American Finances From 1789 to 1835

I.

How we may best manage and most speedily pay off our great public debt will practically be the vital question in American politics for a long time to come. Every year its importance is, through the medium of taxation, brought home to all classes and to every species of industry, while at the same time any lack of wisdom or experience in dealing with this central issue is sure to be felt in the wide circumference of the rest of our public questions. A similar inquiry held a dominant place in our national councils from the year 1789, the date of the present constitution, down to the year 1835. The financial history of this period is well worth special study, because of the signal ability and sagacity by which the government brought its difficult problem to a successful issue. In dealing with our existing debt, it may therefore be not without utility to trace, in a short review, the growth of its experience in finance during that time, whether as manifested in its prevailing ideas, or as embodied in actual legislation.

Our present constitution owes its origin to the financial embarrassments of the government formed under the articles of confederation. That government had to depend for its revenue upon the States, by making requisitions upon them in their integral and sovereign capacity. Under this system, however, there existed no power to enforce these requisitions; and hence when the States, sometimes by default and sometimes by refusal, failed to pay their respective quotas into the common treasury, the government found itself reduced to bankruptcy. There were no funds for its own support; the interest upon the loans which had been contracted both at home and abroad on account of the war of the Revolution remained unpaid; and fresh infractions of treaty and financial obligations were daily bringing deeper humiliation upon the country.

To devise some remedy for this most disastrous condition of affairs, delegates from all the States met in convention, in Philadelphia, in the year 1787. This body, as was natural under the circumstances, was at the outset solely intent upon ingrafting needed power and vitality upon the existing articles of confederation. Their deliberations, however, carried them beyond this original purpose, and resulted finally in their framing a new scheme of government altogether,— the constitution of the United States.

Among the provisions of this constitution was one to the effect that all debts for which the United States had become liable as a confederation, as well as every agreement entered into by them, were now made valid, by express terms, against the United States. Ample powers were, in view of recent experience, likewise conferred upon the new government, both to secure its own maintenance and to provide for the public credit.

The total amount which had thus been formally assumed as public debt was estimated, with principal and arrearages of interest together, to reach the sum of $54,124,464.56, and became thenceforth distinguished and known under the names of foreign debt and domestic debt. The foreign debt summed up $11,710,378.62, and resolved itself into (1) loans obtained from private lenders in Holland, (2) sums of money furnished from time to time by the king of France, and (3) a small amount due to Spain.

Our country as a borrowing power (under the guarantee, as will be hereafter seen, of the king of France) was first introduced into Holland in the year 1781. John Adams, American ambassador at the Hague, had received general authority to borrow any sums required for necessary expenses, and succeeded by his wise management and perseverance in obtaining loans amounting to nine million florins, equal to $3,600,000. Four separate loans of this description were negotiated by him; the first in the year 1782, and the last in 1788. The rate of interest to be paid on this money was fixed nominally at four and five per cent. per annum; but the premiums and gratifications exacted by the lenders ran it up in reality as high as seven per cent. The payment of the interest went on quite regularly, the money coming directly out of the proceeds of the loans. Indeed, the last two loans, each for one million florins, were expressly obtained for this purpose, and were so Pledged. Meanwhile, no part of the principal had been paid, the first installment thereon not falling due until the year 1793. These several loans had been made reimbursable, in equal payments, within fifteen years from date, the first payment to be made in the eleventh year.

The French debt differed in many respects from the debt owing in Holland. In addition to the support of his arms during the war of independence, the French king had also rendered important pecuniary assistance. Between the years 1778 and 1783, in addition to a subsidy of six million livres, he had granted under the title of loans thirty-four million livres, equal to $6,296,296. The amount last mentioned was divided into three parts. The first part consisted of loans made previously to the 16th of July, 1782, amounting in all to eighteen million livres. By a contract between the two countries, all arrears of interest up to that date, together with any interest that might accrue until the conclusion of a treaty of peace, were made a present to the United States in token of the king’s friendship. The principal was made payable, with five per cent. interest per annum, in ready money in twelve equal parts, and at the royal treasury in Paris; the first payment to commence from the third year after a peace with Great Britain. The second part was the single loan, on the 5th of November, 1781, of five millions of florins, computed by agreement at ten millions of livres. Strictly speaking, this was a loan by the States-General of the United Provinces of the Netherlands to the French king, but made in favor of the United States; the king undertaking to guarantee its payment. This debt was to be reimbursed in Paris, in ten equal payments at four per cent. per annum. And in order that the king of France might be enabled to fulfill his own obligations in regard to it, the first of these payments was made due on the 5th of November, 1787. The third part was also a single loan of six millions of livres, bearing interest at five per cent. Its repayment was fixed within the period 1797-1802, both years inclusive.

