Historical Sketch

Following the actions at Lexington and Concord in 1775, one of the first issues the second Continental Congress faced when it convened that May 10 was how to gather the funds necessary to prosecute a war. The colonies had only recently retired their debt for the French and Indian War--there was approximately the equivalent of $12 million circulating (in specie and paper money) in the entire country; the Continental Congress had no power to raise revenue through taxes; and had no credit on which to borrow money. Given this situation, the Congress initially raised funds in the only manner possible, by printing bills of credit. Each colony was requested to levy taxes in support of the war effort, with the revenue to go to the Board of Treasury to cover the interest on the bills and create a sinking fund to retire them. As legislative powers were claimed by both British and colonial/state agents to the confusion of all, and with the states lacking the framework for collecting taxes, Congress received very little in the way of revenue from the states during the course of the war.

After the Treaty of Paris was signed in 1783 ending the Revolutionary War, Congress found itself saddled with almost $8 million in foreign and $42+ million in domestic debt--and without direct powers of taxation as a means to repay the war debt. Of the $8 million requisitioned from the states in 1782, only $420,031 had been repaid by January 1783. Although the individual states often assumed their share of the national debt, paying interest due on bills and certificates issued to their citizens through the Continental Loan Offices, it was clear to Superintendent of Finance Robert Morris that only revenue powers under a national government would allow the fledgling nation to retire its public debt. Lacking that, however, Morris worked tirelessly to settle the domestic debt, so that in 1782, Congress began to liquidate its accounts with individuals who had not already settled with their respective state treasurers. Commissioners for each state inspected and assigned a value to all claims and issued interest-bearing final settlement certificates.

Continued deterioration of the nation’s finances, culminating in tax revolts like Shays’ Rebellion, along with a growing acceptance that the remedy lay in amending the financial provisions of the Articles of Confederation, ultimately led to the Constitutional Convention. With the ratification of the U.S. Constitution in 1789, Congress was finally able to impose and collect taxes to fund the common defense and debts of the United States. In 1790, Alexander Hamilton proposed a new plan to fund the national debt. Rather than pay it off, he recommended the consolidation of old debts into new securities (stocks) with public revenues specifically pledged to pay their interest. Subscribers to these certificates of federal debt received a 6% stock issue, interest starting in 1791 and payable quarterly, equal to 2/3 the principal due. The final 1/3 came in the form of another 6% certificate of deferred interest that would start in 1801. Another stock certificate of 3% covered the interest due from December 31, 1789 to December 31, 1794. Hamilton’s plan was ultimately a success, and what remained of the domestic war debt was paid off by individual states establishing sinking funds to retire any outstanding debt certificates.