Part I The Economic Legacy of the American Revolution 1 Changes in Foreign Trade

After peace came in 1783, the new republic faced a two-fold economic adjustment: to peacetime from the artificial production and trade patterns during the war, and to a far different trading picture than had existed before the war. The largest change between the two eras of peace was the shift in trading patterns resulting from independence. Most importantly, while Americans were freed from the shackles of British mercantilism and could trade freely with the rest of the world, the United States was now a foreign country that could no longer freely enjoy a market within the British Empire.

While the bulk of America’s trade remained with the British Empire, the pressure of New World opportunities and tightened British restrictions greatly changed the structure of American trade. American exports to Great Britain fell almost in half during the 1780s, the bulk of the drop being in rice and especially in tobacco. Before the war, tobacco was compelled to go to Britain and was re-exported from there by British merchants. Now American tobacco found other markets abroad, especially in France, where tobacco formed 70 percent of the imports from the United States. Part of this shift was impelled by a heavy English tax on foreign tobacco and rice, which lowered the British demand for American staples. Tobacco grew and prospered immediately after the Revolutionary War, particularly in the new frontier areas: Kentucky, Tennessee, and up-country South Carolina and Georgia. Virginia and other southern tobacco-growing states were initially buoyed by the high price of the crop, but by 1785 the great postwar tobacco boom was over and tobacco prices began a sharp fall.

The American naval stores—largely pitch and tar—and indigo industries had been artificially stimulated in the colonial period by British bounties; now, shorn of these subsidies, the indigo and the naval stores industries—concentrated particularly in North Carolina—declined, and their shipments were made to the northern states rather than to Great Britain. The decline of indigo, however, was offset by the rapid growth of a new southern crop: cotton, particularly in backcountry Georgia and South Carolina. Also expanding in the South was the production of grain, previously confined largely to the middle provinces. Corn, wheat, and flour production expanded greatly in the South, and Alexandria became a leading center for the export of grain.

With American-built ships now excluded from British ports, the New England shipbuilding industry, previously used by British owners and then prosperous from profiteering during the war, declined during the postwar period. The Massachusetts whaling industry, crushed during the war from loss of access to the fisheries, never really recovered due to an American shift from spermaceti to tallow candles and to prohibitory British import duties on American whale oil. The continued British military occupation of the Northwest also deprived Americans of fur trade with the Indians of that region.

While severe British restrictions diminished the British West India trade, and the Spanish West India trade was similarly cut off, smuggling helped to evade these regulations. Furthermore, American commerce expanded with the French West Indies, which furnished a ready market for American fish and wood products. Holland also greatly expanded its imports of tobacco and rice, as well as its entire trade with America. American imports of British manufactures, however, barely declined, reflecting the American consumers’ (especially the New Englanders) overwhelming preference for British goods. An additional development was America’s launching trade with Canton in China in 1784–85, in which ginseng and furs were traded for tea and calicoes. The China traders tried to get the Confederation Congress, as well as the state of Connecticut, to intervene heavily to encourage the trade, but these governments refused; one important interpenetration of politics and economics, however, was the appointment of two leading China traders, Samuel Shaw and Thomas Randall, as consuls to China—this at the instigation of John Jay, the Secretary for Foreign Affairs.

Thus, the Revolution heavily altered American foreign trade. In response, merchants expanded their partnerships to cover every major marketing center. New England shipping had been hurt by blockaded fisheries during the war but were even more stimulated by extensive profiteering. After the war, shipping declined, however, even though many Tory Boston merchants were replaced by enterprising new men moving in from smaller seaport towns in Massachusetts. The fisheries continued to be crippled since access to Newfoundland was cut off by Britain. Hence, the New England ports were not as prosperous as ports elsewhere. Newport was permanently damaged by the war and was replaced by Providence as the commercial hub of Rhode Island. The severe cutback of West India markets, moreover, crippled New England agriculture and played a large role in the chronic postwar depression of the New England farmers. In general, many coastal areas experienced consolidation of the large seaports at the expense of the smaller, e.g., Boston at the expense of smaller ports in New England, Providence replacing war-torn Newport, Hartford winning over war-ravaged New Haven, and Baltimore gaining rapidly at the expense of Annapolis. Virginia, which had never had or needed a leading port (its trade taking place on coastal rivers and wharves) created an artificial port by granting Alexandria, in 1784, a monopoly for the official entry of foreign ships. New York, devastated by occupation and war, recovered remarkably and moved to catch up to Philadelphia as the nation’s largest port.

The Revolution also produced a great (but as yet unstudied by historians) stimulus to foreign investment of capital from France and Holland that had previously been shut out by British mercantilism. French and Dutch investments were placed in American securities, currency, and commercial houses.

The slave trade, cut off during the war, resumed with the arrival of peace, especially in slave-depleted South Carolina, which imported 7,000 slaves during 1783–85. But all the states except the Carolinas and Georgia had prohibited slave imports by the end of the war, and the Carolinas followed suit in the late 1780s. Rhode Island’s gradual abolition of slavery, passed in 1784, had the effect of breaking up the large plantations of its Narragansett County, for the economic viability of these plantations had rested on slave labor. The end of slavery led to the breaking up of these quasi-feudal slave-maintained large estates and their dissolution into independent farms. The American Revolution, indeed, had an intangible—and hence neglected—but highly significant economic impact in freeing land for the market and business enterprise. The abolition of entail and primogeniture throughout the country, and especially in the South, the elimination of British proprietary estates and quitrents, the confiscation of royal forests, the redistribution of large Tory estates—all of this served to free land for flexible economic use by private enterprise. And, as Professor Ver Steeg has emphasized, the almost unnoticed abolition of Crown sovereignty over minerals and other subsoil natural resources moved these resources into the realm of free private discovery, property, and use—an event of incalculable importance for the future.[1]

American manufacturing in that era took place almost exclusively in homes and in small local shops; it was undertaken by self-employed artisans, or “mechanics.” It is important to realize that these mechanics were not modern proletarians, but self-employed small businessmen. The drastic reduction of imports during the war, especially from Britain, the great source of manufactured goods, stimulated an expansion of such manufacturing as textiles, salt, and iron products in the United States. It was inevitable that the end of the war should bring about a flood of British imports of which Americans had been deprived, especially textiles and all manner of specialized manufactured goods, and that much of the artificial wartime expansion would prove to be uneconomic in peacetime conditions. A readjustment of production and commerce to the new peacetime conditions had to be made, and the faster, the better. Some of the war manufacturing, notably the new iron furnaces and forges in Pennsylvania, proved to be viable, as did much of the household textile manufacturing in the South. But wartime domestic salt production was far too uneconomic to continue, and many of the manufacturers and artisans were forced to cut back in the face of the renewed competition of British and other imported goods.[2]

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[1] Clarence L. Ver Steeg, “The American Revolution Considered as an Economic Movement,” Huntington Library Quarterly (August 1957), pp. 361–72.

[2] [Editor’s footnote] Merrill Jensen, The New Nation (New York: Knopf, 1950), pp. 177–257; Curtis P. Nettels, The Emergence of a National Economy, 1775–1815 (New York: Holt, Rinehart and Winston, 1962), pp. 45–64.

