Economic History Review, LIV, 4 (2001), pp. 639–656
Forging a nation state: the
Continental Congress and the
financing of the War of American
Independence1
By BEN BAACK
We, therefore, the Representatives of the united States of America, in General
Congress, Assembled, solemnly Publish and Declare . . . that as Free and
Independent States, they have full Power to levy War, conclude Peace,
contract Alliances, establish Commerce, and to do all other Things which
Independent States may of right do.
Declaration of Independence
July 1776 the Continental Congress declared that the former British
were to have all of the political and economic powers associaItedncolonies
with free and independent states. Having done so, however, Congress
was committing itself to undertaking simultaneously two very daunting
tasks. First, a necessary condition for a nation to be independent is not
to be under the military occupation of a foreign power. For the Continental Congress this meant the formidable undertaking of expelling the
powerful, experienced and, during wartime, extraordinarily well financed
British military. In addition, Congress was committing itself to the development of institutional arrangements for government which would provide
for the production of public goods such as defence, administrative
bureaucracies, and judicial systems. Since the provision of public goods
has to be financed in some manner, the process of nation building also
involved the creation of institutional arrangements for public finance such
as the establishment of credit, monetary, and tax systems.
The political outcome of the onset of the War of American Independence was the beginning of a decade-long process of developing an
institutional structure to finance the war. Over time the process involved
redefining the financial powers of the Continental Congress vis-à-vis the
states. Although the waging of war and the creating of governing institutions are national activities usually considered separately by historians,
this article will explore their interrelationship.2 Having taken on the
responsibility for gaining independence, Congress was not initially given
1
The author is grateful to the anonymous referees for their comments on an earlier draft of
this article.
2
There is a small but growing literature which addresses this relationship. See, for example, Bean,
‘War and nation state’; Brewer, Sinews of power; Sargent and Velde, ‘Macroeconomic features’;
Bowen, War and British society. None of these works, however, has examined the American case.
 Economic History Society 2001. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden,
MA 02148, USA.
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the authority by the states to finance the war necessary to achieve this
independence. Rather, the states agreed voluntarily to provide Congress
with the revenue for the war effort. This arrangement established a
divergence between the financial interests of the states and those of
Congress. Since independence was a public good for the states, they had
little incentive voluntarily to contribute funds to Congress. In short, the
arrangement made between the states and Congress to finance the war
institutionalized a free rider problem.
The creation of the American nation state was indeed a complex
development involving the interaction of a wide variety of factors. This
article limits itself to an examination of the evolution of the financial
powers of the national government. The position taken is that the institutional change which occurred can be viewed largely as a matter of
attempts made by Congress to deal with the free rider problem. The
methodology used is drawn from that of the new institutional economics.3
An analysis is made of how the institutional structure of the national
government at the onset of the war influenced the set of possible choices
of war finance measures. The article then investigates the extent to which
the institutional structure of the government was changed in response to
the financial demands of a continuing war. How were these changes
influenced by the decision-making process incorporated in the institutional
structure of the government? And, finally, to what extent did the financial
powers granted to the national government under the constitution reflect
the path of institutional change during the course of the war?
The initial focus is on the period from 1775 to 1781, when the articles
were ratified and the battle of Yorktown was fought. This period is
divided into two phases. The argument is made that Congress at first
tried to circumvent the free rider problem during phase I (1775-7) and
later sought to resolve it during phase II (1778-81). The analysis is then
extended to the postwar period and implications are drawn for the
establishment of the constitution.
I
During phase I the Continental Congress developed a means of revenue
generation which was not a part of the institutional arrangement made
with the states for the financing of the war. This new source of revenue
enabled Congress to avoid the problem of the reluctance of the states to
deliver on their agreement to make voluntary contributions. Accordingly,
Congress was able to circumvent the free rider problem and at the same
time to finance the prosecution of the war against the British. In effect,
during this phase of the war the states got a free ride.
The Continental Congress which convened on 10 May 1775 rapidly
undertook some of the activities associated with a national government.
Reacting to the events in Lexington and Concord, Congress for the first
time passed measures involving national expenditures. In June of that
3
For a recent review of the literature see Williamson, ‘New institutional economics’.
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year it established the Continental army, appointed the first generals of the
army including George Washington as commander-in-chief, established a
variety of army corps, and made arrangements for the purchase of arms
and munitions.4
At that point, Congress found itself in the rather unsettling position
of having assumed national expenditure powers without having any independent source of revenue. In theory, the options for a government in
raising revenue are taxation, borrowing, and seigniorage or printing
money. In June 1775, however, the Continental Congress was confronted
by severe political and economic constraints in the choice of revenue
sources. Quickly implementing a national tax system to meet the immediate expenses of the military would have been very difficult. No matter
what the nature of the taxes had been, all the bureaucratic machinery
necessary for collection and enforcement would have had to be established. This would have required time and resources, neither of which
Congress had.