These engagements with France the old Congress had found itself unable to fulfill; although prompt payment, owing to the low condition of that country’s finances in 1787, when the first installments became due, was especially necessary. The arrears accumulating after this fashion swelled the amount of principal and interest due to France at the close of the year 1789 to nearly three millions of dollars. As there was no abatement in their financial difficulties, the double motive of gratitude and justice urged the United States to begin without delay to reimburse the French debt.

Negotiations were accordingly opened at Amsterdam and Antwerp for the purpose of borrowing money upon the credit of the United States. Any other course, if not altogether impracticable, seemed at least to be unwise. The supply of money at home was too limited for the pressing needs of the government, either with respect to amount or time. Even had the home market been able to furnish the funds, the drain upon its cash for remittance to France would have been ruinous. Moreover, the money of foreigners would have been brought over here to be subscribed to a domestic loan, or to be invested in the stock. This would have induced a higher rate of interest, and by this means the specie of the country, which did not at the time exceed five million dollars, would have been carried away all the faster.

Eight loans were obtained in Holland, amounting in all to 23,500,000 florins, which, at forty cents per florin (the treasury rate of exchange), gave the sum of $9,400,000. The first of these loans was effected on February 1, 1790, and the final one on the 10th of April, 1794. The highest rate of interest, counting in extra charges along with the nominal interest, was a fraction more than five and a half per cent.; while the lowest actual interest was a fraction less than four and a half per cent. These conditions were quite as favorable as granted at the time to any borrowing power. The proceeds of the loans here spoken of were applied to paying the arrears of interest on the foreign debt, together with any installments of the principal then due; and also in providing for such other engagements and contracts respecting it as might avail to the public benefit.

Before, however, these financial dispositions were fully matured and settled more than a year had been suffered to elapse; so that on the 4th of August, 1790, the time when the laws were enacted for carrying them out, the arrears of principal and interest had largely increased. Happily, matters in this regard were being accelerated in the interim by the sagacious action of Mr. William Short, the financial agent of the United States in Europe. Foreseeing the wants of the government, that gentleman had, in the month of February, entered into a provisional agreement for a loan of three millions of florins in Amsterdam. This loan was accepted on account of the government on the 25th of August following, and out of it a first payment was made to France early in December. Other payments succeeded each other at short intervals, so that by September, 1792, accounts were adjusted between the two countries. At that time, too, the policy began to be adopted of paying the installments in advance, as such a course, it was believed, would tend to revive the friendly feelings of France, already weakened by previous breaches of faith. But, from want of confidence in the stability of that government, this policy was soon abandoned. The regular payments continued to be made promptly up to the 31st of December, 1795. The balance of the debt, remaining unpaid on the 1st of January, 1796, was, because of an increase of interest, now exchanged for domestic securities, created for the purpose, at the rate of 18.15 cents per livre, the par value of the precious metals as agreed upon between the two countries.

Under this arrangement, certificates of domestic debt were issued by the United States, in favor of an agent duly authorized by the committee of public safety of the national convention, to the amount of $2,024,900; $1,848,900 of this sum bore interest at five and a half per cent., and the remaining $176,000 four and a half per cent. In this final settlement was also included a loan of one million livres from the farmers-general, obtained in the year 1777. Thus was closed the account with the republic of France. The French debt, by means of re-loans, had now been transferred to Amsterdam and the United States.

Out of the proceeds of the new Dutch loans was likewise discharged the small debt due to Spain, as also the claims for pay and service of the foreign officers who had enlisted in the army during the late war, amounting to $186,988.23. The Spanish debt originated in this wise: In the year 1780, Congress, then under the pressure of immediate necessity, had sold bills of exchange on the American minister at Madrid to the amount of five hundred thousand dollars. It was hoped that these bills, which were at long dates, would be met by a loan from Spain. On their presentation for payment, however, the Spanish court refused to advance the money; and only after repeated solicitation was that government finally persuaded to grant a loan of $174,011, to be payable within three years, at five per cent. interest. This debt was paid in August, 1793, at which time it had amounted, with arrears of interest, to something more than $268,000.

The management of the domestic debt gave rise to more serious difficulties than the foreign debt. On the demise of the late government this debt amounted to $42,414,085.94. Out of this total $27,383,917. 74 were represented by certificates which had been issued on account of the principal of the debt; $13, 030,168.20, in indents, went to sum up the arrears of interest as computed to December 31, 1790; and two million dollars was the estimate formed of the unliquidated portion, consisting chiefly of continental bills of credit. The capital of the debt was in the nature of an annuity at six percent. per annum, redeemable at the pleasure of the government by the payment of the principal. As to the arrears of interest, which bore so large a proportion to the principal of the debt, any immediate payment was not at all practicable. While the very nature of these claims made them of necessity a subject for construction, yet they were entitled to the same consideration as was given to the principal.