2

The Depression of the 1780s
and the Banking Struggle

It has been alleged—from that day to this—that the depression which hit the United States, especially the commercial cities, was caused by “excessive” imports by Americans beginning in 1783. But this kind of pseudo-explanation merely betrays ignorance of economics: a boom in imports reflects voluntary choices and economic improvement by consumers, and this expression of choice can scarcely be the cause of general depression. In short, an improved standard of living for the bulk of consumers reflects improvement and not depression. It is impossible for consumers to buy “too many” imports, for they must pay for them with something, and this payment is financed from exports or from previously accumulated specie. Specie, indeed, had been accumulated in the colonies by the end of the war from British and French war expenditures. In either case, the payments reflected affluence rather than destitution, and these purchases were an enormous help after the ravages of the war. A specie drain is also the result of consumer desires and obviously cannot continue indefinitely. Clearly, Americans could not merely buy from abroad and not sell; indeed, if they could have done so they would have found a utopian cornucopia in which one need only consume without having to produce or sell in exchange.

There was, however, an excess of imports, but this was not caused by the free choices of American consumers. In the first place, as we have seen above, many manufacturers were artificially expanded during the war and with the resumption of peace these businesses now had to compete with the more efficient British, who at the same time restricted American exports. In addition, there was inflationary credit expansion by the Bank of North America, headed by wealthy Philadelphia merchant and former economic czar Robert Morris, and by two new banks which sprang up in 1784 to take advantage of the large profits of this new-found occupation: the Bank of Massachusetts in Boston and the Bank of New York in New York City, the latter organized mainly by large public creditors. Each institution enjoyed a monopoly on banking in its region. Inflationary expansion of bank credit leads bank clients to believe that they have more real money than they actually possess, and this leads to an artificial expansion of imports, which must be paid for in specie. The consequent drain of specie from the expanding banks, and increased calls for payment of their notes and deposits in specie, inevitably creates difficulties for the banks and forces them into hasty contraction, which in turn leads to deflation and depression. It is this boom-bust cycle of bank credit expansion and contraction that occurred in the immediate postwar period and brought a depression in mid-1784 and 1785. This trade cycle was superimposed on and aggravated the inevitable postwar distress of over-expanded wartime manufactures by increasing imports more than would have otherwise been the case.

Excessive importation continued into the 1780s. At the end of the Revolutionary War, the contraction of the swollen mass of paper money, combined with the resumption of imports from Great Britain, cut prices by more than half in a few years.[3] As we shall see below, vain attempts by seven state governments, beginning in 1785, to cure the “shortage of money” and re-inflate prices were a complete failure. Part of the reason for the state paper issues was a frantic attempt to pay the wartime public debt, state and pro rata federal, without resorting to crippling burdens of taxation. The increased paper issues merely added to the “shortage” by stimulating the export of specie and aggravated the importation of commodities from abroad.

By the end of 1783, Robert Morris had succeeded in divorcing his Bank of North America—which had begun the year before as a virtual central bank—from the federal government.[4] Its growing profitability—it had paid a dividend of 14.5 percent in 1783—stimulated its own expansion as well as new bank projects. The bank increased its subscription by $500,000 in January 1784 and soon a new group, disgruntled by the loans of the Bank of North America going to favored insiders, asked for the chartering of a Bank of Pennsylvania. The Bank of North America was furious at the threat of competition at home (it worried not at all about the new banks in Boston and New York), and Pelatiah Webster, a bank stockholder, argued presumptuously in the Pennsylvania Assembly that the two banks “might act in opposition to each other and of course destroy each other,” i.e., compete. When this argument unsurprisingly failed to impress the legislators, the Bank of North America in March used the ancient device of cooptation: it expanded its new shares to $1.6 million and cut in the promoters of the new bank. Thus the Bank of North America’s expansion ended the threat of another bank in Pennsylvania. But the bank was scarcely out of trouble. Soon it was forced by liabilities accrued from its previous expansion to contract sharply during 1784 and precipitate a financial crisis.[5]

After the victory of the radicals in the fall 1784 elections, the victors, led by Assemblymen William Findley of Westmoreland, Robert Whitehill of Cumberland, and John Smilie of Fayette counties, moved to repeal the charter of the Bank of North America. While the radical Constitutionalists acceded to the depression-born demand of artisan-manufacturers and passed a protective tariff, their push against the bank in the spring of 1785 precipitated a notable debate over the bank’s activities. A pamphlet war, as well as a legislative debate and mass petitions, raged over the Bank of North America. While much of the anti-bank argument was political—attacking its special privileges, its favoritism, in general its negation of the liberal ideal of equality before the law—the radicals also emerged with some sophisticated economic arguments against the bank. The Assembly committee that recommended repeal, as well as the anti-bank men in subsequent debates, stressed the crucial economic point that, as one legislator phrased it, the bank was “an engine of trade that enabled the merchants to import more goods than were necessary, or than there was money to pay for, [and that] by means of a bank the European merchants were enabled to procure and carry off money for their goods.” Then, after the temporary expansion of this fictitious credit, the bank “overtraded” and was later forced to contract and precipitate an economic crisis. In short, the radicals in the anti-bank debate of 1785, led by Findley and Smilie, adumbrated the later Ricardian theory of banking and international trade which was also in essence a monetary theory of the trade cycle. The following year, the eminent Reverend John Witherspoon, in his Essay on Money (1786), though favoring the bank, explained in greater detail how inflation of bank paper raises prices and drives specie out of the country. Indeed, in the course of the controversy an anonymous pamphleteer, “Nestor,” first proposed in America the “currency principle” of 100 percent specie backing for bank liabilities and argued that a bank “should not emit a single note beyond the sum of specie in its possession.”

In accordance with his general theory of the history of American banking struggles, the historian Bray Hammond persists in labeling the radical hard-money opposition to the bank “agrarian,” even though he inconsistently admits that wealthy Philadelphia capitalists like George Emlen also stood for hard money and against the bank. This view, furthermore, is hard to square with the fact that the Philadelphia delegates (at this point radicals) voted overwhelmingly for repeal of the bank charter.[6]

To defend its existence, the Bank of North America brought out heavy guns indeed, all its supporters being either stockholders, in pay of, or in debt to, the bank. Leading the defenses was the noted James Wilson, the bank’s counselor and heavily in the bank’s debt. Wilson not only advanced the specious legal argument that the bank’s charter, though granted as a privilege by the state, was now somehow its “property right”; he also insisted that the cause of the depression was only excessive importation per se. Other prominent defenders were Robert Morris, Gouverneur Morris, and Pelatiah Webster, who opined that “a good bank may increase the circulating medium of a State to double or treble the quantity of real cash, without increasing the real money, or incurring the least danger of a depreciation.”

The Pennsylvania Assembly overwhelmingly repealed the charter of the Bank of North America in September 1785, but the debate continued to rage. Finally, the conservatives’ political victory in the 1786 elections, in which they carried Philadelphia and eastern Pennsylvania, led to the re-charter of the bank in the following year, though with considerably restricted powers.

The most inglorious role in the continuing debate was played by Thomas Paine, author of the fiery libertarian pamphlet Common Sense (1776), who was reportedly hired by the bank to lend his formidable pen to its cause. In a 1786 pamphlet, Paine not only defended bank inflation and advanced the flimsy “property right” argument, he had the presumption to urge that the state privilege the bank by making it a kind of central bank to the commonwealth, with the state borrowing from the bank instead of issuing state paper to meet its expenses. Understandably denounced by his old radical comrades as a mercenary renegade, Paine not only mendaciously denied any vested interest in defending the bank, but he also lashed out at the opposition as an unholy alliance of irresponsible frontiersmen and urban capitalists and usurers. So far had Paine advanced down the right-wing road that he now advocated a return to a bicameral legislature.

