid it would fall under British control. Spain secretly returned Louisiana to France in 1800 under the Treaty of San Ildefonso, but continued to exercise control over New Orleans.
The situation grew urgent for Americans when, in 1802, the Spanish revoked the “right of deposit,” preventing U.S. goods from being stored in New Orleans for export. This threatened American trade and prompted Jefferson to instruct his diplomats to negotiate the purchase of New Orleans – or at least secure access to the port. France, under its energetic leader Napoleon Bonaparte, had just taken control again – but French ambitions in the Americas were crumbling. A devastating slave revolt in Saint-Domingue and the looming threat of renewed war with Britain turned Louisiana into a burden rather than a blessing. Without Saint-Domingue, Louisiana’s value as a granary diminished, and Napoleon needed funds for his European campaigns.
In April 1803, as American envoys Robert Livingston and James Monroe prepared to negotiate for New Orleans, Napoleon’s finance minister, François Barbé-Marbois, surprised them by offering the entire Louisiana Territory for sale. The Americans, lacking explicit authority to buy all of Louisiana, nevertheless quickly seized the opportunity. After rapid negotiations, the two sides agreed on a price of $15 million (80 million francs). Of this sum, $11.25 million would be paid directly to France, while $3.75 million would be used by the U.S. to settle claims by American citizens against France. The purchase treaty, signed on April 30, 1803 and antedated to May 2, went in history as “The Louisiana Purchase”.
Analyzing a deal starts with understanding its protagonists, in terms of what they want to achieve as well as what constraints they operate under. The central figures of the Louisiana Purchase, Napoleon Bonaparte and Thomas Jefferson, were both leading an expanding nation but they were markedly different in the ambitions and constraints shaping their decisions.
At 34, Napoleon Bonaparte ruled France as First Consul, his reputation already cemented as a military genius and a master of political strategy. He thought big, and his goal was nothing less than to secure France’s dominance in Europe. Facing renewed war with Britain in Europe, Napoleon’s focused on consolidating power and raising funds for impending military campaigns. Spreading resources or attention was not his style: his signature military move was to concentrate overwhelming force on the enemy’s weakest point. Unsurprisingly he needed little time reconsidering how Louisiana fit into his plans – or more precisely: did not fit. Following the setbacks in Sainte Domingue, Louisiana dwindled in importance and Napoleon recognized that holding onto it would be precarious. The territory was vulnerable to attack by the British, who might draw the United States into an alliance. Selling the territory to the Americans was a logical move. It would provide much-needed cash, remove a vulnerability, and strengthen the U.S. as a counterweight to Britain. His own ministers and family disagreed, but Napoleon wasn’t very constrained by political or other forces imposed on him.
In contrast to the saber-rattling military genius, the third president of the United States was a scholar and diplomat. Thomas Jefferson authored the Declaration of Independence, and was deeply committed to Enlightenment ideals of liberty and individual rights (although that did not stop him from owning 600 slaves and fathering 6 children with one of them). Preoccupied with agrarian expansion and economic development of the country he presided over, Jefferson’s initial goal was simply to secure New Orleans and ensure American access to the Mississippi. He authorized negotiators up to $10 million for New Orleans, but the French surprised them by offering all of Louisiana for $15 million. Jefferson was considerably more constrained than Napoleon. The Constitution did not explicitly grant the president authority to acquire new territory, and Jefferson was a strict constructionist. Furthermore he faced fierce political opposition from Federalists, who feared the dilution of their political power if the union would encompass more states. Despite his misgivings, Jefferson would eventually decide national interest outweighed constitutional uncertainties, calling Congress into session early to ratify the treaty.
Different though they were, both men just rationally pursued straightforward interests in brokering the transaction – which helps explain why negotiations didn’t take long once circumstances aligned. Ironically, if the deal had failed at all, it would have been on the American side, due to constitutional and political hand wringing. The Louisiana Purchase almost didn’t happen because of doubts on the alleged winners’ side. That alone is a proof point it is more balanced than most people think.
Next to the substance of the deal – what both parties achieved – a good analysis also considers structure and style – how they got there.
Jefferson and Napoleon didn’t personally meet to do the deal, but authorized delegates. When negotiations kicked off in January 1803, Jefferson was represented by Robert Robert Livingston, U.S. Minister to France since 1801. A New York lawyer, Livingston was a member of the Committee of Five who turned Jefferson’s draft into the Declaration of Independence, and hence one of his confidants. Still in January 1803, Jefferson also sent James Monroe, another Founding Father who had served as U.S. ambassador to France and later went on to become the fifth U.S. president, as special envoy to assist Livingston. Illustrating how important a deal was to Jefferson, Monroe also got a mandate to negotiate and alliance with Britain should negotiations fail with the French. Livingston and Monroe were authorized to purchase New Orleans for an amount up to $10 million. Napoleon was represented by Françcois de Barbé-Marbois, his foreign minister and a former ambassador of France to the U.S. (where he met and married the daughter of the Governor of Pennsylvania).