The ratification of the new constitution by a number of the States sufficient to secure an organized government exerted a timely and restorative influence upon the public credit. The belief became general that now some effective provision would be made for the payment of the domestic debt. That it was just and valid had never been questioned. It was designated “ the price of liberty; ” and the good faith and honor of the country had been repeatedly and solemnly pledged for its payment. The late government had made, it is true, earnest and laudable efforts towards fulfilling its obligations, but these efforts were defeated by the more urgent necessities of the war, as well as by its own inexperience in finance, not to speak of the embarrassments of a defective constitution during the last seven years of its existence. Now that the new government had competent powers to command the resources of the whole country, the confidence of creditors began to revive. And this confidence that some action would be taken in their behalf received new strength and sanction on the adoption by the house of representatives, at the close of the first session of Congress in September, 1789, of a resolution declaring that they considered an adequate provision for the support of the public credit to be a matter of high importance to the national honor and prosperity. A rapid increase took place in the market value of the public securities. They had been selling for no more than fifteen and twenty cents upon their nominal value. But from January, 1789, to November of the same year, they rose thirty-three and a third per cent.; and by the following January they had risen fifty per cent. more.

On the 4th of August, 1790, was passed an act known as the funding act. This was a plan for remodeling the domestic debt, and it grew out of the absolute necessity of bringing the government’s liabilities within reach of its probable income. Were the government, with its current expenses, — always liable to increase from contingent demands, — to attempt to pay the interest of the entire mass of the public debt on the basis contracted for, it would have to control a revenue of not less than five millions of dollars annually. To undertake to secure this sum by means of taxation would, it was apprehended, put a very great strain on the nascent capacity of the country, as its ability to bear taxation was as yet practically untried. In lieu, therefore, of the original basis contracted for, a provision for the debt was made under the funding act on a basis calculated at four per cent. The measure was an appeal to the intelligence of the creditors, and to their interest as well, in favor of an arrangement which was considered to be based upon a real and fair equivalent. This reorganization of the old debt made it easier to be provided for, while at the same time it offered unquestionable security for the strict fulfillment of the new engagements.

A loan was now opened for the full amount of the domestic debt, the subscriptions thereto being made payable in the certificates that had been previously issued for it. For every sum subscribed in the principal of the debt two certificates were issued: one of them for an amount equal to two thirds of the subscription, bearing interest (payable quarterly) at the rate of six per cent. per annum from the 1st of January, 1791; the other for the remaining third of the sum, bearing the same interest after the year 1800. The debt in this new shape was subject, upon the accruing of the interest, to redemption in such payments as were not to exceed in a single year, on account of both principal and interest, the proportion of eight dollars upon a hundred dollars. The arrears of interest, computed to the last day of December, 1790, were fundable, dollar for dollar, into a stock redeemable at the pleasure of the government, and bore interest at three per cent. per annum, payable quarterly from the 1st of January, 1791.

Lest it might be imputed that this new measure acted upon the necessities of the creditors, and so carried with it an appearance of coercing them, the change in the form of the debt was left to their own choice. To this end, a solemn legislative declaration was made in protection of the rights of any creditors who did not think proper to subscribe to the new loan, and which stated that those rights should in no wise be altered, abridged, or impaired, and that their contracts were to remain in full force and validity. An appropriation was made for paying them an interest on their respective claims equal to the interest payable to the subscribing creditors. The sole condition attached to their payment was the return of the old certificates in exchange for new ones of like tenor, or their registration. This was necessary as a protection against fraud, and also as a help towards ascertaining as far as possible the extent of the public debt. The option of separating the arrears of interest from the principal and funding them at three per cent. was also given the creditors. But it was well understood that no more was to be done for the non-subscribers than was positively due to good faith.

Under the new form now assumed by the public debt the government relinquished the right of redeeming it at pleasure, which it could previously use to its advantage whenever there was a fall in the market-rate of interest. This surrender served to give to the debt a more fixed character. Again, instead of the interest being paid at the end of the year and only at the treasury, it was now to be paid in quarterly payments and at thirteen different places, which made it equivalent to 6.15 per cent. per annum in lieu of the stipulated rate of six per cent. Furthermore, by the original contract only an annual provision for the interest was required, whereas the funding act appropriated and pledged funds for both the interest and the principal, and this appropriation was made coextensive with the duration of the debt.

