Debt Relief and the Founding
Modern Policy and the Constitutional Convention Share Anxiety Over Debt
Debt forgiveness is an extremely hot topic recently, not just politically but as a news story. Student debt forgiveness was a major topic of discussion in the Democratic Party primary as well as President Joe Biden’s first two years in office. It was also litigated in the courts and now appears to be in a holding pattern until the Department of Education releases new rules. Just this week, a group of Senate Democrats including Senators Fetterman, Whitehouse, and Welch introduced a bill to cancel the debts students owe across the country for lunch. Scribe’s Stylus is a non-partisan endeavor, so we will not be commenting on those policies directly. Instead, we endeavor to provide information about the early history of debt relief in the United States.
Both government and individuals generated a lot of debt during the American Revolutionary War. Even before the war began, many merchants were in debt due to previous purchases and the ongoing boycotts of British goods. The war then impeded commerce further. The Treaty of Paris which ended the war said these debts were still to be paid. Furthermore, the Continental Congress still owed a sizeable amount of money to soldiers who had often gone without pay on the promise of later payment. Many of them sold their promissory notes to speculators for pennies on the dollar to ensure they received some compensation. They then returned home often to either more debt from their time away or to an uncertain economic future because they did not have useful economic skills, having spent their youth fighting in the Continental Army.
Farmers, especially returning soldiers, were particularly concerned about debt. They were not paid for their service as promised but they still owed money for their personal debts. They also endured years with limited exports for their goods. When they were unable to pay their property was taken by the courts, leaving them penniless and without land or money for their children. This created a climate of fear, anger, and suspicion which was most acutely felt for courts and creditors.
Some states adopted more democratic forms of government during the war and were led to very populist policies in the 1780s. Some states attempted to forgive debt or issue paper money. Others extended the terms of repayment or ceased the imprisonment of debtors which was still legal at the time. Paper money was one of the most widespread policies debtors advocated. The printing of paper money had a history in the colonies dating back to the 1690s at least. Before the Revolutionary War, the colonies were prohibited from minting coins and often compelled to pay taxes or merchants in the relatively rare specie (gold or silver) which did exist in the colony. Paper money was controversial because it often lost value quickly and was not broadly accepted in other nations, lowering its value to merchants. In some states it was not considered legal tender, meaning no one was forced to accept it. Regardless, states were unlikely to accept any form of paper money from a different state. The federal government created paper money during the war (Continentals) but they were a marked failure. Inflation exploded, they were often rejected as payment, and eventually most were sold to speculators for pennies on the dollar. By 1780, they were worth only one fortieth of their face value. Despite these problems, debt relief policies were broadly popular because the money supply was so limited and debt so severe, but they did anger creditors and endangered the availability of future credit for those states. It is worth noting that American creditors were often debtors to other parties themselves and had similar anxieties. The fundamental problem was a limited economy and poor supply of money.
Other states, Massachusetts for example, continued to enforce debts through the courts and offer little or no relief. Farmers were additionally harmed by requirements from merchants to pay for goods in specie rather than with paper currency. The stress of paying the debt led to real violence and civil unrest. The Pennsylvania Mutiny of 1783 saw continental soldiers threaten the Congress in an attempt to receive back pay. 1786 saw the Paper Money Riot and Shays’ Rebellion. Both attempted to use physical force and the threat of violence to force changes in the law in ways helpful to debtors. Daniel Shays and his men shut down the courts in a number of cities and attempted to target the federal armory in Springfield, MA. Both events were successfully stopped, but extreme anxiety remained and neither creditors nor debtors were satisfied.
Ultimately, the issue of debt was not only a political livewire but a source of substantial unrest and violence. It further endangered the economy broadly and the availability of credit which was necessary to conduct a modern economy. The country attempted to confront this during the constitutional convention and the next several years, roughly 1787-1791. The Articles of Confederation were always intended to be a wartime measure, but any amendment required unanimous agreement which was seldom given. Many important figures, George Washington among them, believed for years a stronger federal government was needed, but the immediate impetus for the Constitutional Convention of 1787 which produced the current US Constitution was an inability to raise revenue for debts, the economic chaos caused by state policies, and the violent unrest which endangered both creditors and government officials.
The newly-crafted constitution contained several important provisions related to debt relief. Article I, Section 10 reads:
“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility” [Emphasis Mine].
Of importance to us now are the restrictions on creating or issuing legal tender and the restriction on impairing contracts. This made most of the pro-debtor policies states passed in the 1780s unconstitutional upon ratification.
This would initially seem to be a clearly negative turn for debtors, but several factors mitigated the harm. First, all states were barred from the policies, so it created an even playing field. Second, the new constitution also prohibited states passing tariffs and duties against each other which substantially impeded trade. Third, the new federal government was substantially more stable economically. It now had powers to tax directly and used this to pay the debts it owed and create the fairly limited federal government which existed in the 1790s. It also assumed the remaining debt of the states, so they were no longer burdened and forced to implement punishing taxes on their citizens. The new Treasury Secretary, Alexander Hamilton, also spent substantial time and resources convincing foreign nations the United States could not only pay its debt but also deserved access to additional credit. The new government was also empowered to mint or print new federal money which was legal tender, slowly improving the money supply in cooperation with new foreign credit.
In the end, the nation and its citizens were better off financially and the extreme concern over debt and credit eased with the new government and passage of time. This are a number of parallels to modern debt relief, but also some important differences including that the modern debt under discussion is overwhelmingly owed to government rather than to private citizens or corporations. It is not our job to tell you what policies to support, but it is informative the issue is not new and has reared its head before, even early in the nation’s history.
Sources
“Beginning of U.S. Debt, The.” TreasuryDirect Kids. United States Department of the Treasury. Accessed September 27, 2023. https://www.treasurydirect.gov/kids/history/history.htm.
“Big Idea 7: Remembering the Veterans of the Revolutionary War.” Museum of the American Revolution. Museum of the American Revolution. Accessed September 27, 2023. https://www.amrevmuseum.org/big-idea-7-remembering-the-veterans-of-the-revolutionary-war.
Greenwalt, Phillip S. “Soldier Pay in the American Revolution: How much money did the average Continental Army soldier earn during the Revolutionary War.” American Battlefield Trust. American Battlefield Trust. Revised June 4, 2021. https://www.battlefields.org/learn/articles/soldier-pay-american-revolution.
Hatfield, Stuart. “Continental Congress vs. Continental Army: Paying for it All.” Journal of the American Revolution. January 21, 2019. https://allthingsliberty.com/2019/01/continental-congress-vs-continental-army-paying-for-it-all/#:~:text=The%20Continental%20soldiers%20were%20not,very%20land%20they%20fought%20for.
Lepore, Jill. These Truths: A History of the United States. Revised Edition. New York City: W.W. Norton & Company, 2018.
Middlekauff, Robert. The Glorious Cause: The American Revolution, 1763-1789. New York: Oxford University Press, 2007.
Van Cleve, George William. “The Anti-Federalists Toughest Challenge: Paper Money, Debt Relief, and the Ratification of the Constitution.” Journal of the Early Republic 34, no. 4 (2014): 529-560.