Merchants and Magistrate
THE PUBLIC CREDITOR INTEREST IN MASSACHUSETTS POLITICS, 1780–86
Richard Buel, Jr.
From a paper presented at the Bicentennial Conference on Shays’s Rebellion and the Constitution, 1986, sponsored by Historic Deerfield, Inc.
All the states had widely divergent experiences during the Revolutionary War, yet all emerged facing a common problem, that of the Revolutionary War debt. This essay examines the various possibilities that existed for dealing with the debt and the reasons that impelled the government of Massachusetts to embark on a fiscal policy that led directly to Shays’s Rebellion. It focuses on the “creditor” interest, which is generally thought to have provoked the rebellion.1 It argues that the creditors were not entirely homogeneous and that the dominant element among them had more in mind than lining their pockets at the expense of their fellow citizens; that they were also concerned with the larger end of securing Revolutionary achievements; and that in pursuing their larger objective they, as the state’s most favored group of creditors, actually placed their personal financial interests in jeopardy by agreeing to hitch their fortunes to those of creditors less favored by state policies as well as to those of federal creditors.
The Revolutionary debt quickly became the key problem of the 1780s. The war had reduced the finances of the Confederation to chaos. The initial mobilization had been financed by having the states most directly involved in the fighting issue paper bills of credit. Soon, however, Congress stepped in with its own bills in an attempt to establish centralized control over the war effort.2 This money held its value for about a year but then progressively depreciated until, by the early 1780s, it had ceased to circulate. As a result, Congress increasingly lost control over the continent’s resources, and after 1779 direction of the war devolved largely upon the individual states. The French maintained the illusion that Congress was still in charge by subsidizing Robert Morris’s operations as financier general during the last year of the fighting, but it was an illusion. The Articles of Confederation, in fact, gave the central government no power to raise a revenue beyond calling on the states for requisitions, which they were slow and reluctant in meeting, if indeed they met them at all.
In 1782 Morris tried to address the problem by “liquidating” part of the federal debt to equitable specie values and by asking the states to fund it, principally with an impost of 5 percent, but his efforts came to naught.3 The proposal, amounting to an amendment of the Articles of Confederation, required the unanimous consent of the states.4 Outside his small nationalist clique, Morris was regarded with deep suspicion, and the debt he proposed to fund was that owing only to individuals, not to states.5 Those states that felt they had given far more than their share to the war effort feared that their interests would be sacrificed to those of individual creditors.6 They recognized that the impost, as an indirect tax, seemed to be the most eligible way of paying the foreign debt, which was due in hard coin, and therefore more of them endorsed it than might otherwise have done so. Nevertheless, it proved impossible to procure the consent of all. As a consequence, the Confederation remained dependent on an inadequate requisition system for what little revenue it had.
Massachusetts eventually endorsed the impost, but reluctantly.7 On the grass-roots level it remained unpopular. Many people believed that the revenue from it would be used to pay for commuting the half-pay for life, granted to Continental officers in 1780, into five years’ full pay at the end of the war.8 Commutation, which increased the army debt by 50 percent, was particularly resented in Massachusetts because the state had gone to extraordinary lengths during the war to protect both officers and men from the effects of depreciation. Early in 1779 the legislature had guaranteed to the army the full value of the wages originally stipulated by Congress, and a year later it authorized the issuance of £8 million in treasurer’s or depreciation notes to make good its pledge.9 Though these, like the currency, also depreciated, many regarded commutation as an attempt by the officers to compensate themselves twice over for losses in which the entire population had shared as a result of the war.10
The citizens of Massachusetts also felt that the states had been victimized by the collapse of the old Continental money. At the beginning of 1781 these bills had passed at a higher value in Massachusetts than anywhere else in the Confederation. This had led to an enormous influx of them into the state, followed shortly afterwards by a precipitate decline in value that halted their circulation, leaving the treasury and many citizens holding assets that were virtually worthless.11 One possible explanation for the higher price of Continental money within Massachusetts was the faster tempo of trade enjoyed there after Rochambeau’s expeditionary force arrived at Newport.12 The leadership, however, saw it as the result of their patriotic zeal in taxing the people at the rate specified by Congress’s requisitions.13 They saw themselves as the victims of their own willingness to participate in a national fiscal scheme, and this experience, together with Congress’s initial reluctance to grant the state credit for the huge cost of the abortive Penobscot expedition, enhanced the suspicions of centralized authority that lingered on in Massachusetts from the era of imperial rule.14
