Financial History Issue 112 (Winter 2015) | Page 24
Collection of the Museum of American Finance
system of paying interest on their citizens’
national securities. Once this ball started
rolling, it was hard to stop, especially since
it aggrandized the states.
Congress tried twice to regain control
of its own debt. In 1784, it offered its own
paper certificates, or “indents,” in lieu
of interest to public creditors, who then
could redeem them through the states in
payment of state taxes. Seeing nothing in
this program for them, most states either
refused to implement it or implemented it
so poorly that it had little impact.
A year later, Congress attempted to
bar states from paying their requisitions
with state interest certificates, but this
backfired badly. Some states ignored the
mandate; others, again led by Pennsylvania, got around it by calling in all or part
of the national securities held by its citizens and exchanging them for state bonds
that typically paid interest in some form
redeemable as tax payments. The states
then fulfilled their current requisitions to
Congress by offsetting the interest or principal owed on these securities and held the
remainder either to pay later requisitions
or for any future reconciliation among the
state and national governments over warrelated debts.
By 1786, the states had assumed much of
the total national debt, with Pennsylvania,
New York and Maryland alone holding
nearly one-third of it. Congress was rapidly becoming irrelevant. By replacing state
bonds for national securities, the loyalties
of public creditors shifted from the nation
to the states. And the flood of new state
bonds, many of which were issued in small
denominations and circulated almost like
cash, addressed the urgent economic need
for currency without involving Congress.
Severe deflation in the value of hard
money had caused a nationwide recession
that a well-regulated emission of paper
credit could ameliorate. Many cautious
Americans doubted, however, that elected
state legislatures could regulate it well.
In a June 1786 letter to Washington, Jay
described these paper-money skeptics as
“the better kind of people – by which I
mean the people who are orderly and
industrious, who are content with their
situations, and not uneasy in their circumstances.” This sort, he warned, “will be led
by the insecurity of property” to question
republican rule and “prepare their minds
for almost any change that may promise
them quiet and security.”5
Engraved portrait of statesman John Jay.
Washington agreed and found it “much
to be feared … that the better kind of people” might resort to a monarchy or worse.
“We are apt to run from one extreme
into another,” he wrote back to Jay. “To
anticipate and prevent disastrous contingencies would be the part of wisdom and
patriotism.”6
Jay’s fears notwithstanding, the benefits from expanding the money supply
through state-issued bonds and interest
certificates revived popular demands for
states to issue paper money. The wartime
experience with hyperinflation, which hit
22 FINANCIAL HISTORY | Winter 2015 | www.MoAF.org
creditors like Washington especially hard,
had soured many wealthy Americans on
paper money. Having lent out money
in pounds sterling