Financial History Issue 121 (Spring 2017) | Page 28

payments and taking them out of circulation . But the states did not collect enough taxes , and the Congress did not issue bonds that could have been purchased with the bills and made them a sound investment . Due to excess currency , lack of confidence in the union and the high prices of goods , severe depreciation set in ; by the spring of 1780 , the bills were passing at one-fortieth their face value .
Congress tried to intervene and stop the currency from depreciating by redeeming $ 180 million worth of bills at market value in specie ( money in coin ), i . e . for $ 4.5 million specie . The action — paying $ 4.5 million for $ 180 million of bills — was essentially a repudiation of their own promises and damaged Congress ’ credit ; it was also unsuccessful , and the market value of currency remaining in circulation continued to decline to one-hundredth their face value by the end of the year .
Meanwhile , war demand kept driving up prices and Congress ’ debts to Holland , France , domestic lenders and soldiers . In February 1781 , in response to the growing crisis , Congress asked the states for the power to collect import duties to begin paying its Revolutionary War debts , but this required agreement from all the states .
Additionally , in accord with the Articles of Confederation , ratified in March 1781 , Congress began annually requesting the states collect and fulfill quotas of the sums needed to pay ongoing wartime expenses . The taxes the states collected were almost entirely direct taxes ( property and poll taxes ), which became increasingly burdensome as the war went on . Output declined and families lost laborers to the army and went into debt .
Making matters worse , since the Continental currency no longer circulated and specie was scarce , there was a shortage of currency with which to pay taxes ; many taxes were paid in goods . The compliance rate on these congressional quotas from the states was roughly 50 % in 1781 and 1782 . For the rest , the Congress had to borrow , which largely amounted to Robert Morris , the Superintendent of Finance , writing promissory notes on his own credit .
By the end of 1781 , three states still had not assented to the import duty request . Congress ’ debts were mounting , and Morris could barely make interest payments in specie on the debts already owed .
How could they restore paper credit and currency in this situation ? A temporary balm was found in the Bank of North America , capitalized with a loan of specie from France . It began operation in January 1782 and created a dependable and credit worthy currency of bank notes through to the end of the war . 2
Hamilton and the 1782 Address to Rhode Island
By the fall of 1782 , every state had signed onto the import duty request except Rhode Island . After an unsuccessful attempt by Thomas Paine to overcome Rhode Island ’ s objections , the Congress deputized a three-man committee to craft a special message to the state in December . The three were James Madison , Alexander Hamilton and Thomas Fitzsimmons .
Hamilton ’ s hand can clearly be seen in much of the language . In arguing for import duties , they write that while Congress would like to pay creditors the principal of the debt , the next best thing is to “ fund the debt , and render the evidences of it negotiable ”; that is , to make the debt tradable as money . That statement stands out because it is what Hamilton later writes as Secretary of the Treasury in 1790 . Then , the following sentence makes it entirely clear that Hamilton had already formulated the main polemic of his first famous report of 1790 in 1782 . He wrote :
Besides the advantage to individuals from this arrangement , the active stock [ liquid assets ] of the nation would be increased by the whole amount of the domestic debt , and of course the abilities of the community to contribute to the public wants [ pay taxes ]. The national credit would revive and stand hereafter on a secure basis .
Funding the debt would increase the liquid assets in the economy by the amount of the debt , Hamilton said , and it would allow public borrowing to be a resource in the future . He added , that “ This was another object of the proposed duty ,” a statement which shows he had in mind a much more integrated system of finance than simply collecting import duties to pay off a war debt . He would soon elaborate .
Hamilton and the 1783 Congressional Tax Plan
What happened ? Rhode Island still did not budge and agree to import duties to finance the Federal authority , and Virginia rescinded its previous agreement . The exercise of the previous two years asking the states for an import duty power fell flat . In response , Morris threatened to resign if Congress could not figure out how to fund the debts . Congress debated the issue for some time and reached a compromise plan in April 1783 .
Congress still asked for the power to collect taxes , but instead of an indefinite duration for the power to pay the debt — 30 years or more — they requested 25 years . Also , instead of a broad power to collect duties on all goods to reach the total amount , the plan gave the states the power to choose whatever they wanted for 50 % of the total . Hamilton objected to the compromise and was one of three delegates to vote against it . One might wonder , what is
26 FINANCIAL HISTORY | Spring 2017 | www . MoAF . org