More importantly, would the colonial assemblies have granted Congress
the power to tax? The experience of 10 years of protest against new
British taxes suggested that they would not. This point was made by
Robert Morris in one of his essays on war finance. ‘America having never
been much taxed for a continued Length of Time . . . and the Contest
being on the very Question of Taxation,’ he observed, ‘the laying of
Imposts unless from the last Necessity would have been Madness.’5
Moreover, without the power of taxation, Congress would in turn have
a difficult time borrowing. The capital market solution would not be a
viable option for a government without a tax base.
The one remaining alternative for Congress was to consider printing
money. A letter was drawn up and sent to all the colonial assemblies
both to inform them that a Continental currency was being considered
and to seek their advice on such an undertaking. After having received
a favourable response from the colonial assemblies, on 22 June 1775
Congress authorized the first issue of currency. For the rest of the year
Congress relied solely upon currency issues for revenue.6
During the autumn of 1775 and the early months of 1776 it became
apparent to the members of Congress that the British government was no
longer interested in attempts at reconciliation. In the royal proclamation of
23 August 1775 the king declared that the American colonies were in a
state of rebellion. In a speech to Parliament on 26 October, the king
4
Burnett, Continental Congress, ch. IV. Furthermore, it ordered the new army to undertake an
invasion of Canada. Historians have offered various reasons as to why this was done. See the
discussion in Higginbotham, War of American Independence, pp. 106-15. At the same time, however,
Congress was still trying to reconcile its differences with the British government. During July it
issued the Olive Branch Petition and the Declaration of Causes of Taking up Arms. Both proclaimed
the great value of, and the intention to restore, the unity between the colonies and Britain. The
petition is reprinted in Hutson, ed., Decent respect, pp. 127-31, and the declaration in Morison, ed.,
Sources, pp. 141-5.
5
Quotation taken from Rakove, Beginnings, p. 305.
6
Congress authorized a second issue in July and a third in November. Dates and values of
currency issues during 1775 are given in Nourse, American State Papers, V, p. 764.
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asserted that the goal of the colonists was independence and that Britain
would bring all of its military power to bear in defeating the Americans.
Then in February Congress received a copy of the Prohibitory Act passed
by Parliament which declared an end to all trade with the colonies and
made all colonial ships subject to capture.7 In effect, the British government was officially proclaiming that this was a war of independence
before the Americans did. Four months passed before Congress
declared independence.8
The declaring of independence did not alter the way in which Congress
financed the war effort. Until then, Congress had depended upon currency
as its sole source of revenue. Although declaring independence meant
eliminating any possibility of reconciliation with the British, it did not
change the fact that the Continental Congress had a revenue system
which seemed to be working.
The British decision to seek a military rather than a political solution
to the rebellion led to a rapid build-up of forces in North America. At
the time of the fighting in Lexington and Concord, the British army in
the American colonies numbered about 7,000. By the end of 1776 it
exceeded 27,000. Less than a year later the total was over 31,000. During
the campaigns of 1776 and 1777 the British army occupied at one time
or another New York City, Newport, Philadelphia, and all of New Jersey.9
In response, Congress increased its war effort by expanding the number
of troops and the supply of money. By the end of 1777 total currency
issues were about two and a half times the amount reached at the time
independence was declared. As long as the Continental dollar held its
real value, then Congress could simply match the quantity of issues with
the resource demands of the war.
This policy was constrained, however, by the institutional arrangement
whereby Congress was not the only entity issuing money. During the
period from 1775 to 1777 each state relied primarily on its own currency
issues for revenue as less than half had passed any tax legislation.10 In
effect, individual states and Congress competed with each other for real
resources through the issuance of currency. The resulting over-supply of
money led to rapid inflation reducing the real value of the Continental
dollar. Congress was therefore in the position of losing control over the
value of the very source of revenue upon which it was relying to prosecute
the war.
Relying upon currency issues as its sole source of revenue exposed
Congress to another problem. As historians have long noted, compared
with other colonial powers Britain was better able to acquire resources
7
These three documents are reprinted in Jensen, ed., Historical documents, pp. 850-3.
For a survey of the political and economic factors considered by Congress prior to declaring
independence see Rakove, Beginnings, chs. IX, X.
9
One of the classic works on the military aspects of the War of American Independence from
the British point of view is Mackesy, War for America. I have used the British troop numbers
reported in its app., pp. 524, 525.
10
For the revenue policies of the individual states during the war see Harlow, ‘Aspects’.