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[3] [Editor’s footnote] For more on Revolutionary War finance, see Murray Rothbard, Conceived in Liberty, vol. 4: The Revolutionary War, 1775–1784 (Auburn, AL: Mises Institute, 1999), pp. 1487–97, 1508–13; pp. 373–83, 394–99. The original Conceived in Liberty volumes were published in individual editions. Page numbers to the earlier individual editions will follow page numbers to the 2011 all-in-one edition.

[4] [Editor’s footnote] For more on the Bank of North America, see ibid., pp. 1506–07, 1523–24; pp. 388–93, 409–10.

[5] The Bank of Massachusetts, having expanded from its inception in 1784, was also forced to contract as losses hit its mercantile customers in the spring of 1785; this contraction aggravated the depression during that year.

[6] Bray Hammond, in his eagerness to denigrate the radicals, discusses only their political arguments and completely omits their economic reasoning. Bray Hammond, Banks and Politics in America (Princeton: Princeton University Press, 1957), pp. 53–62. In addition, see ibid., pp. 87–88. Contrast Hammond’s analysis with the thorough and judicious treatment in Joseph Dorfman, The Economic Mind in American Civilization, 1606–1865, vol. 1 (New York: The Viking Press, 1946), pp. 260–68. See also Harry E. Miller, Banking Theories in the United States Before 1860 (Cambridge, MA: Harvard University Press, 1927), pp. 23, 30, 49–51, 139; Robert L. Brunhouse, The Counter Revolution in Pennsylvania, 1776–1790 (Harrisburg, PA: Pennsylvania Historical Commission, 1942), pp. 172–75. [Editor’s remarks] Nettels, The Emergence of a National Economy, pp. 61–62, 77–81.

3

The Drive for State
and Federal Protective Tariffs

Every depression generates a clamor among many groups for special privileges at the expense of the rest of society—and the American depression that struck in 1784–1785 was no exception. If excess imports were the culprit, then voluntary economizing could help matters, and the press was filled with silly fulminations against ladies wearing imported finery. Less foolish and more pernicious was a drive by the beleaguered and often sub-marginal artisans and manufacturers for the special privilege of protective tariffs.

As early as July 1783, a group of manufacturers from Philadelphia met to petition the Assembly for protection against foreign imports. The following year, a group of Boston manufacturers submitted a similar plea. During the depression year of 1785, the urban artisans banded together in earnest. The Boston manufacturers in twenty-six trades formed The Association of Tradesmen and Manufacturers of the Town of Boston in the spring of 1785 to agitate for a protective tariff in their state, and they were followed by the formation of a General Committee of Mechanics in New York, which soon merged with the Manufacturers Society of New York to fight for protection. Mechanics from Philadelphia, Baltimore, Providence, and Charleston were also active though not formally organized. In particularly hard-hit New England, the town of Nantucket actually asked the state legislature in 1785 for permission to secede and rejoin Great Britain in order to try and regain prosperity. In Philadelphia, the master cordwainers, the shoemakers of the city, decided in March 1785 to engage in concerted economic pressure to try and block further imports of boots and shoes. They agreed not to buy, sell, or mend any imported shoes, and they obtained the support of their employees, the journeymen cordwainers.

Since the bulk of the country’s imports came from Great Britain, it was easy for the protectionists to employ anti-British demagogy and denounce American economic troubles as a British plot. For their part, the urban merchants were of course happy to ban British importers or British ships, but did not want any restrictions on British goods; in short, each group sought its own special privileges. Thus, when the Boston merchants agreed to boycott all British merchants, the Boston manufacturers bluntly pointed out that they didn’t care whether British goods were imported by British or American merchants, and they petitioned for a comprehensive protective tariff in Massachusetts. Finally, in the summer of 1785 the Massachusetts General Court passed a protective tariff for artisans and a navigation act for the merchants. The navigation act banned any exports from Massachusetts in a British vessel, and goods imported in all foreign vessels were to pay double duties as well as a special levy. Import duties, for their part, were raised to a new high and were levied on almost every type of manufactured good; excise taxes were also levied on the consumption of luxuries. While the merchants chafed at the protective tariff, the Boston artisans maintained their organization as a pressure group and a vigilance committee to check upon local merchants. In August 1785, the Boston artisans wrote to “tradesmen and manufacturers” of the other large towns, urging them to put equivalent pressure for a protective tariff upon their legislature. Massachusetts raised the tariff rates again the following year. However, because its navigation law had also injured French shipping while all French ports were open to American vessels, Massachusetts was pressured into repealing her navigation act in 1786.

Rhode Island levied a schedule of protective tariffs in 1785; New Hampshire levied import duties in 1784, forbade exports of goods on British ships the following year, and added a protective tariff schedule in 1786. Much lower tariff duties were levied by Virginia, the Carolinas, and Georgia.

Most important was the drive for a protective tariff in the most industrialized and populous city in the United States, Philadelphia. Under artisan pressure the radical-dominated legislature passed a protective tariff in the autumn of 1785, as well as an anti-British navigation law. The conservatives, it may be noted, were far more enthusiastically in favor of a tariff than were the radicals. By 1786, indeed, virtually every state had passed a navigation law against British shipping. However, there were sharp differences in degree, with Connecticut, New Jersey, Delaware, South Carolina, and Georgia only discriminating against British shipping to a slight extent.

It soon dawned upon the manufacturers and the merchants, however, that state tariffs and state navigation laws were not as effective a grant of privilege as they desired. For while most of the manufacturing states of the North imposed high protective tariffs for the benefit of their manufacturers, the South, with less manufacturing, understandably imposed lower tariffs upon themselves. The growing manufacturing of Pennsylvania and the rest of the North now wanted to secure the large southern market for themselves. Even enjoying the mild tariffs of the South, they could not successfully compete with the more efficiently produced and lower-cost English goods, or with English shipping. Hence, the northern manufacturers concluded that a nationalist system in which only the federal government could set a uniform tariff was important for monopolizing the southern market—at the expense, of course, of the southern consumers and any of the consumers of the low tariff states. Hence, the urban artisans in the North began to look with favor on the old nationalist idea of a strong, overriding central government and began to ally their important mass support with the longstanding schemes of the northern financial oligarchy.

Merchants, too, began to long for a uniform national navigation law. For those states which taxed or restricted foreign vessels very heavily (e.g., New Hampshire, Massachusetts, and Rhode Island) soon found that they lost substantial trade to those that retaliated very lightly against British shipping (e.g., Connecticut, New Jersey, Delaware, South Carolina, and Georgia) and they even had to abandon their much stronger laws. Hence, the merchant’s drive for a nationally imposed privilege to close the “loophole” of relative freedom and consumer choice in the other states. Again, a strong central government began to loom as a particularly attractive goal.[7]

In April 1785, merchants and traders (retailers) of Boston turned to Congress for depression remedies, and Boston, a few months later, urged Congress to repel foreign merchants and shipping. In fact, James Bowdoin, the ultra-conservative governor of Massachusetts, urged that state to call a constitutional convention to endow Congress with greater powers, a plan endorsed by the Massachusetts legislature and by John Adams, then Minister to England. New Hampshire quickly followed suit. Also early in 1785, the New York merchants in the New York Chamber of Commerce urged congressional action against foreign traders, and the manufacturers and traders of the city joined in calling for greater power to Congress. Citizens of Philadelphia, in June 1785, asserted that only full powers to Congress over the commerce in the United States could bring relief from the economic depression; the Council of Pennsylvania followed with a plea for stronger congressional power. The Virginia and Maryland legislatures, as early as 1783, urged authorization for a congressional navigation act, and they were followed by the merchants of Philadelphia.

