The Articles of Confederation (1781-1789)
Summary—Debts of Congress
The United States takes full financial responsibility for all the debts accrued and money borrowed under the authority of the Second Continental Congress during the American Revolution. The United States solemnly pledges to repay all these debts.
In an attempt to maintain the good credit of the United States in the eyes of foreign nations and creditors, the Confederation Congress guaranteed that all debts contracted by the Continental Congress would be repaid. However, this commitment to repay debts is not matched in the Articles by any articulated means of repayment.
Other than the taxes that the states were supposed to supply, Congress had no independent source of revenue with which to repay its creditors. Because many individual states had their own debts from the war, they were typically more inclined to pay those first before contributing to repayment of the national debt. These issues were compounded by the fact that each state printed its own paper money and established its own set of commerce regulations. Furthermore, inflation raged out of control in both the national and state currencies.
Given the limited range of authority in matters of finance, it is amazing that the U.S. Congress managed to stay financially afloat at all. Much of this could be contributed to the abilities of the first Secretary of Finance, Robert Morris, who tried to work within the confines of the system as much as possible. In 1782, he established the Bank of North America. Although this was suspected by some to be an illegal extension of the authority of Congress, it passed Congress and greatly assisted in financial stability. However, his attempts, along with Alexander Hamilton, to pass an amendment empowering Congress to collect a 5% impost failed in both 1781 and 1783.
Without an established source of revenue, Congress also could not pay the soldiers in the Continental Army. This moved troops close to mutiny on two separate occasions. At Newburgh in March of 1783, troops protesting their lack of pay came close to mutiny until George Washington intervened. In Philadelphia in June 1783, another group of mutinous troops demanding pay forced Congress to retreat to Princeton. During this year, Robert Morris resigned from the position, haunted by accusations of corrupt politics and inability to perform his job due to the limitations of Congress.
The issue of debt repayment deeply worried individual states as well. Massachusetts levied high taxes and imposed strict regulations about debt repayment after the war. In 1787, these taxation methods resulted in an armed protest of Massachusetts farmers, led by Daniel Shays, a former captain in the Continental Army. The Massachusetts legislature's unyielding attempts to immediately repay its debts abused the rights of citizens in much the same way as the British Parliament had a decade earlier: the Massachusetts farmers rallied under the same cry as the American Revolutionaries, "no taxation without representation," and relied on similar military tactics.
When the legislature failed to respond to their petitions for change, Shays and his followers closed the courts and attempted to capture a federal arsenal of weapons in Springfield, MA. Referred to as Shays' Rebellion, this group of farmers, although defeated by the local militia, proved to many that issues of taxation would continue to stir up internal conflict unless managed by a strong national government. Reactions to Shays' Rebellion largely propelled politicians to favor a strengthening of the national government and encouraged their participation in the Constitutional Convention of 1787.