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1.00
Continental dollar:specie ratio
0.83
0.28
0.17
0.03
1775
1776
1777
Year
1778
1779
Figure 1. Average annual specie value of continental dollar, 1775-1779
Note: The period covered is from the initial issue of currency to the year in which the Continental Congress first
resolved to end issues as a source of revenue. Ratio on 22 June 1775 = 1.00
Source: Bullock, ‘Finances’, p. 135
for war as a result of its ‘financial revolution’ of the seventeenth century.11
The British were well aware of the importance of finance in conducting
warfare and knew that if they could undermine the revenue policy of the
Continental Congress the rebellion would collapse. Therefore, early in
the war the British set out to undermine the value of the Continental
dollar by counterfeiting it.12
The vulnerability of dependence upon currency became clear to Congress with the onset of inflation and the depreciation of the Continental
dollar. The specie value of the dollar began to depreciate in mid- to late
1776, and its average specie value fell by over 70 per cent during 1777,
as indicated in figure 1. In the course of that year, a 52 per cent increase
11
For an analysis of the financial revolution in Britain see North and Weingast, ‘Constitutions’.
A quantitative assessment of how Britain financed its colonial wars is offered in Brewer, Sinews
of power.
12
Although the British government did not officially state that it was counterfeiting the Continental
dollar to depreciate its value, the policy was confirmed in a letter written on 30 January 1780 by
the commander-in-chief of the British forces in North America to the British secretary of state, repr.
in Bolles, Financial history, pp. 152-3. The quantity of British counterfeits produced during the war
is not known. For what is known see Scott, ‘New Hampshire counterfeiters’; idem, ‘British counterfeiting press’; idem, ‘Counterfeiting in New York’; Newman, ‘Counterfeit continental currency’; idem,
‘Successful British counterfeiting’.
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in currency issues by Congress had generated an increase of only 19 per
cent in the specie value of revenue.
With its sole source of income at risk, Congress took several steps to
generate alternative sources.13 It managed, for example, to arrange some
grants and loans from France. Since the French government did not
want the British to know they were giving aid to the Americans, the
arrangements were made in secret and the total value was quite small.14
In late 1776 Congress started the process of establishing Continental
Loan Offices in each of the 13 states. Each office was given the authority
to issue loan office certificates which promised repayment plus interest
based on the faith of the United States.15 These efforts produced only
modest results.
While the United States had been unable to achieve independence by
the end of this phase of the war, at least its rebellion had not been
defeated. The Continental Congress had taken on the expenditure powers
of a nation state and fielded a military which had managed to hold its
own against the British. By issuing currency, Congress had been able to
circumvent the free rider problem. As a result, the states were able to
receive the benefits of a national military fighting for their independence
without making any of their promised voluntary financial contributions
to the Continental Congress.
II
During phase II there emerged a war with very different characteristics
from those of phase I. What had been a rebellion of British colonies
turned into an international war. This development can be traced to the
battle of Saratoga in the autumn of 1777. During that year the British
had devised a strategy based on the premise that the heart of the rebellion
was in New England. The plan was simple. The British army would cut
New England off from the rest of the colonies and then the full might
of the British forces would be brought to bear on the isolated American
army. A quick and decisive victory would not only be a major step in
bringing about the end of the rebellion but also ensure that the French
would not intervene. To execute the plan, a 10,000 man army under the
leadership of General Burgoyne was sent from Canada to and down
along the Hudson river to link up with a northward bound army from
New York City. The plan unravelled totally, however, when Burgoyne
13
The onset of inflation also led some states to try new financial policies. For the first time, tax
legislation, as well as wage and price control legislation, was passed in a small number of states:
Rockoff, Drastic measures, ch. 2.
14
Details on how the Americans made these arrangements with the French government are given
in Bolles, Financial history, ch. XVII.
15
In November, Congress also authorized the establishment of a national lottery. There is no
record of how much revenue it generated (if any). Details of the loan office programme can be
found in Bolles, Financial history, ch. XVIII; Robinson, ‘Continental treasury administration’, ch.
VII; Ferguson, Power of the purse, ch. 2.
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was forced to surrender his entire army to the Americans at Saratoga on
17 October. This battle proved to be a major turning point of the war.16
With the defeat of the British at Saratoga, Congress saw an opportunity
to convince the French that the Americans had a reasonable chance of
success in the war. Within a month it approved the Articles of Confederation with the hope that this action, coupled with the victory at Saratoga,
would persuade the French to recognize and assist American independence.17 A letter making this argument was sent along with a copy of
the articles to each of the states urging ratification.18
To the French government Saratoga meant the Americans had by now
generated a military with the necessary, though perhaps not yet sufficient,
capabilities of defeating the British. In addition, with the adoption by
Congress of the Articles of Confederation, the political environment in
the colonies appeared to the French to be increasingly favourable for a
united effort against the British. On 6 February 1778 France signed a
treaty of alliance with the United States.19
For the British government Saratoga meant the collapse of its strategy
to defeat the rebel army in New England and keep France out of the
war. Its first reaction had been a peace proposal to the Americans offering
a variety of concessions but not independence.20 When this was rejected
by Congress the British made the decision to renew the war, this time
focusing on the southern colonies.