On April 30, 1784, Congress responded by asking the states for the authority to enact a navigation law for fifteen years, prohibiting British vessels from engaging in the United States coastal trade or from importing any goods not produced in Britain. In order to be ratified, nine states had to agree to this measure. Virginia agreed at once, but other states balked at the centralized control and the domination of the carrying trade that the law would grant to New England merchants. Delaware, South Carolina, and Georgia particularly balked at the restrictions of the law, and the attempt to gain agreement by the states failed.

No sooner was the Congress rebuffed than its power-seeking nationalist forces began anew. Early in 1785, the young Virginia lawyer James Monroe headed a congressional committee that urged an amendment to the Articles for perpetual congressional power to regulate interstate and international trade, and to levy duties on imports and exports. State powers were to be safeguarded, for all duties were to be collected by state authority and the funds were to accrue to the states where they were collected. The proposal, however, was defeated in the Congress, largely by southerners understandably reluctant to place a monopoly of the carrying trade in the hands of American merchants, a monopoly that at the same time would raise the price of imported goods and lower the prices of southern exports. The redoubtable Richard Henry Lee, back in Congress as its president, led the libertarian forces in staunchly opposing any sweeping powers for federal regulation of trade and managed to defeat the Monroe amendment in August 1785. A year later, a similar amendment again failed to pass the Congress.

A determined movement for national power was also welling up in Massachusetts. Governor Bowdoin’s scheme, propounded during mid-1785, for a new centralizing constitutional convention was stopped in its tracks by the refusal of the Massachusetts delegates to Congress to press for the plan. Writing sternly to Bowdoin in early September 1785, the delegates, headed by the redoubtable liberal Elbridge Gerry, blasted the schemes of the centralizers: “plans have been artfully laid, and vigorously pursued, which had they been successful, We think would inevitably have changed our republican Governments, into baleful Aristocracies. Those plans are frustrated, but the same Spirit remains in their abettors.”[8] The Massachusetts legislature was forced by this rebuff to rescind its resolutions for a new centralizing convention.

Even more important to the nationalists than regulation of commerce was the acquisition of the taxing power. In the last gasp of nationalist dominance, Congress in April 1783 had accordingly proposed a new impost after the last one failed in 1782.[9] This time, the impost power was only to be granted for twenty-five years and the states were to administer the collection of duties. The accompanying message sent by Congress to the states on behalf of the impost was drawn up by Virginia’s nationalist congressman James Madison. Around this proposed federal impost of 1783, there raged the most important political controversy of the postwar Confederation period. Here was the rallying ground for both the nationalist and the radical-liberal forces. In Congress, Jonathan Arnold and John Collins of Rhode Island had led the opposition to the impost. Now, first to raise public voice in opposition among the citizenry was the great George Mason. Drafting the Fairfax County (Virginia) resolutions, Mason found both in the impost plan and in Madison’s plea “strong proofs of the lust for power.” Trenchantly, Mason likened the plan to the arbitrary measures of the Stuart monarchs in England. Any congressional taxing power spelled disaster: “Congress should not have even the appearance of such a power. Forms generally imply substance, and such a precedent may be applied to dangerous purposes hereafter. When the same men or set of men, holds both the sword and the purse, there is an end of liberty.” To the nationalists’ plea for taxing power to pay the public debt, the liberals proposed that the debt be divided up and paid by the several states, according to their realistic depreciated value. Thus, there would be no amassing of centralized power.

Unanimity of agreement by the states was again required to adopt the impost of 1783. New Jersey, North Carolina, and Delaware, with little direct import trade, were willing enough to have national revenue derived from tariffs, and consented readily. New Jerseyites, furthermore, had invested large sums in federal securities. One of the few opponents in North Carolina was the old Regulator leader, Thomas Person.[10] South Carolina followed suit in support of the impost, and Pennsylvania, still under the iron control of the right-wing, soon followed also, over weak objections by the Constitutionalists.

Massachusetts ratified the impost in the fall of 1783, but only after a tight struggle. Old radicals like James Warren and liberal merchants like Stephen Higginson led the opposition, but in general the commercial eastern and the Connecticut River towns favored the impost by a large majority while interior and especially western Massachusetts was bitterly opposed. Despite Massachusetts’ narrow approval in 1783, the urban towns continued to be restive, and the towns of western Suffolk County urged a county convention in 1784 against the impost, a request that was angrily turned down by Boston. As late as 1786, the country town of Rochester, in southern Plymouth County, attacked Congress’ half pay for army officers, and attacked the impost as eliminating “the Constitutional Check which the General Court had on Congress.”

The struggle was also intense in Connecticut, where agricultural opinion brought the impost to defeat, while Tory Fairfield County voted for it. The intense rural opposition to the impost in these states was not surprising since these were precisely the people who would have to suffer the burden. But after insisting that the revenue be paid only for public debts and not for any pensions, to which New England was bitterly opposed, the impost finally passed the Connecticut legislature in 1784.

Debate was more heated in Virginia, following that state’s crucial role in blocking the previous impost plan of 1781. Such powerful figures in Virginia as Thomas Jefferson lobbied for the plan, and Patrick Henry came out in its support. The opposition was led by George Mason and Richard Henry Lee; Lee, too, denounced the thirst for power and aristocracy exhibited by the plan, as well as the breakdown of the limits which the Confederation had hedged around federal encroachment on the liberties of the states. Patrick Henry’s sudden shift into opposition seemed to doom the impost, but open pressure by George Washington, combined with the surrender of Mason, secured Virginia’s approval of the impost at the end of 1783.

The story was similar in South Carolina. The state had first turned down the congressional request but, after pressure by George Washington, was finally persuaded to approve the impost. In Georgia, the opposition was so great as to delay approval until 1786. One by one, however, the states fell into line; even Rhode Island, over the bitter opposition of David Howell, who led the resistance against the 1781 impost, approved the impost in early 1786. Rhode Island’s shift was propelled by the change of heart of Nicholas Brown of Providence, one of the leading merchants of the state, and previously one of Howell’s major backers. Owner of $50,000 of federal securities, Brown decided that these securities were being “neglected,” so he swung over to the impost. As in Massachusetts, the opposition to the impost rested with the inland towns, while the urban interests, merchants, and mechanics favored the tax.

By August of 1786, every state but New York had approved the impost. While the oligarchs and the urban artisans united to favor the impost, the opposition was led by Abraham Yates, the Albany lawyer and cobbler who had risen to leadership of the radical forces in New York State. Yates stressed the thirst-for-power theme and, along with other opponents of the impost, cited the English theorist James Burgh in warning of the inner tendency toward the expansion of government power.[11] Unerringly, Yates centered on the central importance of the taxing power and warned that it “is the first, nay, I may say the only object of tyrants. . . . This power is the center of gravity, for it will eventually draw into its vortex all other powers.”[12] Yates also warned that true republicanism can only be preserved in small states, and keenly pointed out that in the successful republics of Switzerland and the Netherlands the local provinces retained full control over their finances. A taxing power in Congress would demolish state sovereignty and reduce the states, where the people could keep watch on their representatives, to mere adjuncts of congressional power, and liberty would be gone.

