Funding Act of 1790
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The United States Funding Act of 1790, the full title of which is "An Act making provision for the [payment of the] Debt of the United States", was passed on August 4, 1790 by the United States Congress as part of the Compromise of 1790, to address the issue of funding (i.e., debt service, repayment and retirement) of the domestic debt incurred by the Colonies; the States in rebellion; in independence; in Confederation, and subsequently the States' comprising and within, a single, sovereign, Federal Union. By the Act the newly-inaugurated federal government under the US Constitution assumed (and thereby retired), the debts of each of the individual Colonies' in rebellion and the bonded debts of the States in Confederation — debts that each state had individually and independently issued, on its own "full faith and credit", when each of them were in effect, an independent nation.
The United States government then (through its also newly created Department of the Treasury), issued U.S. Treasury Securities (backed by the "full faith and credit" of the United States of America) offering these securities to the bondholders of the former States' and Confederation's bonded debts, at par. That is, at 100% of their face value (full assumption); and at rates of interest (and all other terms) that were as specified on the bonds when they were issued by the states and Confederation. When this was done, it resulted in the "full assumption" of state debts by the federal government through the issue of federal securities. And for the states of the new union, the full and complete retirement of their bonded obligations incurred in the Revolution, and the Confederation.
With the formation of the new government in 1789 and under the recently adopted US Constitution, the settlement of the Revolutionary War debt was a matter of prime importance. As a result, the first House of Representatives directed the first secretary of the treasury, Alexander Hamilton, during the presidential administration of George Washington, to draw up a plan for the support of public credit. Consequently, the First Report on the Public Credit was issued on January 9, 1790, which became the foundation for subsequent action taken by Congress for funding and paying the public debt. The Funding Act of 1790 that followed was concerned primarily with funding the domestic debt held by the states.
The Funding Act authorized the federal government to receive certificates of state war-incurred debts and to issue federal securities in exchange. It essentially proposed “a loan to the full amount of the said domestic debt.” The terms of the loan were that two-thirds of the principal of the debt subscribed should draw an interest of 6% per annum, from January 1, 1791, and the remaining one-third of the principal to receive interest at the same rate (6%) from 1801, with interest “payable quarter yearly”. The debt consisting of arrears of interest should bear an interest of 3% from January 1, 1791.
- New Hampshire – $300,000
- Massachusetts – $4,000,000
- Rhode Island and Providence Plantations – $200,000
- Connecticut – $1,600,000
- New York – $1,200,000
- New Jersey – $800,000
- Pennsylvania – $2,200,000
- Delaware – $200,000
- Maryland – $800,000
- Virginia – $3,500,000
- North Carolina – $2,400,000
- South Carolina – $4,000,000
- Georgia – $300,000
Not all the state quotas were filled, so the total assumed was only $18.3 million. Furthermore, although the Act was limited to one year, it was later extended till the entire debt was subscribed and funded according to the law.
This sum was also to be loaned to the United States with the terms such that each subscriber was to be entitled to a certificate equivalent of 4/9ths of the sum subscribed, bearing interest at 6% per annum, another certificate equal to 3/9ths of the sum subscribed bearing interest at 3% with both commencing January 1, 1792, and a third certificate of the remaining 2/9ths of the sum bearing 6% interest starting from the year 1800.
The Act also provided for the funding of securities issued by the Confederation into new federal issues. State governments had acquired nearly $9 million of the $27.5 million of Confederation debt outstanding in 1789. The law provided that for every $90 worth of principal turned in, there should be issued $60 worth of 6% stock and $30 of deferred that would bear interest after 1801. Arrears of interest were funded into 3% stock.
Finally, the funding program resulted in the settlement of accounts between the states and the national government completed in 1793. This was intended to equalize the per capita burden of war expenditures among the states. Each state was credited with the amount it spent during the War and debited for sums received from the national government.
The shedding of the state debt burden allowed the states to reduce taxes, resulting in the lowering of taxes in many states including Maryland, Pennsylvania, New York, Virginia and Massachusetts. However, this was associated with a subsequent imposition of federal taxes, therefore effectively leaving the status quo unchanged. The Funding Act left the states with substantial revenue earned through the federal securities, with income from this source making up nearly one-fifth of total state revenue. This income enabled states to directly invest in industry and promote economic enterprises.
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- Funding Act of 1790 Date of Publication: 1790 Early American Imprints, Series 1, no. 46047 (filmed) Title: [Bill. 1790] An act making provision for the debt of the United States. Also available at Wikisource.