III
For the Americans the victory at Saratoga had not brought independence,
but rather a continuation of the war. This was a pivotal point in the
development of the financial powers of the Continental Congress. During
the first phase of the war the states had not made any financial contributions to Congress. This had not been a problem since Congress had
simply issued currency. Over this period, however, the Continental dollar
had lost about 70 per cent of its specie value. If Congress was to finance
a continuation of the war it had to develop a fundamentally different
approach to war finance.
Congress did undertake such an effort by passing resolutions aimed at
establishing sovereignty over monetary policy. For the first time Congress
asked all the states to refrain from any further issues of currency. Furthermore, it requested that state currencies already issued be called in through
state taxation and cancelled, and it recommended that future state expenditures be financed by state taxes. The bottom line was that the states
were asked to stop issuing currency as a source of revenue and join a
16
For an analysis of the significance of Saratoga see Ketchum, Saratoga.
The articles as approved by Congress are published in Ford, ed., Journals, IX, pp. 906-28.
Ibid., pp. 932-4.
19
For American efforts to obtain recognition and aid from France see Dull, Diplomatic history. A
discussion of the French decision is in idem, French navy, pp. 68-101.
20
Bemis, Diplomacy, ch. V.
17
18
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21
national monetary union. This would help to resolve the problem of
what had become a game of issuing currency being played between
Congress, the states, and the British counterfeiters.22
Congress took several further steps which it hoped would enhance its
position in this game. Since the limited powers granted to it under the
articles did not allow the coercion of the states or the prosecution of
those who counterfeited its currency, Congress resorted to recommending
to the states that they pass laws against the counterfeiting of the Continental dollar. Rewards were offered to informants whose testimony led to
conviction under any such state laws and broadsides were circulated
describing counterfeit Continental dollars.23 In addition, Congress
resolved to have withdrawn and replaced the entire issues of 20 May
1777 and 11 April 1778 as they had been extensively counterfeited by
the British.24
Despite all of these efforts, Congress made little progress towards its
goal of achieving sovereignty over monetary policy. With the continuing
depreciation of the dollar during 1779, Congress resolved in September
to end the issue of currency altogether,25 thus bringing to an end a policy
which no longer enabled it to circumvent the free rider problem.
IV
A more successful effort by Congress to develop a fundamentally different
approach to war finance was to address the free rider problem directly
through the establishment of a national tax system. This effort would
have a significant impact upon the institutional evolution of Congress as
well as upon the manner in which the war was financed during the
second phase.
Following the adoption of the Articles of Confederation, Congress for
the first time implemented a voluntary tax arrangement with the states.
On 22 November 1777 Congress issued state requisitions for revenue to
be in proportion to the value of land and generated by state taxes.
Accordingly, the cost of establishing and operating the bureaucratic structure to assess, collect, and enforce the taxes would be borne by the states
while the tax revenue would be sent to Congress to be spent in a manner
it determined. Since Congress did not have the power of coercion over
the states, the voluntary nature of this arrangement did not resolve the
free rider problem. To reduce its severity, however, Congress made
21
For the first request of the states see Ford, ed., Journals, IX, pp. 955-6.
During the 1980s and 1990s economists generated a substantial literature on the issue of
optimizing seigniorage. See, e.g., Easterly et al., ‘Money demand’. This literature assumes, however,
that the national government has control over the money supply.
23
Ford, ed., Journals. Recommendation for state laws, XIII, p. 11. Rewards, XVII, p. 530. Two
broadsides dated 20 May 1777 and 11 April 1778. See XV, item 238, p. 1451.
24
Ibid., XIII, pp. 21-2.
25
Ibid., XIV, pp. 1013-14. The last authorized issue was on 29 November. Less than four months
later Congress resolved that all dollars be taken out of circulation and replaced with a new dollar.
For a discussion of these measures see Robinson, ‘Continental treasury administration’, ch. V.
22
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explicit how much each state owed. By doing this, any state which did
not meet its specified requisition would at least be clearly identified as a
free rider.
In addition to the voluntary state requisitions, Congress shortly thereafter resorted at first indirectly and then directly to what was in effect
compulsory taxation in the form of the confiscation of property. On 27
November, Congress resolved that the states confiscate and then sell the
real and personal estates of those who remained loyal to Britain. The
resolution then asked that the proceeds from the sales of these estates be
used by the states to purchase loan office certificates.27 On 20 December,
Congress formally authorized the confiscation of private property by the
Continental army.28 Individuals were to be compensated with certificates
or receipts. These certificates of indebtedness, as they were later called,
were to list both the quantity and quality of the property taken by
the army.29
While Congress was able to rely increasingly on state requisitions and
impressment for the next two years, a turn of events occurred in late
1779 which was to have a significant impact upon how Congress viewed
its role in financing the war. This started with the British decision to
renew their campaign in the south. This British effort was to lead to a
series of military defeats for the Americans and a consideration by
Congress of additional measures to help compensate for the increased
strain on its funding system.
At the very time when Congress was bringing to an end its policy of
issuing currency, the British launched their largest offensive since 1777.