In New York the struggle was over congressional versus state control of collecting the proposed impost. In the critical vote in the spring of 1786, and again the following year, the New York legislature refused to grant Congress any control over collection, and insisted that New York’s paper money be accepted in payment of duties. Congress refused to accept these conditions, and the impost of 1783 was defeated. Thus, the unanimity principle under the Articles of Confederation had made all attempts to impose a congressional taxing power impotent.

The votes of the New York legislature aligned with the merchants of New York City and Albany, led by Alexander Hamilton and Philip Schuyler, and the bulk of urban mechanics, in favor of the impost, while the followers of Governor George Clinton from the other upstate counties, led by Abraham Yates, were overwhelmingly opposed. Similar lines would be drawn in the ratification debates over the Constitution.[13]

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[7] While Connecticut taxed imports from Massachusetts, and New York in 1787 moved to tax foreign goods imported from neighboring states, the specter of disunity and disrupting interstate tariffs was more of a bogey to sell the idea of a powerful national government than a real factor in the economy of the day.

[8] Edmund Cody Burnett, The Continental Congress (New York: W.W. Norton and Co., 1964), p. 637.

[9] [Editor’s footnote] For more on the failed imposts of 1781 and 1783, see Rothbard, Conceived in Liberty, vol. 4, pp. 1514–17, 1521; pp. 400–03, 407.

[10] [Editor’s footnote] Thomas Person was a North Carolina assemblyman and later a prominent Antifederalist. The Regulators of North Carolina was a movement in the late 1760s and early 1770s upset over the colony’s arbitrary land grants, corrupt tax officials, and high taxes and quitrents. Murray Rothbard, Conceived in Liberty, vol. 3: Advance to Revolution, 1760–1775 (Auburn, AL: Mises Institute, 1999), pp. 997–1009; pp. 233–45.

[11] [Editor’s footnote] James Burgh was a Scotsman known in the colonies for his Political Disquisitions (1774). He wrote in the tradition of John Trenchard and Thomas Gordon of Cato’s Letters and criticized taxation without representation and Britain’s stern actions against her colonies. Rothbard, Conceived in Liberty, vol. 4, pp. 1262–63; pp. 148–49.

[12] Jackson Turner Main, The Antifederalists: Critics of the Constitution, 1781–1788 (Chapel Hill: University of North Carolina Press, [2004] 1961), p. 79. [Editor’s remarks] For more on Abraham Yates and the liberals in New York, see Rothbard, Conceived in Liberty, vol. 4, pp. 1389–90; pp. 275–76.

[13] [Editor’s footnote] Merrill Jensen, The New Nation, pp. 225–27, 282–301, 400–13; Main, The Antifederalists, pp. 72–102; Nettels, The Emergence of a National Economy, pp. 69–75; Burnett, The Continental Congress, pp. 633–53.

4

The Burdens
of State Public Debt

A key to the politico-economic problems of the Confederation period, as well as one of the leading arguments for centralized power, was the swollen corpus of war-born public debt. The mass of federal and state debt could have depreciated and passed out of existence by the end of the war, but the process was stopped by Robert Morris. Morris and the nationalists moved to make the depreciated federal debt ultimately redeemable at par, and also agitated for federal assumption of the states’ debts. This was done to benefit speculators who purchased the public debt at depreciated values and to force a drive for a national taxing power. As a result of the nationalists’ efforts to assume the public debt, the value of the public debt, in specie, increased from $11 million in 1780 to $27 million in 1783, the vast bulk of which was held in the northern states. While scrambling to assume some of the debt themselves, the states had also amassed a huge burden of their own debt. Thus, by the end of the war, Massachusetts’ total debt was nearly £1.5 million; Rhode Island, about $0.5 million; Connecticut, over $3.75 million; Pennsylvania, over £4.6 million; Virginia’s over £4.25 million. As a result, payment of interest on the debt amounted to an overwhelming proportion of the state budget, and one estimate is that 50–90 percent of state expenditures went for this purpose: out of South Carolina’s total budget of roughly £104,000 in 1786, over £83,000 went to pay interest on the debt; of Virginia’s budget of roughly £256,000 in 1784, over £207,000 went to payment of interest.[14]

One problem that bitterly divided the states during the Confederation period was the settlement of common accounts. Under the Articles, expenses made by the several states for causes common to them all would be lumped together as “common charges” and the charges paid proportionately by the various states. In short, “debtor” states would pay their share to claimant “creditor” states through Congress and thus settle their accounts. Wartime expenses were clearly a common charge for the general welfare, and therefore those states which had expended more in the war effort (notably the southern states, because of the nature of the last few years of the war) were entitled to payment from the others. Logically, the public debt incurred by Congress should also have been assumed pro rata by the separate states, but the nationalists’ fierce determination to amass and retain a federal debt was able to keep that debt a federal rather than a “common” charge.

Throughout the 1780s the southern states tried to obtain their just settlements, but the northern states faithlessly fell back on technicalities, lack of official vouchers and authorization, etc., to keep the southern states from their just due. Also the South in particular had gone much further than other states in assuming unliquidated federal debt during the war (e.g., Quartermaster and Commissary certificates) and had exchanged them for state debts, only to find Congress (i.e., the North) balking about accepting these federal certificates as evidence for expenditures in the common welfare. Again, the North was depriving the South of their just due. As the dispute dragged on during the decade with the southern states unable to redeem their claims, Robert Morris’ wily “solution” proposed in 1783 began to look better to all concerned. An ultra-nationalist’s dream, the proposal was to accept all southern claims without cavil, but not to be paid by the debtor states: to be assumed by the federal government, which would issue federal securities for all claims. In short, the federal government would assume all war-born state debts.

The tax-and-debt burdens of the states were, of course, aggravated when the depression of 1784 hit the country, for now a fixed sum of taxes and debt payments had to be exacted from a depressed economy in which prices were generally lower and therefore the real tax burden greater. One critical problem was whether the debt would be paid at its depreciated market value, which at least reflected current economic realities, or whether the state would insist on paying them at their far greater face value, and thus impose an enormously greater tax burden upon the people. The anger of people at paying debt charges was considerably aggravated by the fact that the bulk of this debt had passed from its original owners at highly depreciated amounts into the hands of speculators. Payment of face value, then, would not even benefit the original public creditors; in fact, they too would suffer from being taxed for the benefit of a windfall to a comparative handful of speculators in the public debt.

Virginia was sensible enough to pay much of the debt at its depreciated market value, and make its taxes to pay the debt payable in depreciated certificates. Hence, Virginia was able to reduce its debt rapidly and without imposing enormous burdens on its taxpayers. Massachusetts, on the other hand, so handled its debt during the war as to benefit its debt holders and speculators, consolidating its debt by 1784 at twice its market value. To pay this particularly large debt, Massachusetts levied enormous taxes and insisted on collecting them in specie. This is not surprising, since the Massachusetts government was basically run by the very groups that owned the great mass of state debt. The debt burden was borne particularly by the poor, since roughly 33 to 40 percent of Massachusetts’ state revenue was raised by poll taxes, which were equal for each citizen. As a result, it is estimated that at least a third of a Massachusetts farmer’s income after 1780 was extracted from him in taxes, and in specie at that. Farmers and the poor demanded that the state debt at least be scaled down to market value, but the conservative ruling groups angrily refused.