Considerable intrinsic value now accrued to the public debt in its new form from these stipulations. Nor is this statement negatived by the fact of the reduction of the interest from six per cent. to four per cent., inasmuch as it was made on an estimate of the resources of the country below the value of their subsequent growth and expansion. And it is this growth in the national finances which might hinder the measure, without adverting to this fact, from being appreciated in our day at its full value. The very change in the mode of appropriation formed of itself a valuable consideration; and this was evidenced at the time by the opposition of a strong party to the funding of the debt upon terms so advantageous to the creditors as those offered. This party contended that a discrimination should be made between the possessors of the certificates by purchase and the original holders, as the latter, under the pressure of need, had had to sell their certificates at a very great discount. The permanent had this advantage over the annual provision, namely, that once it was made it was absolutely safe, at least until all the three departments of the government should concur in revoking the solemn pledge given to the creditors. The annual provision, on the other hand, was always liable to be defeated by the prevailing passions, prejudices, or intrigues of a majority of but a single branch of the government. Some of the creditors were at first for insisting on better terms, and in a memorial to Congress entered their protest against the commutation as a breach of faith, particularly in view of the favor shown to the foreign creditors. Nevertheless, seeing on the whole that there was now secured to them a permanent and reliable settlement of their claims, all agreed to accept the modification proposed.

The books for receiving subscriptions were opened in all the States on the 1st of October, 1790, and were closed on the last day of the year 1797. During this interval nearly the whole of the old debt was subscribed to the new loan; there were a few, however, who still held back from funding their certificates, although they had registered them. All evidences of debt presented after the loan should be closed, and previous to the 12th of June, 1799, were to be paid in specie at their nominal value if registered, and at their market value if not registered. If any of them failed to be presented within this defined period, they became, by the fact, forever barred from settlement or allowance. The total amount of domestic debt that was funded was $41,963,561.98; $19,622,505.52 of this amount were in six per cent. stock; $9,416,382.92 in deferred stock; and $12,924,673.54 in three per cent. stock. The difference between the amount actually funded and the amount at first computed to be outstanding was attributable not so much to the act of limitation as to the loss or casual destruction of certificates throughout a period of more than twenty years. To this chief cause may be added the errors made in the estimates themselves, as for instance in the old emission bills, which, while computed at forty for one, were provided for at one hundred for one. Loan certificates, also, which were thought to have been already applied to the public service were returned to the treasury and canceled.

An important feature in the general plan for reorganizing the public debt was the assumption by the government of the debts incurred by the States in support of the war, and which in their nature and of right were properly a charge against the United States. The Congress which assembled at the commencement of the war of independence, possessing no defined powers of government, had no right to tax the States. However, when an appeal was made to them, the States furnished money and supplies according to their ability, considering these contributions as loans or advances for the common weal. By the adoption of the articles of confederation in the year 1781, no practical change was made in the mode of carrying on the war. The public contracts still continued to be turned over to the several States for settlement, a course which was not only a relief but a necessity to a government with an empty treasury. The main obligations thus undertaken by the States were that they should settle the arrears of pay of their respective lines of the army, as well as the claims of their own citizens, many of whom already held the certificates of the commissioners or other officers of the United States for supplies furnished or services rendered. Now these obligations the States either paid in their own bills of credit, or substituted their own State certificates for the certificates of the United States. Such creditors therefore not only had never been asked to consent to this transfer of their claims from the United States, but had besides received no actual payment, but only promises of payment, which remained still unredeemed. Here arose a conflict between justice and generosity. Each State from the first was bound for its just proportion of the expenses of the war; anything advanced in excess of this of course gave the State a claim to remuneration. Until, however, the extent of these latter demands had been ascertained, the United States were not strictly obligated to assume their indebtedness. But on the other hand it would have been impolitic, and even invidious, to make a discrimination between equally meritorious public creditors, by paying one class and leaving the other to look for payment to the States, which were already overburdened with debts.

The debts of all the States taken together were found to amount to about $21,500,000. For the full sum a loan was opened at the same time and the same places as already prescribed for the domestic debt; and to each State was assigned a quota of it about equal to its estimated and still unpaid war debt. The subscriptions were paid indiscriminately in the certificates of the principal and of the interest (this latter computed to the 31st of December, 1791) of the debts of the respective States, issued prior to January, 1790, for services or supplies furnished for the prosecution of the late war. Each person subscribing received three certificates: one for a sum equal to four ninths of the subscribed sum, with interest at six per cent. per annum from the 1st of January, 1792; another for two ninths of the subscribed sum, to bear interest after the year 1800, at six per cent.; and the third certificate for the remaining three ninths, bearing an interest of three per cent. from the 1st of January, 1792. The interest on these several certificates was payable in the same manner, and the principal was made subject to a like mode of redemption, as the correspondent stock created by the loan funding the domestic debt.

