Eleanor Finch
The signing of the US Constitution in 1787 was a pivotal moment in the nation's history, but it also raised questions about the country's existing debts. The Articles of Confederation, which served as the nation's first constitution, had already established that debts owed by Americans to British subjects must be honoured as per the 1783 Treaty of Paris. However, the enforcement of this treaty was challenging due to states' objections and the lack of authority of the Confederation Congress. The delegates to the Constitutional Convention in 1787 aimed to address these issues and create a more effective government. The new Constitution, which went into effect in 1789, led to the formation of a new federal government that assumed responsibility for the debts incurred by the individual colonies and states. This was formalized in the Funding Act of 1790, which provided for the funding and repayment of domestic debts, including those from the Revolutionary War. Alexander Hamilton, the first Secretary of the Treasury, played a key role in establishing measures to manage and pay off these debts, arguing that a national debt, if not excessive, would be a blessing for the country.
| Characteristics | Values |
|---|---|
| Date of signing of the Constitution | 1789 |
| Person responsible for the plan to settle debts | Alexander Hamilton |
| Date of the plan to settle debts | 1790 |
| Name of the plan to settle debts | First Report on the Public Credit |
| Date of the Funding Act | 4 August 1790 |
| Amount of state debts assumed by the federal government | $21.5 million |
| Amount of debt actually assumed by the federal government | $18.3 million |
| Amount of Confederation debt outstanding in 1789 | $27.5 million |
| Amount of Confederation debt acquired by state governments | $9 million |
| Date by which settlement of accounts between states and the national government was completed | 1793 |
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What You'll Learn
The US Constitution was ratified in 1789
The original US Constitution included seven articles, outlining the framework for the federal government. The first three articles embodied the separation of powers, dividing the government into the legislative, executive, and judicial branches. The legislative branch consisted of a bicameral Congress, the executive branch was made up of the President and subordinate officers, and the judicial branch comprised the Supreme Court and other federal courts.
The remaining articles of the Constitution addressed concepts of federalism, outlining the rights and responsibilities of state governments in relation to the federal government, and establishing the process for constitutional amendment. The Constitution also included the Debts and Engagements Clause, which addressed the issue of debts from the Revolutionary War. This clause provided that the federal government would assume responsibility for debts incurred by Congress or under its authority before the adoption of the Constitution.
The ratification of the Constitution in 1789 set a precedent for future amendments, with Congress considering and proposing the first several Constitutional amendments that year. The Congressional Apportionment Amendment, proposed in 1789, aimed to determine the appropriate size of the House of Representatives and the apportionment of representatives among the states following the decennial census.
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The Debts and Engagements Clause
The clause was included in the Constitution to provide certainty and continuity in the financial affairs of the new nation. It ensured that the United States would honour the debts and engagements of the previous government, maintaining the public faith and credibility of the country. This was particularly important in the aftermath of the Revolutionary War, as the settlement of war debts was a pressing issue.
The original proposal for the Debts Clause, put forward by Randolph, stated that:
> "The Legislature of the U.S. shall have power to fulfil the engagements which have been entered into by Congress, and to discharge as well the debts of the U.S.: as the debts incurred by the several States during the late war, for the common defence and general welfare."
However, the final version of the clause underwent a stylistic change. It replaced the phrase "by or under the authority of Congress" with "before the adoption of this Constitution," clarifying that the debts in question were those incurred prior to the Constitution's enactment.
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The Revolutionary War debt
Alexander Hamilton, the first US Secretary of the Treasury, played a pivotal role in addressing the Revolutionary War debt. He advocated for the government to assume some debt to meet its expenses and pushed for measures to assure debt repayment, thereby increasing confidence in the government. Hamilton's influence extended to policy decisions, where he emphasized a strong central government, implied powers, and the assumption of state debts.
The First Report on the Public Credit, issued on January 9, 1790, laid the foundation for Congress's subsequent actions in funding and repaying the public debt. This culminated in the Funding Act of 1790, which provided for the retirement of bonded obligations incurred by the states during the Revolution and the Confederation. The Act authorized the assumption of state debts, the funding of securities, and the settlement of accounts between the states and the national government.
The Funding Act of 1790 addressed the issue of funding, repayment, and retirement of domestic debt incurred by the state governments, first as the Thirteen Colonies and later as independent states. It marked a "full assumption" of state debts by the federal government through the issuance of federal securities. The Act also provided for the funding of securities issued by the Confederation, with state governments acquiring a significant portion of the outstanding Confederation debt.
The settlement of the Revolutionary War debt had far-reaching consequences. It allowed the states to reduce taxes, as they were no longer burdened by war expenditures. Additionally, the federal government's assumption of state debts helped to prevent serious constitutional controversies from arising.