Typical of the eastern mercantile oppression over the mass of citizens and farmers was the imposition of excise taxes, which harmed the bulk of consumers. Thus, the tax on spirits (e.g., cider brandy) distilled from one’s own apple orchard was twice the level of the tax on New England rum: a clear privilege to the Boston and other eastern merchants over the western farmers. Tax oppression upon the Massachusetts people was enormous, and the courts ruthlessly threw those who could not pay into jail. Tax defaulters’ property was seized, but in the time-honored way of neighborhood solidarity, local mobs prevented anyone but the owner from bidding for the property.

To the distressed people of Hampshire and Berkshire counties in western Massachusetts, it became increasingly clear that salvation must lie in their own hands alone: specifically by taking direct action to close the hated tax-enforcing courts. On February 11, 1782, a convention of Hampshire County at Hadley urged the suspension of civil suits; leading a call at the convention for direct action was the Reverend Samuel Ely of the town of Conway. The convention also prioritized the discriminatory excise taxes: “We esteem it as a matter of great grievance that Excize should be paid on any articles of Consumption in a free Republick.” Throughout January, Ely had stirred up the northern towns of the county, attacking the Massachusetts government and the constitution, and denouncing the highly excessive salaries of the governor and the superior court judges. Now, his views appeared so radical that one Northampton divine feared that the government itself was in danger, and none other than Joseph Hawley, the former leader of the western Massachusetts Left, accused Ely of treason. It was clear that the hard-pressed masses of western Massachusetts had found a new leader.[15]

Samuel Ely was a Yale graduate and former preacher in Connecticut, and a volunteer fighter at the Battle of Bennington in August 1777. On April 4, Ely addressed the mob in front of the common pleas court of Northampton and called for the people to rise up and close the court. The Hampshire moderates tried to take the play away from Ely with a county convention at Hatfield on April 9, which opposed the holding of county courts and suits for debt, but also opposed all radical measures to close them; particularly staunch in their conservatism on this issue were the older commercial Connecticut River towns—Northampton, Springfield, Hatfield and Hadley—with Joseph Hawley the leading delegate from Northampton. Samuel Ely scorned the schemes of the moderates, designed to quell his movement, and again raised a mob in front of the Northampton courts on April 12, calling for armed uprising. His plan was blocked by people standing to defend the courts. For his leadership in the Northampton riots, in mid-May Samuel Ely was arrested, convicted, and imprisoned in a Springfield jail. On June 13, a mob of 120 Hampshire men marched from Northampton to Springfield to free their leader from prison. Ely was freed, and, after an armed clash with a sheriff’s posse, the insurgents yielded three hostages for their return of Ely. But on the eighteenth, 600 rebels marched on Northampton to demand release of the hostages, but withdrew upon pleas of the hostages themselves. The situation eased only when the hostages were freed; Ely eventually fled to the free air of Vermont.

The General Court suspended the right of habeas corpus, and sent a grievance committee headed by Sam Adams, which called a Hampshire County convention for August. While doing nothing to allay grievances, Adams and Hawley were able to use their former radical reputations to grant amnesties and quiet the county; people’s conventions continued in the following year but without further major riots. The following August, one of Ely’s men, Justus Wright, led a rescue mob in Northampton on behalf of another Ely follower and tried to close the courts in Westfield. After Wright’s arrest in 1784, petitions of amnesty on his behalf were made by the towns of Goshen and Chesterfield. Wright himself, from prison, denounced the Massachusetts government as an “aristocracy” of “tyrants.” A small rump convention at Hatfield, in March 1783, also voted to pay no more taxes to the state of Massachusetts.

Disturbances had also occurred further west in Berkshire County. At the end of February 1782, a mob of 300 in Pittsfield succeeded in closing the common pleas court, but a month later, a large county convention in Pittsfield repudiated such radical methods. The leader of the successful Pittsfield uprising had himself been a justice of the peace, James Harris of Lanesborough. Harris had refused to pay taxes to the town, resisted the sheriff in serving court writs, rescued a neighbor’s cow from the sheriff, and declared that the courts must be “ripped up” to make the General Court listen to the people’s grievances. The following autumn, the mob rescued a pair of oxen from the hands of the sheriff; the mob, led by Major Thomas Lusk, had formally agreed to set themselves against the government. The General Court resorted here to continuing its suspension of habeas corpus.

At the beginning of the depression, Massachusetts managed to quiet Hampshire and Berkshire temporarily by lightening the tax burdens on the towns; however, it compensated for this by imposing a harsh stamp tax on all documents and papers, hitting at all state transactions and distressing the newspapers of the state; the newspaper tax, however, was soon repealed.

While the tax burden was most severe in Massachusetts (other New England states levied taxes at one-fourth the rate), all the states groaned from the postwar tax and debt burden, which undoubtedly aggravated the postwar depression. Much of the revenue, especially in importing states like New York, was derived from the state imposts. A particularly burdensome tax was the fixed tax per acre of land prevalent in the South. Thus Virginia levied a tax of one shilling per 100 acres and North Carolina five times that amount—these taxes greatly discriminated against the owners of the poorest land. Mass pressure from the backcountry forced Virginia, the Carolinas, and Georgia to abandon this tax and to moderately graduate the land tax. South Carolina, indeed, established a uniform land tax by value.

When the depression came, Connecticut, in contrast to the unyielding Massachusetts, agreed to abate taxes and grant time for their payment. Virginia sheriffs in the western country ran into similar trouble as in western Massachusetts. Any property they seized was rescued, many taxpayers refused to pay taxes and threatened to resist seizure of their property by force, and other delinquent taxpayers went into hiding. Numerous county petitions in Virginia pleaded the impossibility of paying taxes, a condition aggravated by the low price of tobacco in the mid-1780s. The Virginia legislature reacted sagely to the protests—again in contrast to Massachusetts—and agreed to lower or suspend taxes, and to allow hemp-growing western farmers to pay their taxes in hemp or flour. Indeed, Virginia agreed, in the spring of 1784, to suspend all tax collections for six months, and then agreed to cut taxes in half for the year 1785.[16]

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[14] [Editor’s footnote] The continual use of both pounds and dollars may be confusing to the reader. The states generally used English units (pounds, sterling, and pence) as their unit of account, which they began while they were still British colonies. During the colonial era, since Britain used mercantilist restrictions to prevent English specie from leaving the country, the colonists imported specie from other regions, in particular the Spanish silver dollar. The colonies also heavily issued paper money, which was indirectly linked to the specie unit of account through taxes and legal tender laws. In the early 1790s the new government put the country on a dollar accounting system that defined the American dollar in terms of both gold and silver (at a 15 to 1 ratio). Murray Rothbard, Conceived in Liberty, vol. 2: “Salutary Neglect”: The American Colonies in the First Half of the Eighteenth Century (Auburn, AL: Mises Institute, 1999), pp. 621–38; pp. 123–40; Murray Rothbard, “A History of Money and Banking Before the Twentieth Century,” in A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph Salerno (Auburn, AL: Mises Institute, 2005), pp. 65–68.

[15] [Editor’s footnote] During the Revolutionary War there was a crisis of leadership among the Massachusetts radicals. Since John Hancock and John and Sam Adams began to move rightward, new radical leaders had to be found in 1775 and 1776. One of them was Joseph Hawley, who later criticized the new Massachusetts constitution in 1780 as overly conservative and infringing on religious liberty. Rothbard, Conceived in Liberty, vol. 4, pp. 1258–63, 1500; pp. 141–49, 386.