Under the command of Sir Henry Clinton, an army of about 8,000 men
was withdrawn from New York in December 1779 and sent by ship to
the south. These British troops eventually laid siege to Charleston where
on 12 May 1780 the entire defending American army surrendered. It
was by far the most severe defeat inflicted upon the Americans during
the war. Later during that summer, on 16 August, the Americans suffered
another major defeat at Camden.
With the loss of two armies and the south in chaos, the intensified
war led Congress to issue two additional state requisitions in late August
and early November. However, the states were already behind in paying
their currency requisitions. With high inflation and requisitions set in
nominal terms, the states had an incentive to delay payments as the real
value of requisitions declined over time. Congress tried to overcome this
latter problem by ordering that the two new requisitions be paid in real
goods and specie.30
26
The specified amount owed to Congress by each state according to this resolution is listed in
Ford, ed., Journals, IX, p. 955.
27
Ibid., p. 971.
28
Ibid., pp. 1043-7.
29
Discussions of the use of impressment can be found in Cometti, ‘Impressment’, and Ferguson,
Power of the purse, ch. 4.
30
Ford, ed., Journals, XVII, p. 783; XVIII, pp. 1011-17. There is no record of these requisitions
ever being paid.
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In response to the deteriorating military situation and the increasing
financial pressures on Congress, there emerged a political effort directed
at giving Congress the power of coercion to resolve completely the free
rider problem inherent in the requisition system. On 10 October 1780
the New York state legislature passed and sent to Congress a resolution
declaring that when a state did not meet its requisitions then Congress
should ‘Direct the Commander-in Chief . . . to march the Army . . . into
such state: and by a Military Force, compel it to furnish its deficiency’.31
One month later a similar call for Congress to use coercion was made
at the Hartford Convention where representatives met from the states of
New Hampshire, Rhode Island, Connecticut, and New York. Among
other things, the convention delegates agreed to a resolution recommending that George Washington and the Continental army be given
the authority to force the states to comply with the requisitions from
Congress.32 The resolution was sent to Congress where it was subsequently debated.33
Confronted with the confluence of a loss of currency issues as a source
of revenue, a series of military defeats, and a growing political movement
to use the Continental army to force the states to comply with requisitions, Congress in early 1781 began seriously to address the notion of
a coercive national tax.34 However, to achieve the power of taxation
Congress had to overcome a significant constraint on decision making.
The Articles of Confederation clearly defined the institutional relationship between the states and Congress. The states were to be free and
independent while Congress had only limited and well specified powers.
Any alteration by amendment of this structure which enhanced the powers
of Congress could come only at the expense of the sovereignty of the
states. To avoid this happening without the consent of the states, the
framers had incorporated a decision-making rule for Congress requiring
unanimity among the states to amend the articles.35 Granting the power
of taxation to Congress would therefore require the unanimous consent
of the states.
The initial effort by Congress for a national tax focused on foreign
trade. In February 1781 Congress passed an amendment for a tariff on
imported goods.36 It was sent to the states for consideration and approved
by 11 within one year. In the end the vote of Rhode Island was the
single rejection. Despite a majority vote of the states in favour of the
31
Resolution reprinted in Burnett, ed., Letters, p. 445, n. 6.
Proceedings of the convention are reprinted in Boyd, ed., Papers of Jefferson, 4, pp. 138-41.
33
Ford, ed., Journals, XVIII, p. 1141.
34
Congress had considered, but not acted upon, national taxation as far back as 19 September
1778, when the committee on finance presented a report recommending a national poll tax and a
duty on imports: Ford, ed., Journals, XII, pp. 929, 33.
35
Ibid., IX, art. 13, p. 925.
36
Ibid., XIX, pp. 110-13. Passage of the tariff was a major victory for those who advocated
giving Congress the power of taxation. However, they realized that because of the British naval
blockade it would not be a major source of revenue. To leverage its effectiveness all proceeds were
earmarked to pay down the debt. By doing this the tariff would become a tax base to act as security
for obtaining additional foreign loans to help pay for the war: ibid., XIX, pp. 102-3.
32
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tariff, the requirement of the articles for unanimity prevented Congress
from gaining the power of coercive taxation.
Following the vote in Congress on the tariff amendment, the states
ratified the Articles of Confederation in March.37 The long delay since
the initial approval by Congress in 1777 had been attributable in large
measure to disagreement over conflicting state claims to land in the west.
