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
payments and taking them out of circula- tion. 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 pass- ing 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 mil- lion specie. The action — paying $4.5 mil- lion for $180 million of bills — was essen- tially a repudiation of their own promises and damaged Congress’ credit; it was also unsuccessful, and the market value of cur- rency 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 Arti- cles 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 increas- ingly burdensome as the war went on. Output declined and families lost laborers to the army and went into debt. Making matters worse, since the Conti- nental 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 Mor- ris could barely make interest payments in specie on the debts already owed. How could they restore paper credit and currency in this situation? A tem- porary 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 Con- gress would like to pay creditors the prin- cipal 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: 26    FINANCIAL HISTORY  |  Spring 2017  | www.MoAF.org 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 abili- ties 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 liq- uid 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 Vir- ginia rescinded its previous agreement. The exercise of the previous two years asking the states for an import duty power fell flat. In re ͔5ɥ́ѡɕѕ)Ѽɕͥ ɕ́ձЁɔ)܁Ѽչѡ̸ ɕ́ѕ)ѡՔȁͽѥɕ)ɽ͔ɥ̸) ɕ́ѥͭȁѡݕȁѼ)Ёх̰Ёѕ)єɅѥȁѡݕȁѼѡ)ӊ'S$啅́ȁɗ'S%ѡɕՕѕ(ԁ啅̸ͼѕɽݕȁѼ)Ёѥ́́Ѽɕѡѽх)չаѡٔѡхѕ́ѡݕ)Ѽ͔ݡѕٕȁѡ݅ѕȀ)ѡѽх!ѽѕѼѡ)ɽ͔݅́ѡɕѕ́Ѽ)ٽєЁи=ЁݽȰݡЁ