[16] [Editor’s footnote] Jensen, The New Nation, pp. 302–12; Robert J. Taylor, Western Massachusetts in the Revolution (Providence, RI: Brown University Press, 1954), pp. 103–27; E. James Ferguson, The Power of the Purse (Chapel Hill: University of North Carolina Press, 1961), pp. 203–19.

5

The Issuance
of State Paper Money

A severe depression, bank contraction, a heavy burden of taxes to pay state debts, all this turned men’s thoughts to issuing paper money to finance government. Historians influenced by the Populist struggles of the late nineteenth century have always identified proponents of inflation with “farmer-debtors” and hard-money men as “merchant-creditors.” Actually, while it is true that debtors, especially during hard times, tend to favor inflation, merchants are even more likely than farmers to be heavily in debt since they have higher credit ratings and can borrow more. The result was that most of the economic groups in the 1780s favored inflation: the main problem was in determining which groups would obtain the enjoyment of the newly created money. Those wealthy cliques of merchants who already enjoyed the favors of the existing monopoly-chartered banks naturally opposed competition of state paper money; others tended to favor the new emissions. The exceptions were largely the sober-minded who remembered the rapid depreciation and dislocation during the war.

The first state to push through paper money during the postwar period was Pennsylvania, in March 1785. The Constitutionalists drove the measure through, but this “radical” act was essentially an alliance of farmers and wealthy public creditors who were anxious to have the state supply itself with money to pay their interest claims. Thus, of the emission of £150,000 of paper bills of credit, £100,000 went to pay the interest on the public debt, and £50,000 to be loaned on the security of land. The money could be used for payment of taxes; it was not, however, legal tender for private debts. Indeed, it was the provision of legal tender, not the paper money itself, at which the conservatives balked. Thus, as during the Revolutionary War, the conservative Pelatiah Webster balked not at banks nor at paper money, but at legal tender legislation. The main opposition to the state paper cause came, naturally enough, from the Bank of North America clique, these being the two major competing methods for supplying new money in the states. The Bank of North America refused to accept the already depreciated state notes at par, a major factor in impelling the legislature to repeal its charter. Despite frenzied attacks on all denigrators of the state paper, it had depreciated by 7.5 percent by the summer of 1786, and in the following year the conservative-dominated Pennsylvania legislature began to destroy and contract the outstanding notes.

In South Carolina, the “farmer-debtors” who led the state to adopt paper money were the great planters heavily in debt to British traders for the purchase of slaves to replace the thousands lost during the war. They were joined by Charleston merchants also in debt to the British. In October 1785, South Carolina authorized the emission of £100,000 of interest-bearing notes to be loaned on the security of land. The bills were receivable in payment of taxes, but again were not legal tender. Opponents managed to scale down the issue from the originally proposed £400,000. Extraordinary efforts, including boycotts, organized and individual, were made by merchants and planters of South Carolina to keep up the value of the notes, but they fell nevertheless to a 10 percent discount by the spring of 1787.

North Carolina issued £100,000 of paper in 1786, and these were legal tender. Over a third of the issue was used by the state to buy one million pounds of tobacco at twice the market price, and thus to provide a windfall subsidy to the state’s tobacco planters. The rest of the money went to pay some of the claims of the veterans of the Revolutionary War. Since the money was legal tender, Gresham’s Law (that money overvalued by the State will drive out undervalued money) came quickly into operation. Specie disappeared from North Carolina, and the paper depreciated by over 50 percent by the end of 1787. And since out-of-state creditors would not accept the depreciating paper, the merchants found it difficult to pay their creditors. Thus, the merchants suffered greatly from being forced to accept depreciated paper by the state, while at the same time their out-of-state creditors insisted on hard money. In the meanwhile, the mass of tobacco piled up in state warehouses, and the states found it impossible to sell it anywhere near the price that it had paid. Eventually the state had to take a 50 percent loss on the tobacco. By the end of the decade, North Carolina was forced to begin calling in and destroying its paper money.

Georgia had a similar experience; the legislature issued £30,000 in 1786 to pay Revolutionary veterans, and the bills were made legal tender for all payments: the issue was made at the behest of the rapidly expanding settlers in the backcountry. The money began to depreciate immediately, and Savannah citizens wisely and increasingly refused to take it despite the law. In only a year, the Georgia paper had fallen to a discount of four to one, and it ceased to be legal tender in 1790.

The New Jersey issue was essentially a land bank, pushed through by the Assembly over the opposition of the Council. The legislature finally passed an emission of £100,000 in legal tender bills in May 1786, all to be loaned on the security of real estate. Local vigilante associations terrorized merchants and traders into accepting the paper at par, but they could not terrorize New York and Philadelphia merchants, and the paper issue quickly began to depreciate by 15 percent. By 1789 the money was too valueless to pass in circulation.

The New York paper issue again belies the “radical-farmer-debtor,” “conservative-merchant-creditor” dichotomy. £200,000 were issued in 1786, of which three-fourths was to be loaned on real estate or specie security, and one-fourth to pay interest to public security-holders. Staughton Lynd points out that New York City’s leading conservative newspaper, the New York Daily Advertiser, approved the paper issue, as did the highly conservative Bank of New York. The conservatives were content that the paper was not declared legal tender for new debts, only for old ones. It should be noted that the New York radical leaders were opposed to legal tender, and most were opposed to the paper money.[17] The paper generally passed at a discount of up to 12 percent.

Seven states issued paper money during the Confederation period, and of these Rhode Island was undoubtedly the most enthusiastic. A state in which there had previously been a rash of armed resistance to tax collection, Rhode Island issued £100,000 in 1786, a sizable amount considering its small population. The money was all to be loaned on land—the bill having been put through by the rural farmers over the determined opposition of the Providence merchant community. Rhode Island not only offered a very low interest rate on its loans; it provided a particularly severe set of legal tender laws and punishments. Indeed, a person accused of the heinous crime of refusing to accept the new bills at par was to be tried in a special court, without benefit of jury trial or even of the right of appeal. This brutal attack on the creditors and on merchants impelled mass resistance by the merchants and traders. Many merchants, despite the law, refused to accept the notes, and even closed their stores in protest. Farmers, in turn, pledged to boycott the sale of their produce to Providence. Customers rioted and tried to force tradesmen to accept the notes at par, and many traders and creditors were forced to flee the state. Finally, determined judicial resistance against the coercive acts led, after a furious struggle, to the repeal of these notorious laws in December 1786. The notes depreciated rapidly after that, down to 10 percent of face value by the end of 1788, and the legal tender clause was at last repealed in 1789.

Rhode Island was far more successful in her treatment of public creditors. The creditors were forced by law to accept redemption of their credit in the rapidly depreciating paper. In that way Rhode Island was able to rid her citizens of virtually the entire burden of state debt by 1790, and the debts were repaid at minimum sacrifice to the people of Rhode Island.

Of the six states that did not issue paper money during the 1780s, Connecticut managed to escape its distress by the far sounder method of emergency tax reductions and tax abatements. Delaware was in the trading and financial area of Pennsylvania, and hence Pennsylvania’s bank and state paper circulated there. Virginia’s opinion was staunchly hard money, this sentiment being shared by its liberals as well as conservatives, so there was little struggle there.

