Once the colonies had declared their independence, their first task was to create a unified national government. John Dickinson, a congressman from Pennsylvania, drafted the Articles of Confederation and brought them to Congress on July 12, 1776. Congress adopted the Articles on November 17, 1777, and began the process of ratification, sending copies of the Articles for review by state legislatures. The Articles of Confederation reserved to each state "its sovereignty, freedom, and independence" within the national structure. The central government consisted of the Congress alone, which was elected by state legislatures. Congress could request funds from the states, but had no power of taxation. Similarly, Congress lacked the power to regulate interstate or international commerce. With no executive branch, Congressional committees would be assigned to direct matters of finance, diplomacy, and the military. The Articles did not provide for a judicial system.
The Articles of Confederation became law after Maryland, the last abstaining state, finally ratified them on March 1, 1781. Almost immediately, a host of challenges arose for the new government to cope with. The first challenge was to put the nation on sound financial ground. The war cost the 600,000 taxpayers in America a total of $160 million. To finance the war effort, the Continental Congress borrowed from foreign nations and wealthy Americans, and printed up its own paper money, called the Continental. Due to a lack of faith in the survival of the American government both at home and abroad, the value of the Continental fell 98 percent between 1776 and 1781, leading to rampant inflation.
In an attempt to rectify the situation, Congress made Robert Morris, a wealthy merchant, the nation's superintendent of finance in 1781. He proposed an import duty of five percent to finance the national budget and guarantee the payment of war debts. However, under the Articles of Confederation taxation required the agreement of every state in the Union, and Rhode Island, acting alone, rejected Morris' proposal. After the Revolutionary War came to an end in 1783, Congress proposed yet another tax to finance the budget, but this time New York stood in the way of its passage. Furthermore, throughout the 1780s states continually reduced the amount of financial support they granted to Congress. Additionally, the US economy suffered from British restrictions on trade with the Empire, including the British Isles and the West Indies, two important markets for US merchants. British ports often only accepted American goods if they were carried aboard British ships. Thus American trade declined, and was one of the leading causes of the economic depression which struck in 1784.
America's first national government under the Articles of Confederation incorporated, more than anything else, the widespread fear and distrust of centralized government. Having experienced the oppression of British government, in which the central government had seemed to act without concern for its constituents, early American political leaders advocated a governmental system in which the primary power of the government was distributed to the states, which could be more responsive to the specific needs of the people. Under the Articles of Confederation, the States took primacy over the Union as a whole to the extent that the national government was limited to only those actions that the states saw fit to permit.
With the Confederation in place, the US had taken a crucial step in defining the role of the national government. The Continental Congress had directed the war effort without clearly defined powers. Rather, it had assumed specific powers on an as-needed basis. Now, however, the new nation had a clearly organized government. The only problem was that the national government had been given so little power that it could not be truly effective. Subject to the veto power of any single state, the national government found it nearly impossible to pass measures even within the limited scope of its powers.
In no area was this more apparent than in regard to taxation and finance. While the Congress could ask the states for financial contributions, there was no guarantee that the states would comply, and taxes could only be levied at the national level with the agreement of all states, a feat of near impossibility. Almost every state raised taxes within their boundaries during and after the war, in order to finance their own internal military operations, reconstruction, and war debt. Pressured by these financial burdens, few states were likely to approve of new national taxes, or import tariffs that would raise the prices of all goods. Faced with the disapproval of the states, and declining voluntary contributions to the national cause, the central government was left with no recourse.