Financial History Issue 112 (Winter 2015) | Page 23
mere 2% of the August 1786 requisition.2
Ever since the war began, hard money
in the form of internationally accepted
gold and silver coins had been in short
supply throughout the states. At the time,
Americans relied on other countries for
specie, with Spain’s gold dollar being especially popular. As these coins passed overseas to pay for imported goods and repay
foreign loans, Congress tried to make up
the deficit by printing paper dollars, called
“Continentals,” but stopped in 1779 after
their value collapsed.
By 1781, a Continental was worth half
a cent and even Congress refused to take
them.3 During the war, state-issued paper
money did not fare much better. Most suffered hyperinflation. People wanted hard
money or paper backed by something
of more certain value that a shaky government’s doubtful promises. The states
Pennsylvania — but they did so as a majority faction that was sensitive to manipulable
shifts in popular opinion.
In 1782, when an all-but-bankrupt
Congress stopped paying interest on its
domestic debt, Pennsylvania began issuing
state certificates of interest on that debt to
public creditors in its state in place of the
unpaid interest. It then accepted them back
in partial payment for a newly-imposed tax
and credited the certificates toward its
requisition instead of paying hard money
to Congress. Once issued, Congress no
longer owned the interest covered by the
certificate but never obtained the hard cash
that it needed to pay its other creditors or
fund on-going operations.
Further, until redeemed in payment of
taxes, the certificates circulated as a form
of paper money within Pennsylvania. This
stimulated the cash-strapped local econ-
Collection of the Museum of American Finance
States are in the habit of discussing and
refusing compliance with them at their
option.”1 Most of the nation’s war-related
debts were owed to Americans, however,
and represented the collective obligations
of all the states. If Congress failed to repay
them, then the states could step in to take
care of their own citizens and, by doing
so, supplant Congress in the hearts, minds
and wallets of their people. At the time,
this represented an ultimate threat to federal union.
The scheme was simple and the results
potentially debilitating for the central government. In every state, Congress owed
money to public creditors: persons holding bonds or other securities issued during the war for money, goods or services.
Many of these securities — which originally went to a large number to lenders,
suppliers and veterans — had passed into
the hands of a small number of speculators, who purchased them at a discount.
In turn, the states owed annual requisitions to Congress, and public creditors owed taxes to their states. As long
as Congress was unable to pay public
creditors, the states could accept national
securities from their citizens as payment
for state taxes and apply them at face
value toward their requisition