Chapter One PRELUDE TO THE CONSTITUTION Public debt in the United States can be traced back as far as the American Revolution. One of the primary tasks facing the Continental Congress was devising ways of setting up the operations of its treasury. On June 3, 1775, the first Financial Committee of the Congress was appointed to estimate the extent of financing needed by Congress. Several successive committees followed, until February 17, 1776, when a permanent committee of five was appointed to take charge of the treasury. Most of the work of the committee at this time involved tracking of receipts and expenditures, as there was little public debt. 1 Financing the American Revolution The American Revolution was financed primarily through the printing of money. On July 23, 1775, three men were appointed by the Continental Congress to oversee the printing of $2 million in currency. There was nothing startling about this policy, for it was one that had been used successfully by the separate colonies over the previous century. In those days, the colonies had no method of quickly raising taxes, so they printed money to pay their bills directly. It was intended that this money, called Continentals, would be redeemed through the later payment of taxes, and the legislation authorizing the printing of that money usually stipulated specific taxes which would be paid to redeem the money. In some cases, the taxes would be paid with the new money itself to keep it out of circulation. 2 1 Albert S. Bolles, The Financial History of the United States, from 1774 to 1784, (New York: D. Appleton Co., 1892), 9-11. 2 James E. Ferguson, The Power of the Purse, (Chapel Hill, N.C.: The University of North Carolina Press, 1961), 78–79. As the war continued, this method of public finance was the one employed to varying degrees by both the individual colonies and the Continental Congress. The war lasted longer and cost more than any of the colonists had anticipated, resulting in the excessive printing of money. Consequently, the dollars issued by the Continental Congress suffered a great decline in value during the course of the war. They became "not worth a Continental" in the parlance of the day. Their value dropped drastically during the war. In 1777 it took $1.25 in continentals to buy $1.00 of hard currency (usually gold coins); by April 1781, $167.50 in continentals were needed to purchase the same amount of hard currency. 3 Still, the continental dollars were the most important form of public finance during the war, as can be seen in Table One, which details all sources of finance for the war from 1775 to 1780. Source: Barry W. Poulson, Economic History of the United States, (New York: Macmillan Publishing Co., 1981), 107. The value of the continental dollars rapidly declined, and the colonists had to use other methods of public finance. It was not possible to raise taxes, because they had gone to war under the cry of "taxation without representation is tyranny." The colonists and the Continental Congress eventually turned to borrowing on a small scale. However, the management of the Treasury operations remained cumbersome, and administration of the public debt was often chaotic. |