The subscriptions to the funded assumed debt were closed on the 1st of March, 1793. Out of the total amount which had been assigned to the States only $18,271,814.74 had been subscribed. This difference is chiefly accounted for by the fact that the sums assumed for some of the States were in excess of the actual amount of their outstanding debts. In some instances, too, the debt was of such a kind as to preclude its being accepted; in the case, for example, of certificates issued after the 1 st of January, 1790. A number of persons, besides, not noting the limitation of time for receiving subscriptions, or from entire ignorance of it, lost thereby the opportunity of subscribing.

The debts of the States did not, however, furnish any criterion of their relative contributions to the war. Some of them, escaping more than others the ravages of actual warfare, had therefore been able, by means of current taxation and their ample resources, to meet their expenses and reduce their debt; while those which had suffered, and were therefore forced to make all the heavier drafts upon their credit, found themselves exhausted when the war ceased, and ill prepared to face their liabilities. These grave inequalities in their financial condition, the result of a random distribution of the burdens of the war, it was now necessary to correct; and accordingly the assumption of the state debts was followed by the appointment of a board of three commissioners for the settlement of the accounts between the United States and the individual States.

Under the arrangement effected by this commission, the States were charged with all advances made to them by the United States, including the amount of assumed debt, with interest computed to the last day of the year 1789. The bills of credit, of which the advances principally consisted, were liquidated according to an established scale on a specie value at the date of each of the advances. On the other hand, the States were credited with their individual expenditures, whether of moneys paid or supplies furnished to the United States. This total of credit was liquidated to a specie value also, with interest to the last day of the year 1789. The expenditures on the part of the States having been found to exceed the advances from the United States by over seventy-seven and a half millions of dollars, an apportionment of this excess was made among the States according to the rule for apportioning representatives and direct taxes, as prescribed by the constitution of the United States. In order to insure perfect equalization it was necessary that the newly apportioned sum together with the advances should exactly correspond to the expenditure of each State. This was the standard of adjustment. In every State in which the expenditures fell short of this amount, a balance equal to the difference became due to the United States; and where any of them exceeded it, the balance was in that case due the State from the United States.

The debtor States were New York, Pennsylvania, Delaware, Maryland, and North Carolina. The creditor States, New Hampshire, Massachusetts, Rhode Island, South Carolina, and Georgia.

The balances due to the creditor States amounted to $3,517,584, and were funded by the United States in accordance with the law providing for the settlement of accounts. These balances stood on the same terms as the other part of the domestic debt, except that the stock was not transferable. The purpose of this restriction was to keep as much of the debt as possible out of the hands of foreigners, who were already holders of a large portion of it.

But it was soon found necessary to suspend it, so as to enable the States to pay their remaining creditors. The balances proper were funded in six per cent. stock, two thirds of the amount to bear interest at once, the other third only after the year 1800. Each State also received interest upon its balance at the rate of four per cent. per annum, dating from the last day of December, 1789, to the last day of the same month, 1794. And this interest, which amounted to $703,516.80, was funded in three per cent. stock. The annual interest on the whole, except as to the deferred stock, began to accrue on the 1st of January, 1795.

The sum total of debt undertaken in behalf of the States amounted to $22,492,915.54. By the assumption proper the public debt of the country at large was not augmented. This measure only transferred a portion of it, which was thereby lifted off the States in their separate capacity and placed upon them in their national or united capacity. In this shape the general government was able to manage and provide for it, and it could do it more efficiently than would have been possible under the conflicting systems and less ample resources of the States. For it must be remembered that the States had now vested in the federal government a concurrent and superior power of taxation; and, moreover, that in giving up their right to lay duties on imports and exports they had parted with their most productive source of revenue. In a word, the assumption was a measure devised for fixing the responsibility for the payment of all the debts arising out of the Revolution upon the national government, where it properly belonged.

The case was different with the funded balances. Here there was an actual increase of debt. The United States in funding the balances of the creditor States acted only in behalf of and as guarantees for the debtor States, from which their payment was really due. But the United States have never succeeded in collecting the balances due from the debtor States, which would, as was originally intended, have offset the newly created debt. These States were given the option of settling their accounts either in money or in public stocks, or of expending the sums due upon the fortifications belonging to the United States. This invitation was made to them in the year 1799, at the time of a threatened outbreak with France. The State of New York partially complied with it. With this single and unimportant exception nothing has ever been recovered upon the balances of the debtor States.

