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. 29
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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