Prior to the vote on the tariff, Congress had adopted in September a
plan urging the states to surrender their territorial claims whereby ‘. . .
the Territory so ceded shall be laid out in separate and distinct States
at such time and in such manner as Congress shall hereafter direct . . .’.38
As reported by the committee for regulating the finances of America, the
control over the land ceded by the states would provide Congress with
a potential independent source of income through land sales.39 When the
states finally agreed to the essence of this plan, the last remaining obstacle
to the ratification of the articles was overcome. With the states ceding
their claims, the sovereignty of Congress had been considerably enhanced
since 1777 when the Articles had stated that ‘. . . no state shall be
deprived of territory for the benefit of the united states’.40
The importance to Congress of the land issue can be appreciated when
seen in light of the observation that a resolution had been reached
following a year of major military defeats. However, in order for Congress
to establish these claims the Americans had to win the war. Furthermore,
if they did win, in any peace treaty the British would have to cede the
west to the Americans, which they had not been willing to do previously
under the terms of the peace proposal offered in the spring of 1778.
As phase II drew to a close in 1781, Congress had managed to finance
the continuation of the war and the states had finally ratified the Articles
of Confederation. Congress meanwhile continued to pursue the power of
coercive taxation not only on foreign trade but also on the income and
resources of the states. Congress considered a series of amendments
reflecting a growing movement to empower it with the right to use force
against the states. The first would have authorized Congress to employ
both the Continental army and navy to compel the states to comply with
their requisitions.41 Later, in August, Congress resolved to recommend
to the states additional amendments which were directed at the impressment of state property, the use of force against the states, and the
appointment of collectors who would ‘direct the mode of accounting for
taxes imposed according to the requisitions of Congress’.42
37
Ibid., pp. 208-14.
Ibid., XVII, p. 808.
39
Ibid., XVIII, pp. 1157-64.
40
Ibid., IX, art. 9, p. 918.
41
Ibid., XX, pp. 469-71. In a letter to Jefferson, James Madison, one of the authors of the
amendment, expressed the opinion that a naval blockade of the states would probably be sufficient
to ensure ‘prompt obedience’. Letter repr. in Hutchinson and Rachal, eds., Papers of Madison, pp.
71-2.
42
Congress also sought, this time by amendment, the establishment of a national monetary union
whereby only Congress would have the right to issue money and regulate its value: Ford, ed.,
Journals, XXI, pp. 895-6.
38
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All of this was done before 19 October when the British army in the
south surrendered after the battle of Yorktown. It was indeed an extraordinary period in the history of the institutional development of Congress
during the war of independence. Throughout the spring and summer
months prior to the victory over the British at Yorktown, the newly
sanctioned national government of the United States was considering
military force against its own citizens in order to attain the power of
coercive taxation.
V
Following the battle of Yorktown the diplomatic process of sorting out
the terms of a peace treaty began in Paris. The negotiations were
extremely complex as the participants included the military superpowers
of the time and these had to agree on a resolution of a wide variety of
issues such as land claims, boundaries, fishing rights, and pecuniary
settlements.43 Despite these difficulties, the British and American negotiators were able to reach agreement on a preliminary treaty in November 1782.
While the diplomatic process was under way in Paris, Congress was
confronting a new mix of financial problems. First, it now had to find
the means to deal with the war’s legacy of debt. Congress estimated that
its foreign debt had reached nearly $8 million while its domestic debt
was just over $42 million. Annual interest on the total debt was nearly
$2.5 million.44 In addition, the Continental army was demanding more
financial consideration. Delegations of officers went to Congress arguing
for prompt action on pensions and arrears of pay.45 Congress responded
to these financial conditions by passing a proposition expressing its
opinion ‘that the establishment of permanent and adequate funds on
taxes or duties’ was necessary for ‘doing complete justice to the public
creditors, for restoring public credit, and for providing for the future
exigencies of the war’.46
On 3 September 1783 the peace treaty was signed in Paris. Although
Congress had achieved its goal of political independence through military
and diplomatic means, it had not secured financial independence. The
war had concluded with the free rider problem still institutionalized by
the Articles of Confederation. Two weeks after the battle of Yorktown,
Congress had issued state requisitions totalling $8 million to be paid
quarterly during 1782.47 In January 1783 Congress reported that of
this sum only $420,031 had been received,48 despite the effort of the
43
For accounts of the peace negotiations see Bemis, Diplomacy; Morris, Peacemakers. Given the
number of parties and issues involved, these negotiations serve as an interesting case for a game
theoretic analysis.
44
Ford, ed., Journals, XXIV, p. 286.
45
A summary of the army’s position is given in ‘The address and petition of the officers of the
army of the United States’, Ford, ed., Journals, XXIV, pp. 291-3.
46
Ibid., p. 127.
47
Ford, ed., Journals, XXI, p. 1087.
48
Ibid., XXIV, p. 102.
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superintendent of finance to reduce the severity of the free rider problem
by having local newspapers publish each state’s underpayment.49
Three months later, Congress once again voted for and sent to the
states an amendment giving it the power to levy a national tariff.50 This
took three years to work its way through the state legislatures. In the
end only New York rejected it.51 Once again had it not been for the
decision-making constraint requiring unanimity among the states, the
articles would have been amended. The political support for a national
tariff can be appreciated with one observation. Since Rhode Island was
the only state to reject the 1781 tariff amendment, all of the states had
voted approval for a tariff amendment at one time or another.