The funding of the public debt on the terms already mentioned enabled the government to introduce system into the finances from the very beginning. The postponement to the 1st of January, 1791, of the annual payment of interest (all accruing to that date being converted into new capital) afforded an opportunity of testing the unknown resources of the country in advance of the necessity of a large revenue. In other respects also this delay was opportune, for the old government, not possessing the right to raise direct revenue, had no fiscal service. This branch therefore needed to be organized from its foundation. Officers were to be appointed all over the country, buildings provided for the transaction of business, and all other arrangements entered into incident to the collection of revenue.

To aid in administering the finances, a national bank, under the name of the Bank of the United States, was also chartered, with a capital of ten million dollars. It was granted the privilege of issuing notes, to be receivable in all payments to the United States; and the government likewise subscribed to two million dollars of the stock, paying for it by means of a loan of the bank of the same amount, which was reimbursable in ten years by equal annual installments. The interest on this loan, at six per cent. per annum, was derived from the dividends on the stock. As these averaged all through the duration of the bank’s charter 8 13-36 per cent., a handsome profit was annually coming to the government.

On the 4th of July, 1789, the temporary tariff was adopted to meet the immediate wants of the government. It was based on the one which, as a federal tax, had been proposed to the States by the Continental Congress, and agreed to by all but two. The initiatory expenses of the government being mainly on account of the current service, the duties for the seventeen months this tariff was in force yielded a surplus over appropriations of $1,371,430. A large portion of this sum was subsequently invested in purchases of the public debt.

From the 1st of January, 1791, the annual income needed by the government for all demands was $2,839,163, distributed as follows: for the annual interest on the foreign debt, $542,600; for the four per cent. interest on the domestic debt, $1,896,563; and for current expenses, $600,000. In order to provide this sum an average increase of two and a half per cent. was placed on existing duties. Moreover, on the 1st of January, 1792, the date of the interest on the funded assumed debt becoming due, duties were laid on spirits distilled at home, while a higher rate was then too put on the foreign article. These additional duties gave an annual product of $800,000, and served to raise the national income to the level of all probable demands. All taxes and duties now established were to continue permanent as long as the debt lasted. Moreover, with the single exception of an annual reservation for the government of $600,000, their first proceeds were pledged and appropriated to paying the annual interest of the debt. Congress, however, reserved the right of substituting for these duties others of equal value.

But no sooner was this equilibrium in the public accounts secured than it was disturbed by unforeseen causes, demanding a still larger revenue. An expensive war with the Indians of the Northwest was almost immediately thrust upon the government. The Whisky Insurrection in Pennsylvania, growing out of resistance to the excise law, broke out in 1794; and in the same year, our relations with England becoming critical, the harbors were fortified, arsenals and armories established, supplies of arms and stores purchased, and new ships built for the navy; finally, a treaty at heavy cost had to be purchased of Algiers. To meet these unexpected demands upon the treasury, fresh taxation had to be resorted to.

Apart from a deficit of $526,000, to provide for which some additional duties were put upon imported articles in May, 1792, the year 1794 was the one of greatest embarrassment during this period. The appropriations in that year exceeded those of any former year by upwards of two and a half millions of dollars; while the revenue, by reason of the interruptions to commerce, was estimated to fall off from the receipts of previous years $1,300,000. The tariff was again increased, and internal duties were laid upon carriages, refined sugar, snuff, licenses for selling wines and foreign liquors, and property sold at auction. Besides this, a prospective deficiency of cash in the treasury by the 1st of April made it necessary to provide immediately a million and a half of dollars. This sum was raised by a loan on the new internal duties, pledged in anticipation. By the close of the year signs of relief were apparent. In 1795 the Indians made peace, and England, too, modified her foreign policy in regard to neutral commerce.

The public expenditures were at once reduced, and soon there was a wellgrounded assurance, on the basis of the existing revenues, of a surplus of more than a million of dollars in the year 1795, and in succeeding years also. The annual revenue was placed at $6,552,300.74; the current annual expenditure at $5,481,843.90; giving an excess of income of $1,070,456.84. Making allowance for unforeseen demands and for deficiencies, the latter sum was deemed a sufficient guarantee for commencing a regular and immediate reduction of the public debt. With this view the temporary tariff duties which had been imposed under the pressure of recent complications, foreign and domestic, were retained as an addition to the permanent revenue; and the five internal duties, yielding a sum of $380,000, were also continued in force until the 1st of March, 1801, the year in which the deferred stock was payable. At that time Congress could decide from the actual condition of things whether those duties or any others would be required.