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Alexander Hamilton's plan to settle the Confederation's debts
After the US Constitution was ratified in 1789, the new government faced the challenge of managing the country's existing debts. Alexander Hamilton, the first secretary of the treasury, was tasked with formulating a plan to address the nation's debt and "adequate support of the public credit". Hamilton's financial policies were innovative and aimed to resolve the fiscal chaos stemming from the American Revolution and the Revolutionary War.
Hamilton's plan, known as the First Bank of the United States, had two primary objectives: to standardize American currency and to address the national debt. He proposed that the federal government should pay off all state debts at full value, a bold suggestion given that state IOUs were considered nearly worthless at the time. Hamilton's proposal extended beyond Confederation debts to include those of the states, which was more controversial.
Hamilton's strategy was driven by several key considerations. Firstly, he wanted to maintain the government's credibility and ensure future access to loans. Secondly, he aimed to avoid threatening small merchants and wanted to prevent case-by-case repayment decisions. Additionally, Hamilton sought to bind wealthy individuals who held domestically-owned bonds to the national government. He also proposed a system of taxation to service the assumed debts.
Hamilton's plan faced opposition, and he was only able to push it through Congress after negotiating with Thomas Jefferson, the secretary of state at the time. Hamilton secured Southern votes in Congress in exchange for his support in locating the future national capital on the banks of the Potomac. In 1790, Congress enacted Hamilton's plan, and President Washington signed it into law, establishing the First Bank of the United States. This move helped solidify the government's partnership with the business classes and contributed to Hamilton's broader goal of strengthening the national government.
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Funding Act of 1790
The Funding Act of 1790, officially titled "An Act making provision for the [payment of the] Debt of the United States", was passed on August 4, 1790, by the United States Congress. The Act was part of the Compromise of 1790 and aimed to address the funding, repayment, and retirement of domestic debts incurred by state governments, dating back to the Thirteen Colonies and the states' subsequent rebellions and independence.
The Act authorized the federal government to assume and retire the debts of the individual colonies in rebellion and the bonded debts of the States in Confederation. Each state had previously issued these debts on its own "full faith and credit" when they were effectively independent nations. The Funding Act allowed the federal government to receive certificates of state war-incurred debts and issue federal securities in exchange, essentially proposing a loan for the full amount of the domestic debt.
The Act also provided for the funding of securities issued by the Confederation to be turned into new federal issues. State governments had acquired nearly $9 million of the $27.5 million of Confederation debt outstanding in 1789. The Funding Act stipulated that for every $90 worth of principal turned in, $60 worth of 6% stock and $30 of deferred stock bearing interest after 1801 would be issued. Arrears of interest were funded into 3% stock. This sum was loaned to the United States, with terms entitling subscribers to certificates bearing interest rates of 6% or 3%, commencing on January 1, 1792. A third certificate for the remaining amount bore 6% interest starting from 1800.
The Funding Act had a significant impact on state finances. The shedding of state debt burdens allowed states to reduce taxes, resulting in lower taxes in several states, including Maryland, Pennsylvania, New York, Virginia, and Massachusetts. However, this was accompanied by the imposition of federal taxes, leaving the overall status quo unchanged. The Act left states with substantial revenue from federal securities, with income from this source constituting nearly one-fifth of total state revenue.
The Funding Act of 1790 was a crucial component of the Compromise of 1790, which also included the Residence Act that established Washington, D.C. as the nation's capital. The passage of the Funding Act was facilitated by negotiations and compromises between key figures such as Alexander Hamilton, Thomas Jefferson, and James Madison, who sought to address the contentious issues of debt assumption and the location of the capital.
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Frequently asked questions
The US Constitution, signed in 1787 and ratified in 1789, included the Debts and Engagements Clause, which stated that debts contracted by or under the authority of Congress before the adoption of the Constitution would be considered a charge against the United States, and the country's public faith was pledged to their payment. The First Congress quickly put this into action by enacting Alexander Hamilton's plan to settle the Confederation's debts and those of the individual states.
The total public debt at the time was estimated at $77.1 million.
Hamilton, the first US Secretary of the Treasury, called for the issuance of new federal bonds to cover the debt. He argued that a national debt, if not excessive, would be a national blessing. By February 1792, interest-bearing government bonds were selling for $1.20 on the dollar.
Hamilton's policies helped establish the good credit of the US government and allowed it to meet its normal operating expenses. His plan also resulted in the settlement of accounts between the states and the national government, equalizing the per capita burden of war expenditures. This shedding of state debt allowed states to reduce taxes.
The debts arose from the American Revolutionary War, which ended with the 1783 Treaty of Paris. The treaty stipulated that debts owed by Americans to British subjects were to be honoured, but many states blocked its enforcement. This led to issues with Britain and negative impacts on American importers and manufacturers.
