America's Fiscal Constitution (5 page)

A NEW NATION AND DEMOCRATIC PARTY LIMIT FEDERAL DEBT: 1789–1853

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1789–1802: Years when deficits exceeded debt service = 0

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More than two hundred guests gathered for a sentimental evening at Mann’s Tavern in Annapolis, Maryland, on December 21, 1783. Some had journeyed long distances over rough roads to pay their respects to General George Washington, who had led an improvised Continental Army to victory against the world’s greatest military power. Grateful citizens had greeted the general throughout his sixteen-day trip from New York to the Maryland tavern. Washington looked forward to relinquishing his command in Annapolis before completing the ride to his Mt. Vernon home.

Guests at the farewell dinner lifted their glasses for thirteen toasts, each punctuated by the boom of a cannon blast from outside. The crowd grew quiet as the dignified general rose to offer a toast that sounded more like a plea than a benediction. He expressed hope that the states would give the Congress of the Confederation “competent powers,” which it would need to pay debts to the soldiers and suppliers who had sacrificed so much during the long war for independence.
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Washington had requested a payment plan nine months before this farewell dinner, when he had acted to quell a rebellion by unpaid soldiers
who waited in camp for news of a peace treaty with Great Britain. He had denounced agitators in his army who urged the “dreadful alternative of deserting our country, or turning our arms against it.”
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Those veterans, often dressed in rags, had good reason to worry about whether the Continental Congress would pay their back wages. Congress had no taxing authority, and Great Britain had compelled the states to give assurances, soon broken, that former colonists would honor debts owed to British commercial creditors.

Congress appointed a committee led by Alexander Hamilton, then twenty-nine years old, and James Madison, only four years older, to respond to Washington’s demand that his troops receive three months’ pay when they were released from duty. Madison and Hamilton sympathized with the request but could authorize only partial payment, in the form of bank notes with little value. In June 1783 angry veterans chased Congress out of Philadelphia. General Washington appealed in vain to the governors of all the states: “Where is the man to be found who wishes to remain indebted for the defense of his own person and property, to the exertions, the bravery, and the blood of others, without making one generous effort to pay the debt of honor and gratitude?”
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The morning after the farewell dinner, Washington formally resigned his military commission in a ceremony choreographed by his friend Thomas Jefferson. Jefferson was not the only one who recognized that Washington’s voluntary return to private life might endure as a symbol of democratic public service. George III, ruler of Great Britain and former monarch of the colonists, noted that Washington’s willing departure from official power made him the “greatest character of the age.”
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No one, however, lauded the greatness of the insolvent Congress of the Confederation. It took four months just to clear the farewell dinner bill from Mann’s Tavern. And for five years thereafter, Congress lacked the “competent powers” to repay the principal or interest on debts remaining from the Revolution.
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Hamilton of New York and Madison of Virginia unsuccessfully argued that Congress should tax imported goods to repay its debt. The Articles of Confederation required the consent of all states for the imposition of any tax. In 1785 New York objected to this import tax, as Rhode Island and Virginia had done two years earlier. Meanwhile, compound interest accumulated on the debt.

Some states printed paper money and threatened to compel creditors to accept it in payment of debts, but one state’s paper money would not satisfy creditors in other states or countries. Creditors who had lent money to pay for the Revolution expected debts to be repaid in some form of currency equivalent to the dollar’s value relative to British, French, or Spanish coins.

Dutch bankers, whose credit remained vital for the states’ economic independence from Great Britain, grew impatient.
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Twenty-eight-year-old Congressman James Monroe, a veteran of the Revolution and close friend of Hamilton and Madison, heard that some citizens of Northern states were considering a withdrawal from the Confederation, which would leave the remaining states with the full burden of congressional war debt.

Without the power to tax, Congress could only “requisition,” or beg, states to pay their share of debt service. In 1786 it billed the states for a total of $3.8 million and repeatedly warned each state that failure to pay would be “a breach of public faith and a violation of the principles of justice.” Existing records show that the states paid, at most, $663.
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Delegates from some states even tried to dodge the issue of taxation by avoiding meetings of Congress.

In August 1786 Washington, who called the requisitions “little better than a jest,” mused glumly that “we have probably had too good an opinion of human nature in forming our confederation.”
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Hamilton and Madison, however, had not quite given up hope. Weeks after Washington expressed his frustrations, the two traveled to the same tavern at which the general’s retirement from military service had been honored nearly three years earlier. They would try once more to resolve the debt crisis.

Ten delegates from three other states joined them at Mann’s Tavern for a meeting originally called for the modest purpose of resolving various disputes among states over water boundaries, seaborne trade, and coordinated collection of state taxes on imports. Madison and Hamilton, each of whom stood barely five feet tall, had larger purposes in mind. Madison later wrote—in the formal English he had acquired from reading all the books in his father’s substantial library by the time he was eleven—that they “did not scruple to decline the limited task assigned.”
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Madison and Hamilton convinced the other delegates to call for yet another meeting, in Philadelphia the following spring, to consider issues transcending coastal trade. They hoped to enlist participation by the most influential citizens from each state, so that the Philadelphia meeting would have “powers
adequate” to decide how to satisfy the Congress of the Confederation’s outstanding financial obligations.
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The ambitious purpose of the Philadelphia meeting was deemphasized in Hamilton’s written invitation, which suggested that the resolution of commercial issues might require “a correspondent adjustment of other parts of the Federal System.”
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Madison and Hamilton were more forthright with close friends in sounding the alarm that the Congress of the Confederation had run out of options to repay its debts. To break the deadlock over debt, Hamilton and Madison needed greater authority than they or any state could muster. That task, they believed, required the unique prestige of General Washington.