This was not, however, the earliest provision for reducing the public debt. There had prevailed from the very outset a paramount determination of lessening its burden as soon as practicable. By the terms of the funding act the proceeds of the public lands in the Western territory were appropriated solely in redemption of the debt. The fund from this source was set down at between three and four millions of dollars, the estimated price of the lands being twenty cents per acre. Again, after ample provision, according to the act, had been made for funding the debt, the surplus revenue to the end of the year 1790 was set apart for the purchase of any public stocks which were selling below their par value in the market.

These purchases were doubly beneficial at the time; for, besides sinking a capital often more than fifty per cent. greater than the sum expended, they accelerated the rise of stocks that were in great demand abroad, thus producing a clear profit to the nation proportioned to the enhanced price foreigners were obliged to pay for their purchases. A loan of two millions of dollars was even authorized for the same purpose, in order to place in the hands of the government sufficient means to influence the market whenever it was desirable. In the first quarter of the year 1791, the six per cents sold at eighty-two cents on the dollar; the three per cents and the deferred stock at forty-two cents. As early as the 1st of August, the six per cents had risen to par value, and the other two stocks to sixty cents; and in the month of January, 1792, the former commanded a premium of twenty-five per cent., and the two latter as much as seventy-five cents on the dollar. But they all subsequently declined, owing to the troubled state of public affairs.

The nominal amount of all the stocks purchased on account of the two funds was $1,994,801.43, for which $1,392,672.54 in specie were paid. Of this sum $957,770.65 were credited to the surplus revenue, and the balance to the loan.

A permanent fund for the extinction of the public debt was first established by the act of the 8th of May, 1792. This fund had a twofold endowment: first, it was endowed with the annual interest on the public debt, that is, on the portion previously purchased, redeemed, or paid into the treasury for any debt or demand of the United States, and also on any portion that might thereafter be purchased, redeemed, or so paid; and secondly, it was endowed with the surplus remaining of the sums appropriated to pay the interest on the public debt. The annual proceeds of this fund, which increased as the outstanding stock decreased, were appropriated and inviolably pledged to the purchase, in as equal proportion as possible, of the several species of stocks constituting the public debt, at their market price respectively, if it did not exceed the par or true value; and this purchasing was to continue until the annual income of the fund should be equal to two per cent. of the whole amount of the outstanding funded stock bearing a present interest of six per cent. The fund was thenceforth to be applied to the redemption of that portion of the debt (according to the reserved right of the government), until the whole of it was redeemed. This redemption being accomplished, purchases were to be resumed out of the fund of the remaining unredeemed debt.

The fund was, however, inadequate to any very serious or immediate reduction of the debt. The annual interest account, its only certain resource, was of slow growth, and amounted at that time to less than forty thousand dollars; whereas a sum equal to two per cent. on the whole amount of the six per cent. stock subject to be created was upwards of six hundred thousand dollars.

The plan of redemption devised by the act of the 8th of May, 1792, was now enlarged and perfected by the act of the 3d of March, 1795, in which the name of sinking fund was first adopted. The resources of the sinking fund were now enlarged to such an extent out of the permanent revenues, out of the proceeds of former provisions, and from the bank dividends in excess of the annual interest on the unpaid installments of the subscription loan as to enable the government, on the strength of this increase, to commence on the 1st of January, 1796, the annual reimbursement of the six per cent. stock; to pay as they became due the annual installments themselves of the subscription loan of the National Bank; and upon the final settlement of this last-mentioned debt to begin on the 1st of January, 1802, the regular reimbursement of the deferred stock.

The absolute appropriation of more liberal funds was deemed imprudent and unsafe in the existing state of the revenue; but some auxiliary resources of a contingent character were made available to the sinking fund. These consisted of the net proceeds of the sales of the public lands, of all moneys received into the treasury on account of debts which originated under the old government, and of all surpluses arising from excess of revenue or from unexpended appropriations. These accessions it was hoped would amply secure a more speedy redemption of the debt than had been expressly stipulated for. No further provision in the sinking fund was made applicable to the purchase or redemption of any other component part of the public debt until the six per cent. and the deferred stock had been discharged. Upon such discharge, all the moneys of the fund were to be used in the purchase or redemption of the remaining unpaid debt, whether funded or unfunded, foreign or domestic. If, however, prior to the discharge of the six per cent. and the deferred stocks, the resources of the sinking fund were found adequate to paying the sums applied annually to the reimbursement of these two stocks, and yielding a surplus besides, then this surplus might meanwhile be employed in reducing the other parts of the debt. Nor could the moneys of the sinking fund be diverted to any other purpose than the paying of the public debt until the whole of it was paid, except when its only remaining outstanding portion was the three per cent. stock; in which event Congress reserved the right of using the moneys of the fund thereto pledged for any purpose it might see fit.

