Finances Under the Articles of Confederation

How bad were government finances under the Articles of Confederation?  Pretty bad, although not as bad as histories of the period sometimes imply.

The federal government, under the Articles of Confederation, had no power to tax.  The government’s primary means of raising revenue was to ask the states for money.  These requests were called requisitions.  The following table shows the dates during the Confederation period when Congress enacted requisitions, the years that they were due, and the total amount of money requested in thousands of dollars.   Specie requisitions were payable in gold or silver.  Indent requisitions were devised to allow states to pay interest on government bonds, since the federal government could not do so.  The federal government would print the indents, states would issue them as interest to their bond holders, and states would make them receivable for state taxes.  When the state returned the indents to the federal Treasury, the Treasury would count them toward the indent requisition—provided the state was also current on its specie payments.

To what extent did the states comply?  Alexander Hamilton, after he took over the Treasury, published the following table of money received on requisitions through the Confederation period:

If we do the math, this presents a dismal picture.  States fulfilled only 23% of their specie requisitions and 28% of their indent requisitions.

And yet, this is not the whole story.  Congress later admitted that the requisition for 1782 had been grossly excessive, both from the standpoint of need and the ability of states to pay.  The British virtually stopped fighting the Revolutionary War after the Battle of Yorktown (September 1781), and military expenditures fell.  Also, the Dutch came through with generous loans beginning in 1782.  In 1784, Congress conceded that $4.16 million would have sufficed for the three years 1782-3-4, versus $13.87 million in requisitions.

If we reduce the total requisition by this $9.71 million overage, we find the states meeting 48% of their specie quota and 32% of their indent quota—respectable percentages under the circumstances.  States, it must be emphasized, faced fiscal problems of their own with heavy debt loads and tax bases ravaged by war.

There were some other sources of federal government revenue.  Hamilton cited a total of $856,000 from 1781 through 1783.  He did not give details.  We know that some of the money came from the government share of prizes captured by the Navy, and some from the store of arms and supplies captured from the British after Yorktown.  The figure may also include dividends on Bank of North America stock (see The Bank of North America).

After 1783, there was no more war booty, but Hamilton still cited $339,000 in revenue from 1784 through 1789—an average of $56,000 per year.  This probably includes some sales of army and navy surplus, interest on government accounts, settlements with merchants who had over-charged the government, and a small annual surplus from the Post Office.

Finally, in 1787, the government began to sell land (see Creating the Public Domain).  This brought in $117,000 in specie in 1788-89 and would have brought in vastly greater sums in later years.)

How much did the government spend?  While the war raged, spending was unpredictable and uncontrollable.  With the coming of peace, Congress felt able, in 1784, to present a meaningful budget for the first time.  The budgets for the remainder of the Confederation period, for the ordinary operating expenses of government, were laid out as follows (thousands of dollars):

The “civil departments” were the Board of Treasury and the Department of Foreign Affairs (see Creating the Executive Departments).  The "Marine" budget went to the Navy, which disbanded in 1785.  The “Indian affairs” budget represented embassies to Indian tribes and associated gifts, and in 1788, funds for the purchase of Indian lands (see Indian Policy).  The “Geographer” was surveying the Northwest Territory (see Creating the Public Domain).  Under "Invalid pensions", Congress reimbursed the states for payments to disabled Revolutionary War veterans.

Then, as now, the budget was an estimate, and the amounts actually spent could be higher or lower.  The amounts “actually spent”, shown above, are aggregates compiled by Hamilton in 1790.

Comparing the revenue and expense figures forces an astonishing conclusion.  The amounts remitted by the states (partial as they were), plus miscellaneous revenue and (growing) revenue from land sales, would have been just about sufficient to fund the day to day operations of government.  If the government had been born in peace—say, by Great Britain granting independence in 1775—the revenue provisions of the Articles of Confederation would have been adequate.

But of course, the government was not born in peace.  The colonies had to fight a ruinously expensive eight-year war to achieve independence, and the Confederation government inherited the associated debt.  The revolutionary government sold bonds, it printed interest-bearing paper money, it negotiated loans from Europe, it impressed supplies from its own citizens in return for paper warrants, and it issued certificates for back pay to soldiers whom it couldn’t possibly pay in coin.

By the beginning of the Confederation period (1781), no one knew how much money the government owed.  The Confederation government couldn’t repay that debt, nor even pay interest on it, but at least it quantified it.  Under an act of February 20, 1782, the Superintendent of Finance appointed commissioners who fanned out across the 13 states, reviewing every receipt presented by a merchant for supplying the army, and every tale of farmers who had suffered seized horses and mules.  The commissioners eventually issued $3.7 million in final settlement certificates on claims they deemed to be valid.  In addition, the army issued $11 million in certificates to soldiers for back pay.

This “liquidation” of the previously chaotic wartime debt ranks as one of the foremost accomplishments of the Confederation government, and as an impressive attempt at fairness toward a citizenry which, in other times and places, would have suffered the ravages of war without compensation.  For the time being, unfortunately, the government could offer nothing more than paper.  Creditors who needed hard money were forced to sell their certificates to speculators for a fraction of their face value.  But, it was better than nothing.