At the same time, Massachusetts had shown a strong disposition to establish its own public credit from the moment the Constitution of 1780 had been ratified. One of the first acts of the new government was to move up the date on which the state would begin repaying its debt from 1788 to 1785. To this end, it invited the state’s creditors to subscribe their certificates of indebtedness at fair specie value to newly scheduled loans.15 The revival of commercial activity accompanying the French presence nearby, together with the opening of a trade with Cuba earning large remittances in bullion, also emboldened the General Court to try paying interest on the principal in specie.16 It was hoped that this would give the consolidated debt a sufficiently stable value so that it could pass as an asset as well as a liability.17 During the summer of 1781 the state treasurer had hastily abandoned an attempt to pay interest in specie on the £1.46 million new emission currency Massachusetts had issued at Congress’s behest.18 But in the following autumn the legislature experimented successfully with an excise as a device for raising hard coin. The initial results of indirect taxation encouraged them to expand the number of dutied articles and appropriate the revenue to paying interest on a major part of the state’s consolidated debt.19
Nonetheless, more debt remained than there was ever specie enough with which to pay interest on it. The government attempted to cope with the situation in a variety of ways. When a creditor applied to the treasurer for payment of interest, he was given an order on a local collector rather than actual money in payment. The treasurer retained considerable discretion as to when these orders were issued.20 He also controlled to whom they were directed. This allowed him to exploit the original distinction between that part of the consolidated debt that had been exchanged for the depreciation notes issued to the army (the so-called army notes) and had been funded by an annual direct tax and the rest of the consolidated debt, which had been funded by the excise and impost. An order on an excise or impost collector in a thriving seaport could be a readily negotiable asset.21 An order on the collector of a rural town, on the other hand, was not likely to be worth much, particularly if no execution had been issued against the official involved, as no local figure was going to risk the wrath of his fellow townsmen if he could possibly avoid it.22 By occasional procrastination and by a judicious matching of collectors to creditors, the treasurer was able to stretch out his limited supply of specie so as to meet the demands of those creditors living in the seacoast areas, where most of the revenue was raised. This expedient had the advantage of ensuring that the revenue would continue to come in, but the state paid a price for it. Its consolidated notes sold at anywhere from five to eight shillings on the pound, a good deal more than the two to three shillings a creditor could get for the liquidated federal debt but not enough to prevent a development that posed a serious threat to public credit.23
I am referring, of course, to the speculation in the debt that the depreciated value of the principal invited. As long as unfunded debts circulated below par, there were incentives on both sides for selling and buying at bargain prices. The seller might be in desperate need of money; the buyer could always hope that the debt would eventually be completely funded and would appreciate in value.24
This led progressively to the concentration of the debt in fewer and fewer hands.25 And in a popular political system, such a process had dangerous implications. What was to stop the majority of public debtors from ganging up on the minority of public creditors?26 One could argue that the public, having already received the full value of the debt, was therefore bound to honor it on the same terms; one could say that if the state failed to do this, it would forfeit all public credit; and one could point to the acute embarrassments that the lack of public credit had inflicted on the patriots during the Revolutionary War.27 But these arguments lost much of their force in peacetime. For one thing, the usefulness of public credit was less in evidence than the immediate burden of the public debt; for another, the debtor majority could with apparent reason claim that because much of the debt had been alienated at vastly depreciated prices by the original holders, it should be paid at no more than its current market price, and possibly at less.28 Such devaluation amounted in effect to a disguised form of repudiation, and its attractiveness increased as people found themselves laboring under a growing burden of private debts in addition to public ones.29
To my knowledge, no commentator on Shays’s Rebellion, then or since, has denied that a classic postwar recession, stimulated by low consumption during the war, by the rapid expansion of personal debt immediately afterwards, and by the subsequent difficulty of paying those debts, laid the groundwork for the upheaval.30 In levying a heavy specie tax just when most of the specie that had entered the economy during the war had drained out again, the Massachusetts General Court acted with about as much finesse as had Parliament when it provoked the Stamp Act riots in 1765. Both had perpetrated measures that were clumsy and ill-timed, coinciding as they did with moments when people were scrambling frantically to pay their private debts. Parliament at least had the excuse that distance from the scene had caused its ignorance of local circumstances. The Massachusetts legislature of 1785–86 had no such excuse. Why, then, did it act the way it did?