The president of the senate, the chiefjustice, the secretary of the treasury, the secretary of state, and the attorney-general, for the time being, were appointed the commissioners of the sinking fund. All reimbursements of the capital of the debt were placed under their superintendence, and all moneys accruing to the fund were so vested in them as to acquire the nature and quality of a proprietary trust, incapable of being diverted, except by a violation of the principles and sanctions of private property, to any other object than the reduction of the public debt.

In order that this system of redemption might not be dependent on extraneous provisions, but have within itself full means of complete execution, the commissioners were empowered and required to anticipate the revenue already appropriated, and make loans whenever the prompt payment of the annual interest rendered such a course necessary. These sums were not to exceed in any one year one million of dollars, and were to be payable within a year from the date of each loan. Furthermore, if in their judgment there was reason to apprehend that all the probable receipts into the treasury for any year would fall short of the amount needed for the annual current expenditures of the government, as well as for the payments they had in charge, they were in such contingencies also authorized, and even enjoined, to borrow, either by direct loan or by the sale of certificates of stock, any sums requisite for paying installments falling due of the debt existing on the 3d of March, 1795. For the payment of the interest on these projected loans there were pledged and appropriated, first, the interest on the sums reimbursed from their proceeds; and secondly, such amount of the permanent revenue as might be necessary to make up any deficiency. The interest on the six per cent. and the deferred stocks was, however, not included in this provision, as that interest was already set apart to form accumulations for paying the successive installments of the principal of these stocks; for these installments increased each year in the ratio of the interest liberated by each payment.

The great object of the law of the 3d of March, 1795, seems to have been to make efficient provision for the gradual reimbursement of the six per cent. and deferred stocks, and so pave the way for a future though distant payment of the remainder of the debt. As the successive reimbursement of these two stocks became thenceforth an irrevocable stipulation with the creditors, they were virtually converted from an annuity of six per cent. per annum for an indefinite period into an annuity of eight per cent. for a period of somewhat less than twenty-four years from the first payment under the new system. The first payment was made in one undivided sum, but after that no distinction was observed in the payments between the interest account and that of the principal. Dividends at the rate of one and one half per cent. on the original capital were declared on the last day of March, June, and September, and of three and one half per cent. on the last day of December. This arrangement was adopted because of its easy execution, and was most favorable to the equal and regular circulation of the revenue.

The foreign debt already rested in contracts which provided for its gradual reimbursement at stipulated periods. The Dutch debt made up the largest part of it. This debt amounted to $12,200,000, and for its extinguishment during the next fifteen years required annual payments ranging from $80,000 to $2,220,000, and averaging for each of these years $813,333.33, not including premiums, gratifications, commissions, and expenses of remittance; for all of these debts no provision was practically made except by borrowing money. However, as an expedient for postponing these payments as long as the state of the finances required it, a proposal was submitted to the foreign creditors to convert their debts into a domestic stock, reimbursable at the pleasure of the government. An increase of interest of one half per cent. per annum in addition to the rate already secured by the original contracts was offered them in indemnification for incidental charges; such as the expense and hazard of employing agents in the United States, the chances of exchange, payments of insurance and commissions, and in general for equalizing the facilities attending the payment of interest at home. The French government, we have seen, subscribed the remaining portion of its debt to this domestic loan.

The act of the 3d of March, 1795, is an event of importance in the financial history of the country. It was the consummation of what remained unfinished in our system of public credit, in that it publicly recognized and ingrafted on that system three essential principles, the regular operation of which can alone prevent a progressive accumulation of debt: first of all it established distinctive revenues for the payment of the interest of the public debt as well as for the reimbursement of the principal within a determinate period; secondly, it directed imperatively their application to the debt alone; and thirdly, it pledged the faith of the government that the appointed revenues should continue to be levied and collected and appropriated to these objects until the whole debt should be redeemed.

Under the operation of this sinking fund the payment of the public debt was designed and anticipated to take place by the year 1826, or within a period of about thirty years. It did not respond to this aim and anticipation. Indeed, the practical working of a scheme so complex and intricate would have been in the long run problematical, even had events suffered it to take its regular and intended course. Be that as it may, the failure of some of its provisions, in concurrence with fresh troubles both at home and abroad, besides aggravating some latent defects, overstrained the weak points of a system which, under more favorable circumstances, might have been atoned for, if not wholly overcome, by the elastic resources of the country.

John Watts Kearney.