A strong drive for paper money arose in Maryland in 1786, and the Inflationist Party called for £350,000 of paper notes, of which £200,000 was to be lent to land owners. The Maryland Senate blocked the bill that was passed by the House in late 1786. Like Connecticut, Maryland, after outbreaks of armed attacks on her tax collectors, was partly able to stave off a drive for paper money by abating tax collections and suspending the forced sale of property of delinquent taxpayers. In New Hampshire too, the grievous burden of taxes led to the march of a large armed mob upon the capital in September 1786. The mob besieged the legislature and urged the issue of paper money; but a counter gang of citizens and militia drove off the rebels, and the voters of the towns firmly rejected a paper-money scheme referred to them by the legislature. Conservative Massachusetts, the hardest pressed of all, refused to issue paper or to grant any relief in taxes or in executions for tax delinquency.[18]

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[17] Professor Lynd concludes:

Because of its prominence in the politics of the late nineteenth century, the paper money question has often been considered the central issue dividing radicals from conservatives in the Critical Period. It was nothing of the kind. . . . The allegedly extremist victory was, in fact, a mild inflationary measure rapidly acquiesced in by all groups in the community, just as in other cities. . . . What all creditors feared in paper money was not inflation as such. . . . [but] that it might be made a legal tender.

Staughton Lynd, “The Revolution and the Common Man: Farm Tenants and Artisans in New York Politics, 1777–1788” (Unpublished Ph.D. dissertation, Columbia University, 1962), pp. 212–13.

[18] [Editor’s footnote] Jensen, The New Nation, pp. 313–26; Nettels, The Emergence of a National Economy, pp. 81–88.

6

The Burdens
of Federal Public Debt

Part of the drive for state paper money came from the public creditors as well as the states; for the federal creditors were anxious to get paid by some organ of government, and after the collapse of Robert Morris’ nationalist program they began to agitate for the states to assume their share of the federal debt. Hence, the nationalists came to see that public creditors could prove to be a troublesome two-edged sword. This process was accelerated by Congress’ difficulties in raising its requisitions and its inability to drive through any impost, which meant it was unable to pay interest on the federal debt. Pennsylvania began the process of state assumption during the war, and when Congress defaulted on payment of interest on its loan certificates in 1782, Pennsylvania assumed payment of the interest to its citizens. Pennsylvania, New Hampshire, and New Jersey quickly issued paper monies to pay the public creditors who, while preferring specie, also preferred state paper to nothing at all or to highly depreciated “indents”—paper certificates of interest—which Congress had begun to issue after 1784, and which exchanged on the market for one-fourth to one-eighth of their face value.

In 1787, short of specie and lagging in requisitions, Congress finally allowed the states to service interest on the federal public debt in whatever type of money they chose. The paper-issuing states, furthermore, began, one by one, to assume the federal securities held by their citizens. Pennsylvania’s paper money issue enabled her to assume over $5 million of federal debt, exchanging it for new state securities, Maryland assumed several hundred-thousand dollars’ worth during the 1780s, and New York, in its paper-money bill of 1786, undertook to assume all federal securities in exchange for state notes. New York thereby assumed over $2.3 million of federal securities. By the end of 1786, indeed, the New York, Pennsylvania, and Maryland state governments had assumed nearly $9 million of federal securities—one-third of the total principal of the public debt. New England and the South, with few federal securities extant in their states, accumulated little further federal securities, but it was still true that the states were acquiring more and more federal debt and that this “portended an end to major Congressional receipts and disbursements; the servicing of the debt bypassed Congress, and state revenues were committed to local purposes.”[19] The nationalist program, based on centralized public debt, was increasingly in danger by the late 1780s. Congress, pressed for revenue, was forced to default on payments of its debt to France and Spain.

By the end of 1786, then, the nationalist program was in full rout. Congress had failed to aggrandize itself into the dominant power: it could not achieve a federal navigation act or more importantly a federal impost for its own source of tax revenue. Its requisitions were failing and its eagerly assumed public debt was rapidly being whittled away by the states, and it could not even meet any of the payments on its $10 million of foreign debt. Lacking independent federal revenue, the natural course would have been the disintegration of federal credit and power, and a full resumption of the decentralized policies that had been the initial consequence and the long-range promise of the American Revolution. Soon, as a congressional committee recommended in August 1786, Congress would have had to accept defeat and distribute all of the public debt among the states and let them pay or get rid of the debt as they wished. As Professor Ferguson concludes:

The idea was supremely practical; it accorded with the nature of the Union and the predilections of the states. But it signified the complete abandonment of any effort to strengthen Congress under the Articles of Confederation. Most of the states would probably have retired the bulk of the debt by cheap methods. Congress would have been left with depleted functions and little reason to claim enlarged powers. Creditors would have attached themselves to the states, and no ingredients would have remained to attract the propertied classes to the central government.[20]

In the days before corporations (except for the few banks), public debts provided one of the few markets for security speculation. Of the federal debt, loan certificates, amounting to about $11 million, had originally paid interest and were the “blue chips” of the federal security market. After 1782, the federal government defaulted on interest payments, and consequently the market price of loan certificates fell to about 20 to 25 percent of the nominal price. More speculative were the final settlement certificates paid to civilians and largely to soldiers at the end of the war; they sold during the 1780s at 10 to 15 percent in those states which paid interest on public securities merely in “indents,” which were paper certificates of interest to be redeemed in the future. In those states that decided to support the securities more firmly, notably Pennsylvania, which backed them with taxes and assumed them on its own, the securities exchanged at 30 to 40 percent.

Whereas the more highly prized loan office certificates often remained in the hands of the original owners, the army final settlement certificates were quickly sold by the receiving soldiers and officers and found their way into the holdings of speculators, often very large ones. By 1787, those securities not redeemed by the states were almost all in the hands of secondary rather than the original owners. New York City became the center of this new public security trade and also the clearing house for investment of foreign capital. Foreign investment began to accelerate with the establishment in Europe of Daniel Parker from Watertown, Massachusetts, an associate of Robert Morris; as well as Gouverneur Morris; William Constable; Andrew Craigie; and William Duer. Parker also interested a group of Dutch bankers in American public securities.

As federal securities moved from original owners to brokers and speculators, the concentration of holdings sharply increased. In Massachusetts, original holdings of federal securities generally amounted to less than $500 for any one person; but by 1790, the top 7 percent of all subscribers owned 62 percent of the federal debt, while the lowest 42 percent of holders owned less than 3 percent of the debt. Sixty-one percent of the securities were owned by citizens of Boston. Similarly in Pennsylvania, 3 percent of the holders owned 40 percent of the securities and 9 percent of the holders held 61 percent of the debt. Again, the great bulk of public securities had been transferred by the late 1780s to a relatively few large speculators. In Maryland, the sixteen biggest speculators, or 5 percent of the total, held over 50 percent of the federal debt. Again, Rhode Island’s 2.2 percent of leading debt owners held nearly 40 percent of the total debt.

Overall, taking Massachusetts, Maryland, Pennsylvania, and Treasury registers for interstate holders, the 280 largest holders owned nearly $8 million of federal securities, or two-thirds of the ones recorded in these sources. In contrast, holders of less than $500 of securities owned only 2 percent of the total. Fewer than 3,300 individuals held the roughly $12 million in securities recorded in the Treasury and in the above states.[21]

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[19] Ferguson, The Power of the Purse, p. 234.

[20] Ibid., p. 241.

[21] [Editor’s footnote] Ibid., pp. 220–86.