Congress’s requisition of September 27, 1785, to pay one year’s interest on its foreign and domestic debts precipitated the crisis.31 Of the two, the foreign debt posed the more urgent problem. Under the supplemental Franco-American Treaty signed in 1782, the United States had agreed to begin repaying the principal of a Dutch loan guaranteed by the French at the end of 1787 and to begin repaying the interest and principal of the French loan at the end of 1788.32 Since 1783 the nation’s foreign credit had depended on advances made by Dutch bankers, who might also help in refinancing the entire foreign debt. But Congress had reason to fear that the good offices of the Dutch would soon cease if the nation failed to make some headway in raising specie to meet its first formally scheduled payments.33 The legislature computed that Massachusetts’s share of the amount due on the foreign debt, together with interest on the federal domestic debt, came to £145,655, only one-third of which had to be raised in specie.34 Complying with the requisition, however, far from enriching the public creditors of the state, posed a serious dilemma for them.
The immediate interest of the dominant group of creditors lay in preserving the arrangements that had permitted at least a partial funding of the state’s consolidated debt. Unfortunately, because of an adverse balance of trade that had developed after 1783, the yield on indirect taxes had declined to less than £60,000, an amount that placed even a partial funding in jeopardy.35 Nor was the yield likely to increase, given the trade war with Britain that Massachusetts had embarked upon in 1785. Enraged by a series of British orders-in-council that crippled the state’s trade, by the dumping of cheap British manufactures in the American market, and by the appearance of British factors in Boston, the Massachusetts legislature had struck back with protective duties.36 At first it was thought that raising the duties would increase the revenue, but by early 1786 it had become apparent that yields were continuing to decline.37 As a result, the holders of the consolidated notes serviced by the excise and impost had a wholly new interest in raising specie through direct taxation.
In order to do so, however, they had to ally themselves with those public creditors who held less favored forms of the state debt, such as the “army notes,” and with the federal creditors. Alliance with the federal creditors was a necessity because, despite the reduced yields from the excise and impost, the most eligible way to raise the specie requisitioned by Congress was to divert to this purpose the funds appropriated for paying interest on the consolidated notes. An attempt to divert them had been made early in 1786 and only narrowly defeated, despite the popularity of partial funding in the eastern towns and the political power these towns enjoyed under the Constitution of 1780 because of the provision it made for proportional representation of the population.38 The precarious political situation the most favored state creditors found themselves in likewise made it expedient for them to try to meet the claims of those holding “army notes.”