The combination of a deteriorating financial situation and growing
support in Congress and in the states for a national tax system led
Congress in 1786 to initiate a broad reassessment of the financial constraints imposed by the Articles of Confederation. On the eve of the
tenth anniversary of the Declaration of Independence, Congress appointed
a grand committee
To report such amendments to the Confederation and a draft of such
resolutions as it may be necessary to recommend to the several states for the
purpose of obtaining from them such powers as will render the federal
government adequate to the ends for which it was instituted.52
On 7 August the final report was first presented to Congress with copies
later sent to the states. It recommended seven new amendments to the
Articles, six of which dealt with the generation of revenue for Congress.53
One proposed amendment in the report offered what was a fundamental
change in the decision-making rules determining the financial powers
of Congress.
In case it shall hereafter be found Necessary by Congress to establish any
new Systems of Revenue and to make any new regulations in the finances of
the U.S. . . . such new Systems or regulations shall be agreed to and adopted
by the United States in Congress Assembled and afterwards be confirmed by
the Legislatures of eleven States and in that proportion when there shall be
more than thirteen States in the Union, the same shall become binding on
all the States.54
49
Catanzariti and Ferguson, Papers, 5, Morris letter to Whipple, n. 2, pp. 336-7. For a summary
of the thoughts of Robert Morris on his policy of publishing underpayments see his letter to
Houston, ibid., 6, pp. 674-5.
50
Ford, ed., Journals, XXIV, pp. 257-61.
51
New York actually ratified the 1783 amendment but with conditions attached which were
unacceptable to Congress. Every member of Congress except those from New York subsequently
voted in favour of a resolution to have New York hold a special session to reconsider its position:
Ford, ed., Journals, XXXI, pp. 513-14. The amendment would also have changed the assessment
of state requisitions from the valuation of land by state as required by article 8, to state population
the sum of which was to include three-fifths of the slaves. With New York not objecting to the
change in article 8, provision of the amendment meant that all states had agreed in principle to the
three-fifths rule of counting slaves in the population.
52
Ford, ed., Journals, XXX, p. 387.
53
Ibid., XXXI, pp. 494-8.
54
Art. 18. Ford, ed., Journals, XXXI, p. 497.
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The elimination of the requirement of unanimity would have loosened
the very constraint of the decision-making process which had thwarted
Congress from amending the Articles of Confederation to gain independent sources of revenue.
The release of the committee’s report in August came at a time when
a political consensus for the reform of the articles was quickly emerging.
On 20 September, Congress received a copy of a letter forwarding the
proceedings of the Annapolis Convention which had been held a month
after Congress and the states had begun to consider the grand committee
report. The letter from the chairman of the convention stated that there
had been agreement among the delegates ‘That there are important
defects in the system of the federal government’. These defects were
so serious that it was the unanimous conviction of the delegates that
commissioners should be appointed from the states to a convention at
Philadelphia the following May to devise provisions ‘as shall appear to
them necessary to render the constitution of the Federal Government
adequate to the exigencies of the Union’. After having appointed a
committee in October to consider and report on the letter, on 21 February
1787 Congress resolved that such a convention be held.55
VI
Under the constitution which was to emerge from the convention, the
resolution of the free rider problem long sought by Congress was attained
through the granting of independent sources of income to the national
government. This had been made possible as a result of a lesson learned
during the war for independence. It was reflected in a critical decision
made at the outset of the constitutional convention regarding the voting
rules for decision making. While each state was to have one vote as had
been the case under the articles, all decisions made at the convention
were to be made by a majority vote of the states rather than requiring
unanimity.56 This lowering of decision-making costs enabled the majority
view of a need for independent sources of revenue for the national
government to be made a part of the constitution.
The revenue powers given to the national government under the constitution reflected those sought by Congress under the Articles of Confederation. By far the most important for resolving the free rider problem was
the coercive power of taxation which had nearly been achieved by state
vote on the proposed 1781 and 1783 revenue amendments to the articles.
55
References for this paragraph are from Ford, ed., Journals. Letter received by Congress, XXXI,
pp. 678-80. Committee appointed to consider letter, XXXI, p. 770. Resolution by Congress for
Philadelphia Convention, XXXII, p. 74.
56
Farrand, ed., Records of Federal Convention, I, pp. 7-13. This set of voting rules also enabled
decisions to be made which reflected the view of a majority of the states on a wide variety of other
issues concerning the fundamental nature of the national government. While an examination of
those issues addressed at the convention is beyond the scope of this article, it should be noted that
a rule no longer requiring unanimity was also incorporated in the constitution for state ratification
as well as for both making and ratifying amendments.