Madison, along with Virginia governor Edmund Randolph, persuaded Virginia’s legislature to quickly choose the members of the delegation it would send to Philadelphia. They named Washington as the head of the delegation, even though the nation’s most distinguished citizen had not yet been persuaded to attend the meeting. Madison explained to the retired general why his participation would demonstrate “the magnitude of the occasion,” but Washington begged off. After all, Washington protested, he had just declined to attend an annual reunion of veteran army officers in Philadelphia on the grounds that he had withdrawn from public life.
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In spite of his reluctance, Virginians publicized the fact that Washington would lead their delegation.

Pennsylvania also promptly selected its delegation, which included the state’s two leading citizens: Benjamin Franklin, the famous inventor, writer, and merchant, and Robert Morris, the most prominent businessman in the thirteen states. Franklin and Morris had each played critical roles in financing the Revolution; Franklin secured grants and loans from France, while Morris managed extensive borrowing from American merchants and large planters. News of the attendance of Washington, Franklin, and Morris impressed leaders in the other states. Eventually, every state except Rhode Island sent delegates to Philadelphia.

The meticulous Madison prepared for the meeting by studying how various nations throughout history had collected taxes, regulated commerce, organized defense, and resolved disputes. Meanwhile, Hamilton had made estimates of potential revenues from national taxation.

In February 1787 Congress had been unable to attract a single subscriber for a $500,000 loan, an amount of only about 1 percent of its outstanding debt. Weeks later Washington agreed to attend the Philadelphia
meeting. He wrote to a friend that the impotent Confederation was like “a house on fire” that was “reduced to ashes” while people debated “the most regular mode of extinguishing” the blaze.
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Tensions mounted in the months before the delegates left for Philadelphia. They heard reports that armed farmers in Western Massachusetts had refused to pay property taxes designed to retire the state’s war debts. Samuel Adams of Massachusetts, organizer of the original Tea Party, supported the taxes and thought that those encouraging the tax revolt should be hanged for treason. Henry Lee, Washington’s able cavalry commander during the Revolutionary War, warned that the tax rebellion might spread to other states.

By May 1787, when the Philadelphia meeting convened, Madison observed that “it was seen that the public debt rendered so sacred by the cause in which it had been incurred remained without any provision for its payment.”
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John Marshall, an incisive young lawyer and Revolutionary War veteran from Virginia, described the situation in plainer language: “The public creditors had lost faith in the old government.”
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The delegates in Philadelphia unanimously elected Washington to preside over the proceedings. On May 30, 1787, the fourth day of deliberations with a quorum, they adopted a resolution that reflected the essence of Madison’s plan for establishing a national government “consisting of a supreme Legislative, Executive & Judiciary.”
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For several months they fleshed out a plan to create a new organization capable of servicing existing debt and any future debt occasioned by emergencies. The assembled delegates called it “the United States of America” and set forth its powers in the Constitution.

Benjamin Franklin, then eighty-one, had to be carried to the convention meetings and rarely spoke. He listened carefully to the extended debate about whether senators, who were expected to be wealthier than most members of the House of Representatives, should be allowed to propose or amend any “money bills,” that is, legislation affecting spending or taxes. Franklin blessed the final compromise, which allowed only the House to originate bills, by repeating the maxim “Those who feel can best judge.” Decades earlier, in the colonies’ first request for greater financial independence from the Crown, Franklin had made a related point: taxation would be more acceptable when those who paid taxes could direct how the money would be spent. From the outset the nation’s founders understood the importance of the link between spending and taxation.

Franklin delivered the Philadelphia convention’s closing remarks, in which he urged that all delegates “act heartily,” despite any personal reservations about the text of the Constitution, to obtain its ratification.
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No one heeded that advice more than Madison and Hamilton, who each worked tirelessly to overcome opposition from certain powerful politicians in their states. They wrote essays, now known as the Federalist Papers, designed to persuade New Yorkers to ratify the document. The essays stressed the need for a federal power that could levy taxes to repay existing debt and support national defense. Many citizens in New York and Massachusetts feared the loss of state revenues if the federal government had the exclusive right to tax imports through their busy ports. Connecticut and New Jersey were among the first to ratify the Constitution, since each sought to curtail New York’s ability to tax imports shipped through its port and purchased by citizens of neighboring states.

Some Virginians led by Patrick Henry, the famous orator and a perennial power in the state’s government, argued against the new taxing power granted to the federal government by the Constitution. Madison responded that states could not defend themselves without a reliable source of revenues capable of supporting a national military. If war came, who “could be expected to lend to a government which depended on the punctuality of a dozen or more governments for the means of discharging even the annual interest of the loan?”
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Hamilton battled opposition from his state’s governor and told Madison that the prospect for ratification in New York was “infinitely slender, and none at all,” unless Virginia first approved the document. In the summer of 1789 Virginia and New York finally ratified the Constitution, by narrow margins, though only after enough states had already done so to form a union without them.

Many state conventions sought to condition their ratification on the adoption of various amendments. Madison, already recognized as an authority on the Constitution, asserted that no state could conditionally join the Union. He did, however, pledge that Congress would carefully consider suggested amendments after ratification. This argument failed to persuade North Carolina’s political leaders or Madison’s fellow Virginian James Monroe, who believed that their states should join the Union only after the Constitution incorporated a bill of rights. New York recommended a constitutional amendment requiring a two-thirds majority vote in Congress for any authorization of new federal debt.