The Board of Treasury On July 29, 1775, the Continental Congress jointly commissioned Treasurers, George Clymer and Michael Hillegas, to manage the government's finances. As previously mentioned, in February 1776, a committee of five persons was appointed to control the activities of the Treasury, with an Office of Audits and an Auditor General established shortly thereafter. The committee operated under several names, including the Board of Treasury and the Treasury Office of Accounts. Five additional members were added during 1776. 4 Loan certificates (equivalent to bonds) carrying an interest rate of 4 percent were first issued on October 1776. Loan-office commissioners were appointed in each colony to oversee the sales of loan certificates and these local agents became the fiscal officers of the national government for their region. The interest rate on the loan certificates was soon raised to 6 percent, and remained at this level for the duration of the war. 5 Additionally, loans were secured from overseas, mainly from France and the Netherlands, and loan certificates were often employed as a direct means of payment for soldiers and suppliers. The Continental Congress was not given the power to raise revenues through taxes. It had to continually finance a deficit by borrowing and the debt continued to grow. Without the ability to raise revenues in line with expenditures, the government could not accumulate a surplus to pay off prior debt, which made debt management very difficult. In an effort to achieve some order, the Treasury Office, as it was then called, was reorganized three times between 1777 and 1780. In February 1779, an Office of the Secretary of the Treasury was formed; in July of the same year, the Office was discontinued, and a Board of the Treasury replaced the Treasury Committee. These changes, however, did nothing to solve the problem. A major crisis developed in 1780 when interest payments due in money were suspended. Some interest, payable by bills of credit, was continued until 1782. 6,7 To address the crisis, the Congress eliminated the Treasury Office and Board of the Treasury and replaced it with a Department of Finance. 4 Bolles, Financial History, 13. 5 Ferguson, Purse, 35. 6 7 Ferguson, Purse, 115. Gene and Claire Gurney, The United States Treasury: A Pictorial History, (New York: Crown Publishers, 1978), 2-3. Superintendent of Finance Robert Morris, a wealthy merchant and member of Congress, nick-named "the Financier," was chosen as its leader. His official title was Superintendent of Finance, and his staff was composed of a Comptroller, a Treasurer, a Register and various clerks. Morris created some order in treasury affairs simply by reporting the total debt owed. This marked the beginning of Annual Treasury Reports to the President. On January 1, 1783, the public debt totalled $43 million, $7.9 million owed to foreigners and $35.1 million owed at home. Of the domestic debt, $11.5 million was in the form of loan certificates with two years interest past due on them. 8 In 1784, after several years of service, Morris summed up the situation to the President of the Congress by noting that affairs had become so complicated it was hardly possible to say who was at fault. This was a signal of difficult times ahead. Morris then resigned and he was replaced by a three-person Board of Treasury. Finances, however, still did not improve. Throughout this period the overriding problem for the Treasury was how to raise enough revenue to handle its finances. Even under the Articles of Confederation that had been passed in 1781, the states had not granted the Continental Congress any power to raise money through taxes, jealously guarding that right for themselves. The separate states were each expected to contribute their fair share for expenses. Whenever the Congress did ask the states for money to pay off the debt, it was not forthcoming. Morris and others who later formed the Federalist Party felt that this was a deplorable situation which had to be remedied by a stronger central government with adequate power to raise revenue. A new method had to be implemented to secure a more sound system of public finance. The problem of managing the public debt would become one of the issues in the series of events that led to the passage of the Constitution in 1787. The Power to Raise Taxes In 1783 Congress was given the power to raise taxes via an import tariff, and this source of finance was sufficient to meet the normal 8 Bolles, Financial History, 317. 9 Ferguson, Purse, 179. operating expenses of the national government. The states also agreed to pay the interest on the public debt. But in 1785 revenues were still inadequate and Congress was forced to suspend payment of interest on the debt to France. By 1787 payment of principal was in default as well. This default made it very difficult for the government to borrow money overseas. With the ability of the government's power to meet its financial obligations called into question, domestic borrowing was also foreclosed. For example, when interest payments were suspended in 1782, the market value of loan certificates dropped to about one-fourth of their stated value, where they remained until 1788. The government's financial structure was so weak that it appeared unlikely that a budget surplus to pay off the debt would ever be generated. In addition to the Federalists, holders of the debt became advocates for a stronger central government that would pay off the public debt at par. Chapter Two THE CONSTITUTIONAL ERA There were many issues confronting the men who met in Philadelphia in the summer of 1787 to frame a Constitution and form a new government. At the heart of these issues lay the overriding question of whether citizens of the states would feel a loyalty to a powerful central government. In terms of the public debt, Alexander Hamilton sagely noted that it could form an important bond between holders of the debt and the government. As he had written in 1781, " A national debt, if it is not excessive, will be to us a national blessing." 1 The key to strengthening that bond was not necessarily payment of the debt, but an assurance that it would be paid. The framers of the Constitution established measures to provide this assurance. The Treasury Department As one way of improving the finances of the government, the Constitution gave Congress the power "To lay and collect taxes, duties, imposts and excises . . ." and "To borrow money on the credit of the United States." 2 There was a debate in the House of Representatives over whether to continue with a Treasury Commission or to have a department with a single head. Congress finally decided to replace the Board of Treasury, which had been revived in 1784. They established the Treasury Department, on September 2, 1789, which was to be headed up by a Secretary whose responsibilities included preparing "plans for the improvement and management of the revenue, and for 1 Arthur M. Schlesinger Jr., The Age of Jackson, (Boston: Little, Brown and Co., 1950), 11. 2 Margaret G. Myers, A Financial History of the United States, (New York: Columbia University Press, 1970), 55. |