The incremental cost of satisfying all the specie claims of respective creditors, both state and federal, together with the annual expenses of the government, came to just over £125,000 out of a total tax of £300,000. But before a direct tax for that amount, bearing on all the towns, could be put into effect, some kind of equitable valuation of assets had to be undertaken. The valuations that had been done during the war had been unsystematic at best.39 The General Court had begun to address the problem of reform in 1784 and in 1785 had delegated the job to a grand committee of unprecedented size. Instead of adhering to fixed proportions for the various counties and allowing them to divide up their quota among themselves, each town had its assets appraised systematically.40 Though polls continued to account for approximately a third of the valuation,41 care was taken to have unmovable assets assessed according to the income they might generate, thus preserving a measure of equity between the newer, poorer settlements and the richer, commercial towns.42 The process was slowed down by considerable foot-dragging, and the final allocations were not entirely free of political string pulling. Nevertheless, the legislature had reason to think the valuation adopted in February 1786 was fairer than any that had preceded it.43
The adoption of the new valuation opened the way to the assessment of the largest direct tax for specie the Commonwealth had ever laid. Petitions in favor of paper money or tender laws as alternatives to this measure were rejected by the legislature on the grounds that the experience of the war had shown that they would drive money of real value out of circulation and thus exacerbate the Commonwealth’s problems.44 Though the creditors could not have been oblivious to the risks they were taking—they must have realized that a people who had lived through a revolution that had started as a tax rebellion would be sensitive to such dramatic increases in taxation—most of the state’s leadership felt that private inclinations had already been overindulged, that the time had come to put urgent public needs first, and that a modicum of virtue and restraint would lead to a speedy retirement of the Revolutionary debt.45
The creditors were also guilty of what we would call “vanguardism.” Massachusetts remained the second largest state in the Confederation and still thought of itself as having been far and away the foremost in initiating and prosecuting the Revolution. It had been the first to mobilize its forces for battle, and it had pioneered what was widely regarded as the most republican constitution on the continent, one to which the people had explicitly consented after an initial series of rejections.46 Now, surely, it was time for Massachusetts to lead the way once more by showing the other states how to extricate themselves from the morass of the postwar debt.47 And some suspected that if the state did not assert itself in this way, government under the Articles would break down over the issue of public credit. This was a disturbing prospect because the Articles gave the commercial states of the North more protection against dominance by the agrarian states of the South than they were likely to have in a consolidated union.48
Yet all of these facts do not fully explain why the majority of the Massachusetts legislature attached so much importance to establishing public credit as to risk their separate “interests” for it. There were undeniable instrumental considerations, going well beyond the wooing of influential support through the enrichment of individuals, or even the potential economic benefits to all of successfully funding the debt. The war had shown that no single nation could long survive in competition with others unless it could command the voluntary support of people of substance: in other words, unless it had public credit. What had enabled Britain to continue the struggle against hopeless odds was its command of credit, as opposed to America’s loss of it.49 The war had also shown that because of persistent imbalances in the American economy, the nation needed foreign credit as well. Such considerations undoubtedly played a part in influencing the Massachusetts legislature to respond as it did to the requisition of 1785.
But the most compelling influence touched on a larger question, raised with particular urgency in the immediate aftermath of the war, whether it would be possible to establish a stable government based on the consent of the people if one part of the populace violated its pledge to another; that is, if the public debtors inflicted injustice on public creditors. It was in response to a debtor majority in Pennsylvania that Thomas Paine had written that “a Republic, properly understood, is a sovereignty of justice, in contradistinction to a sovereignty of will.”50 By this he meant that it was essential for a republican government to adhere to principles that all could and should espouse. In accordance with this view, many argued that whatever else might be desirable, an unswerving commitment to public credit was the sine qua non for the firm and lasting establishment of a republican government.51
As we all know, the legislature’s policies provoked a series of court closings culminating in a widespread rebellion, an expensive military repression of it that increased the debt rather than retiring it, and a bitter public reaction to these events that made it impossible to take further action on behalf of public credit at the state level.52 Other states also suffered court closings, and New Hampshire, too, was briefly confronted with an armed rebellion.53 But Shays’s Rebellion alone took on national significance because it showed what could happen when a public creditor minority, enjoying the benefit of the most legitimate constitution on the continent, imposed more than routine taxes on the debtor majority in the name of establishing public credit. In other words, it showed the futility of the states’ trying by their own exertions to save the credit of the nation. In most states in the Union, a minority of public creditors stood opposed in their interests to a debtor majority, and presumably creditors in other states, too, would face uprisings if these states tried to pay their debts.54 Few who did not enjoy special fiscal advantages were so unwise as to try.55
The sole remaining possibility for a solution to the problem of the war debt seemed to be the development of a new form of polity capable both of organizing the total resources of the nation, as the separate states were not, and gathering them in without provoking popular rebellion. That polity would have to be a national one, capable of countering the hostile economic policies of foreign powers and of maximizing domestic revenues from such taxes as the impost. Its precise structure, however, would remain in doubt until after the Philadelphia convention. In the immediate wake of Shays’s Rebellion, one thing only was clear: a radically new departure was necessary if public credit, the absolute prerequisite for the founding of an enduring republic, was ever to be established on a national scale.56