The trio wasted little time coming to an agreement. Barbé-Marbois surprised his American counterparts by offering all of Louisiana in addition to New Orleans, for a total of $15 million. Livingston and Monroe agreed. Strictly speaking they went out of their mandate – and making a quick phone call to Washington was not an option at the time. But considering how well they knew Jefferson, we can reasonably assume they weren’t too concerned they were breaching the spirit of what their president wanted to accomplish, and as soon as April 1803 the deal was agreed and signed. In fact, it’s a bit surprising the Americans were surprised. Considering they wanted New Orleans to allow free trade from the Mississippi Valley, they could have anticipated Napoleon would run the same logic in reverse. If he was to trade away New Orleans anyway, what would be the point of holding on to Louisiana? A decisive, focused man like the First Consul of France would not take half matters. Not considering this scenario was a mistake in negotiation preparation. But what they lacked in preparation, the U.S. team more than made up in internal alignment on the goal and assertiveness in capturing an opportunity. It must also have helped Livingston and Monroe that they could validate their own view with a trusted co-negotiator.
Before negotiations even started, Jefferson had prepared the ground well by some skillful use of backchannel diplomacy. Pierre Samuel du Pont de Nemours, a French economist and publisher living in the U.S., was close to Jefferson and also held personal relations with many senior French officials – including Napoleon himself. Jefferson used this avenue to float the idea and test the waters with Napoleon. By the time he formally sent negotiators, he could be confident conditions were favorable and the chances of a successful outcome high. Meticulous planning is less important when context is favorable.
A final structural question is why Jefferson did not seek a stronger mandate himself. Constitutionally it was far from clear the U.S. president had the authority to acquire such a vast stretch of land. Assuming Jefferson had even anticipated France Louisiana, it is questionable he would have sought a Congressional mandate. Federalist opposition was strong and he couldn’t be sure he would prevail. Furthermore extensive public discussion would reveal the plan to other parties, particularly the Spanish and British, complicating matters and jeopardizing the entire negotiation. Jefferson could not entirely escape this problem – but when he brought the deal to the Senate for ratification, it was a concrete agreement as opposed to a theoretical proposition. Practical considerations trumped theoretical objections: though Federalists attacked the deal on the basis of constitutional arguments, the Senate judged it appealing enough and ratified the treaty on October 20, 1803, by a vote of 24 to 7.
Deal actors operated consistent with their objectives and constraints, and save for a few minor adventurous moves on the American side, no major process mistakes were made. That leaves us with one last analytical question: how did the outcome stack up to the alternative deals available to both parties? In other words: are there ways in which both parties could have done significantly better or worse? What did they give up and what did they gain?
Napoleon could have held on the claimed territory and stationed troops in Louisiana to levy taxes, control trade, or expand into the hinterland. However, this would have required diverting resources from his European campaigns and rebuilding a navy to counter British dominance. After losing 7,000 troops in Haiti to rebellion and disease, France lacked the manpower and funds for sustained colonial operations. France considered retaining parts of Louisiana while selling New Orleans. But Napoleon’s priority was funding his impending war with Britain, not managing a distant colony. The $15 million from the sale provided immediate liquidity, whereas maintaining Louisiana risked costly conflicts without guaranteed returns.
On the surface, this $15 million price tag seems to be the biggest criticism of the deal. Surely France should have asked far more for the enormous territory…? But in reality, there was far less wiggle room on the strike price than one would think. From Napoleon’s perspective, the $15 million sale contrasted with no more than $200K in annual Louisiana customs revenue. And at that price, financing the deal would require $675K in annual interest costs and add 19% to the national debt. The total U.S. budget was in the $8-10 million range, meaning the Louisiana Purchase was financially bearable but could not be stretched orders of magnitude higher.
The other consideration is what, exactly, France gave up in exchange for their $15 million. At the end of the day, Louisiana was not much more than a territorial claim they had once staked – almost on a whim. This was a possession on paper, arguably less than that, not a densely populated or heavily fortified territory. Jefferson didn’t really buy property, he bought a promise another party would stop claiming something they never truly owned in the first place.
If it looks like France couldn’t realistically achieve a better deal, how about the American side?
Jefferson could have tried the traditional method for one country to acquire territory from another country: by waging war. Ethical considerations aside – which would have mattered to a man like Jefferson – the cost of war would certainly have exceeded the price of the Purchase, with an unclear outcome. The U.S. would have paid many times over: first, in terms of actual financial cost. The some more, in societal disruption and loss of human life. And then even more, by turning a long time allied nation and kindred republican spirit into an enemy.