The Imposts of 1781 and 1783

Was there any prospect that the government could pay interest on all of this debt, and repay or at least roll over the principal?  The Articles of Confederation had been drafted in 1776 and 1777, when the debt was relatively small.  They granted the federal government no power to tax.  Now, the debt was large.  More revenue was imperative. 

As the Articles approached ratification, Congress (February 3, 1781) therefore sought the power to tax.  It passed a resolution that “recommended to the states” that they “vest a power in Congress” to levy a 5% tariff on imports.  All 13 states would need to vest this power in Congress for it to take effect.  The resolution left unspoken who would collect the tariff, but the money would go directly to Congress, to pay interest on the national debt.  The tariff would last unless and until the debt was retired.

This is often described as a proposal for an amendment to the Articles of Confederation.  It was not.  It was a stand-alone resolution.  The delegates may not have wanted to reopen the text of the Articles just as they were finally on the point of being ratified.  Nevertheless, the tariff (or “impost”, as it was usually called) was clearly a matter of constitutional import.  Had it passed, the United States would have become more like Great Britain, with a “constitution” made up of a patchwork of separate documents and laws, rather than a single text.

It did not pass.  Eleven states approved it within a year, although some attached conditions and stipulations.  Georgia, for unclear reasons, never voted on the impost.  Rhode Island flatly rejected it.  David Howell, the foremost opponent of the impost, pointed out that Rhode Island had only two percent of the nation’s population but four percent of its commerce, and would thus bear a double share of taxation.  The Rhode Island legislature unanimously agreed.  Then Virginia repealed its consent to the impost, possibly because factions within her legislature disliked Robert Morris.

The impost died.  Arrears of interest continued to accumulate on the national debt.

In 1783, Congress tried again.  This time (April 18), Congress asked for specific dollar duties on coffee, tea, sugar, and liquor, and a 5% tariff on everything else.  Congress bent over backward to satisfy state objections to the earlier impost.  The states were allowed to appoint officers to collect the money, and the tariffs were to last for a maximum of 25 years.  Again, Congress did not attempt to work the grant of power into the text of the Articles, but simply passed a resolution.  The resolution cleared Congress with nine states in favor, one (Rhode Island) opposed, one divided, one under-represented, and one unrepresented.

Thus again, to the legislatures.  Eight states approved within a year, then four more (including Rhode Island) by 1786.  Again, states added troubling stipulations.  It didn’t matter.  This time, New York held out.  New York notionally approved the impost on May 4, 1786, but provided that tariffs would be payable in New York paper money.  This was effectively no approval at all, and Congress said so, but New York refused to reconsider.  The impost of 1783, like its predecessor, died.

Interest on the debt remained unpaid.  Alexander Hamilton, writing in 1790, appraised the national debt at $54 million, of which about $15 million was arrears of interest.  This was not a huge sum in relation to the gross domestic product of the time, estimated (long after the fact, of course) at about $200 million.

Nevertheless, the failure to pay interest was troubling.  In the event of a future crisis, the United States would have no credit.  The need to pay interest was so compelling, in fact, that one might wonder why anybody would have opposed the impost.  The answer is that advocates of state sovereignty wanted the states to pay interest on the debt themselves—at least on that portion owned by their own citizens.  Some states began to do so during the late 1780’s.

A death spiral set in, under which states hesitated to fund the national government because they were forced to pay interest on the national debt to their own citizens.  “(I)t would neither be just nor prudent,” a committee of the Pennsylvania legislature reported in 1786, “to call on the citizens of Pennsylvania for payment of taxes, to discharge the money due to others, while that which is due to themselves is unprovided for.”  Of course, even if each state paid the debt of her own citizens, there would be no one left to pay off the foreign loans.

The Confederation government never solved the problem of the national debt.  It remained for the new government under the Constitution of the United States (COTUS).  In 1792, when the new government was fully up and running, it spent $5.1 million, of which a staggering $3.2 million went to interest on the national debt.

The remaining $1.9 million supported an enlarged army, a salaried Congress, President, and judiciary, and a growing federal bureaucracy.  It represented a four- or five-fold increase over the $400,000 that the Confederation government was spending per year in the 1780’s.

And yet, even so, the Confederation government had created executive departments, improved the Post Office, launched an ambitious land survey, organized the first federal territory, created prize courts, settled state boundary disputes, chartered and funded a national bank, and ordered and quantified the national debt which it was unable to pay off.  Rather than mocking the Confederation government for its weakness, we should be impressed that it did so much with so little.

Sources: Journals of the Continental Congress, Volumes 19 through 34; Alexander Hamilton, First Report on Public Credit, 1790; Charles J. Bullock, The Finances of the United States from 1775 to 1789, 1895; E. James Ferguson, The Power of the Purse: A History of American Public Finance, 1776-1790, 1961; Frank G. Bates, Rhode Island and the Impost of 1781, 1896.

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