debt and the constitution--4/27/2026

27 Apr 2026

debt and the constitution--4/27/2026

0 COMMENTS

Today's selection -- from The Price of Democracy by Vanessa S. Williamson. The road to the U.S. Constitution began with debt.

The colonists went to war—war against a global superpower—with almost no central government to speak of, and no national taxing capacity at all. Under the Articles of Confederation, Congress did not have the power to tax. Instead, Congress had to go hat in hand to the states, making 'requisitions' with which the states only partially complied. Inefficient tax collection was the norm across the colonies, and by the end of 1777, only half of the states had passed any tax legislation. Almost all wars are fought on credit, but America's revolutionaries really racked up the IOUs.

“Tax revenues were low in part because many states were only capable of applying simple, regressive taxes. Taxes proportionate to wealth would have been both less burdensome and more productive, and many poorer Americans demanded such a system. When wealthy Pennsylvanians opted out of the militia by paying a fine, militiamen petitioned for each draft dodger's payment to be calculated 'in proportion to his Estate.' But wealth-proportionate taxation was beyond early America's capacities—both because the wealthy did not want to pay and, relatedly, because many state governments, especially in the South, were simply not up to the job of assessing property. Congress had originally intended to allocate its requisitions based on the states' land values but was obliged to fall back on a population-based system.

“Popular demands for more egalitarian taxation would come to define not only the politics of the postwar period but the framework of American government for the centuries to come. In the meantime, however, taxes could not even begin to meet the needs of the war. 'The laying of Imposts unless from the last Necessity,' said Robert Morris, the crafty Pennsylvania merchant who served as the war's superintendent of finance, 'would have been Madness.' So the Revolutionary War was paid for by issuing currency and taking on debt.

Scene at the Signing of the Constitution of the United States on September 17, 1787, a 1940 portrait by Howard Chandler Christy

“About two-thirds of the cost of the war was funded through federal and state-issued 'fiat money.' This paper currency, not backed by gold or silver, had been used successfully in the colonies before, including to finance the American engagement in the Seven Years' War. The risk of this approach was inflation. Some amount of currency depreciation was not necessarily a problem; it could even work as a progressive, real-time 'tax on money,' as Benjamin Franklin argued. But the American governments usually printed far too much and taxed far too little. With such a glut on the market, the value of money plummeted. The value of the Continental dollar dropped by two-thirds in 1777 and then to nearly nothing. A barber in Philadelphia reputedly used the dollars as wallpaper.

“The rest of the cost of the war was financed by public debt. Millions were owed to foreign creditors, and tens of millions were owed domestically. This debt was held in numerous forms: government bonds and certificates, each with its own intricate repayment schemes; securities given to soldiers in lieu of pay; and IOUs to farmers, artisans, and merchants who had seen their goods requisitioned. Poorer people could rarely afford to hold on to their debt papers. Some soldiers sold their securities as soon as they were issued, just so they could afford to get home from the war. But speculators were willing to invest, for pennies on the dollar, with the hope of spectacular gains should the government eventually honor the debts at face value.

“And that was the key question: Could the postwar government impose enough taxes to pay off its debts? The market in government debt spiked and crashed with investors' confidence in the tax system. But if you had the capital to invest, the risks of buying were not as high as they might seem. Elites sometimes had inside information about which forms of debt were likely to get their interest paid. Even if a government scaled down its repayment, as sometimes occurred, there were profits to be made if the government paid more than the buyer had staked.

“As domestic debt consolidated in the hands of those with the money to speculate, the very richest people in America became the primary beneficiaries of debt repayment. Less than a decade after the Revolutionary War, nine in ten government securities were no longer in the hands of their original owners, and just 2 percent of Americans owned bonds. In Pennsylvania, 96 percent of all state war debt belonged to 434 people, with more than 40 percent held by just 28 men. In Rhode Island, more than a third of the $800,000-plus in federal bonds was owned by 9 people.

“Paying down this debt required taxation. The easiest source of revenue would have been tariffs, and Congress twice sought to enact a national 5 percent impost on foreign goods. But the Articles of Confederation required unanimous consent of the states for such a policy, and at least one state was always in opposition to each variation of the plan. So state governments had to 'open the Purses of the People,' as war financier Robert Morris was blunt enough to say. And the people's purses were very near empty.”