Could the U.S. have haggled for a somewhat lower price? Perhaps so. But it wouldn’t have made orders of magnitude difference, and haggling prolongs the process and makes the outcome uncertain. Assuming a reasonable range had been pre-cleared in backchannel diplomacy, fretting over pennies wasn’t a high priority item. From a pure financial standpoint, the U.S. team most immediately – and correctly – have grasped that the upside optionality of unlocking vast, fertile land would easily compensate many times over.
The U.S. gained some side benefit from the deal too, created by the way they financed the deal. The Louisiana Purchase would establish the young nation’s reputation as a reliable credit once they struck a deal with a prestigious bank…
What do you do when you want to buy something but you don’t have the cash? You turn to a bank. The United States did just that, turning to Barings Bank of London and Hope & Co. of Amsterdam to finance the Louisiana Purchase.
By the time of the transaction, Barings and Hope already had a history of cooperation. Based in the two dominant financial centers at the time, London and Amsterdam respectively, Barings had extensive connections in the Unites States and experience with American finance, while Hope had a strong presence in continental European markets and expertise in issuing sovereign bonds. As Livingston and Monroe were working on the Purchase in April 1803, Alexander Baring and Hope’s Pierre Labouchère met with them to work out the American financing structure. They didn’t suddenly show up, but had been influencing the deal before negotiations started – including on the French side. France initially sought a higher price, but upon Alexander Baring’s advice they reduced it by 20% to $15 million, on the basis the deal would otherwise be unaffordable to the United States. Both merchant banks were part of the backchannel diplomacy.
The banks would end up benefiting handsomely for their advice and toil. First, they helped structure the financing. $3.75 million was funded by France transferring debt it owed to American citizens: going forward, those would be obligations of the United States government. The remaining $11.25 million was funded by issuing U.S. government bonds carrying and interest rate of 6%. As Napoleon preferred an immediate lump sum over a 15 year income stream from the bonds, he agreed the bankers bought the bonds from him at a 12.5% discount.
Of the total $15 million purchase price, Napoleon received $9.8 million in proceeds. The U.S. ended up paying $27.3 million in principal and interests, including the debt taken over from France, by the time the deal was fully paid off in 1823. Barings and Hope did not keep the bonds they purchased from Napoleon. They had no difficulty selling them at close to par value with investors in London and Amsterdam, basically pocketing the discount at which they had bought the bonds. When all was said and done, the banks were not exposed to United States credit risk for very long and made a profit of $1.5 million on the entire transaction between two nations.
In conclusion, while the Louisiana Purchase is often considered overwhelmingly favorable to the United States, the outcome is far more nuanced.
The negotiation itself was quick and uneventful because of two factors. The timing was right as circumstances on both sides had favorably aligned, and both parties made deft use of advisors and backchannel communication to prepare the ground. The Americans weren’t ready for the French surprise they got, and had some internal misalignment to handle, but didn’t have much difficulty navigating through these issues – again helped by mutual agreement being in the best interest of both parties.
To be sure, the U.S. did achieve a very desirable outcome. The deal solved a major problem for them, and the money involved was substantial but bearable. However France too managed to convert a problem into a profit. They obtained the maximum price they could reasonably expect, and gave up something they didn’t really own in the first place. The Louisiana Purchase was an almost inevitable transaction, and the resulting deal logical.
The reality is that the Louisiana Purchase is a balanced deal, not a one sided win of one side over the other. But if we need to declare any winner at all, my vote goes to the banks.
Anatomy of the Deal
Credits
Words > Stefan Verstraeten
Photo > Header – Louisiana Purchase Transfer Document // Missouri Historical Society, St. Louis
> Napoleon and Jefferson paintings, starting top left and clockwise: [1] “Le Premier Consul franchissant les Alpes au col du Grand Saint-Bernard”, by Jacques-Louis David (1802) // Version in the Museum Belvedere, Vienna. [2] “Bonaparte franchissant les Alpes”, by Paul Delaroche (1848) // Version in the Walker Art Gallery, Liverpool. [3] Thomas Jefferson portrait by Rembrandt Peale (1800) // White House Collection. [4] “Behind the Myth of Benevolence”, by Titus Kaplan (2014) // Smithsonian Institution, Washington D.C.
> “Louisiana Purchase, 1803, by Allyn Cox (1994) // First floor of the U.S. Capitol’s House wing.
> Louisiana Six Per Cent Stock Certificate (No. 596) // Treasury of the United States, Register’s Office, National Archives and Records Administration.
> “Welcome to Louisiana” by fotoguy22