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Under the constitution, Congress was now given the power to collect
taxes to pay for the common defence and debts of the United States.57
During the war the initial source of revenue for Congress was the
issuance of its own currency. Over time the real value of revenue from
this source deteriorated with inflation as a variety of other entities were
also issuing currency. To maintain the issuance of money as a revenue
source for the national government, Congress under the articles repeatedly
requested that the states both stop issuing their currencies and make
counterfeiting of the Continental dollar illegal. By means of amending
the articles, Congress had sought the power to establish and regulate a
national monetary system.58 The essence of the goal of these efforts was
attained at the convention. Under the constitution no state could issue
its own money and counterfeiting would be illegal. Only Congress would
have the power to issue money and regulate its value.59
VII
The institutional structure of a government at the onset of a major war
will in large measure establish the set of possible paths to be taken for
war finance.60 In the case of the War of American Independence, the
Articles of Confederation established a financial framework which initially
provided the Continental Congress with an incentive to issue currency.
Following their defeat at Saratoga, the British made a proposal of peace
to the Americans. Had the British offered independence rather than
concessions during the spring of 1778, the Continental Congress would
have successfully financed the war with the issue of currency and America
would have emerged as a confederation of 13 independent states.
However, the Americans rejected the offer and continued their pursuit
of independence. The combination of a continuing war and a collapsing
Continental dollar provided a powerful incentive for Congress to consider
revenue alternatives by enhancing its financial powers under the Articles
of Confederation. The financial result of this effort is summarized in
57
Note one of the legacies of the debate over taxation under the articles. When the delegates to
the constitutional convention decided that representation in the House would be based on each
state’s population they incorporated in the constitution the same three-fifths rule for counting slaves
agreed to by all the states in the 1783 revenue measure. See above, n. 54.
58
See above, n. 45.
59
For a discussion of the constitutional debate on national monetary powers, see Hurst, Legal
history, pp. 3-27.
60
Due in large measure to the initial institutional structure of the Articles of Confederation, the
response of Congress to the financial demands of war differed markedly from what happened in
Britain and France. Britain was able to employ efficient fiscal policies as a consequence of the
outcome of fundamental institutional change which had occurred during the previous century. See
North and Weingast, ‘Constitutions’. France, on the other hand, was unable to emulate such
institutional change. As a result, the French government in response to war demands frequently
resorted to defaulting on its debt and devising various monetary experiments mainly using fiat
currency: see Sargent and Velde, ‘Macroeconomic features’. It would be informative to compare the
effects of war demands upon existing governmental institutions of all the major participants in the war.
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Table 1. Revenue received by Congress per period, 1775-1781
Source
Phase I (1775-7)
Currency emissions
Certificates of debt
Loan office certificates
Foreign loans
Total
Phase II (1778-81)
Certificates of debt
Loan office certificates
Certificates of indebtedness
Specie value ($’000)
% of total revenue
25,370
86.47
3,787
181
12.91
0.62
29,338
100.00
7,684
16,708
17.1
37.1
Currency emissions
Foreign loans
State requisitions
15,450
3,319
1,856
Total
54.2
34.3
7.4
4.1
Total
45,017
100.0
War total
Phase I
Phase II
29,338
45,017
39.5
60.5
74,355
100.0
Sources: Bullock, ‘Finances’, sections I and II of Ch. II and p. 135. How much of a dollar issue by Congress in
Jan. and May 1779 actually went into circulation is a matter of dispute. See Michener, ‘Backing theories’, n. 11,
p. 685. I follow the argument of Ferguson, Power of the purse, ch. 2. This table reports real values in terms of
specie rather than those determined by commodity prices. See Michener, ‘Backing theories’, p. 685, for a discussion
of this issue.
table 1. Prior to 1778 nearly 90 per cent of the revenue generated came
from currency issues. During the second phase of the war over half of
the revenue came from domestic loans and impressment. Larger foreign
loans were made. For the first time the states made financial contributions
to Congress. Altogether these sources generated almost double the revenue from the emission of currency. And as indicated in the table more
revenue was generated by Congress during this phase of the war than in
the first.61
The financial problems encountered during the postwar period encouraged the Continental Congress to pursue enhanced powers. The free
rider problem which the Articles of Confederation had institutionalized
and Congress had spent considerable time and effort to overcome was
finally resolved by the power of coercive taxation granted under the
constitution. The history of institutional change from the articles to the
constitution illustrates just how difficult this problem can be even for a
61
One might speculate as to how different the financing of the war would have been if the
Continental Congress had acquired the power of taxation during the war. The impact would, of
course, have depended upon when this occurred and upon the nature of the taxes imposed. If, for
example, instead of being allowed to free ride by being asked for voluntary payments, the states
had been taxed, the share of total war revenue received by Congress from them would have been
considerably greater than 4% thereby reducing the dependence on currency. Further, Congress
would have been able to leverage a tax base for a substantial increase in foreign loans.
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polity trying to achieve independence. Since the solution requires a
degree of political coercion it was accomplished in the American case by
fundamentally altering the decision-making process at the constitutional
convention.
Ohio State University
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