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The Beacon of Liberty, Vol. III, Issue 6

The Beacon of Liberty, Vol. III, Issue 6

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Published by Matt Erickson
Volume III, Issue 6 of The Beacon of Liberty continues the look into the constitutional power to borrow money under Article I, Section 8, Clause 2; and also looks into the use of (selling) public lands as a means to secure that debt.
Volume III, Issue 6 of The Beacon of Liberty continues the look into the constitutional power to borrow money under Article I, Section 8, Clause 2; and also looks into the use of (selling) public lands as a means to secure that debt.

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Categories:Types, Research, History
Published by: Matt Erickson on Sep 01, 2012
Copyright:Public Domain

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On
 August 4, 1790
, Congress enacted as law theTreasury Secretary’s essential recommendations
forbringing current the past-due debts of the United States.
The first action of the law was to annually appropriate$600,000 (out of import and tonnage Duties) for:
"The support of the government of the UnitedStates, and their common defence, the residue of saidmonies…is hereby appropriated to the payment of theinterest…due on the loans heretofore made by theUnited States in foreign countries;and also to thepayment of interest on such further loans as may beobtained for discharging the arrears of interestthereupon, and the whole or any part of the principalthereof."
1
Section 2 of the 1790 Act authorized the President toborrow $12 million to refinance the existing 
foreign
debtof the United States.Section 3 of the Act proposed another loan, alsoborrowed on the credit of the United States, to the full
amount of the
domestic 
debt (then roughly some $41 million
[~$30 million in principal and ~$11 million in interest]).The financial transactions laid out within the Actessentially consisted of swapping the old debt instruments which were highly depreciated from their face value fornew securities issued at their specie value.The government securities given to the lenders underthis Act as evidence of the new loans were
registered stock certificates 
. The government's old debt was
capitalized 
, orconverted into a capital stock which paid interest.The stock could only (as designated in Section 7) betransferred between individuals, businesses, or othergovernment entities when so noted upon subscriptionbooks opened at the Treasury (or in the individual LoanCommissioner's offices in each State) — hence the
registered 
nature of the stock.Types of payment accepted for the stock issued underthe new loans were debt instruments previously-issued,but valued at their market-value (rather than face value),including:
Certificates of the Register of the Treasury;
Certificates of the State Commissioner of Loans(including those certificates issued January 2, 1779 to replacethe May 20, 1777 and April 11, 1778 Bills of Credit);
 Army and Army Staff Certificates;
Indents of Interest;
Bills of Credit; at the equivalent rate of $100 dollarsin face value to $1 in specie.
 All the various securities issued previously for evidenceof the debts of the United States were accepted andexchanged at their value in gold or silver for new anduniform stock certificates.Sections 4 and 5 of the 1790 Act discussed the threetypes of newly-created stock. Two of them, discussed inSection 4, were
6% stock certificates
. The 6% stock wasissued in exchange for the
 principal 
(amount) of the oldloans.
Clauses Discussed:
Article I, Section 8, Clause 2• Article IV, Section 3, Clause 2
Concepts Discussed:
• To borrow Money • Public Lands
Volume III: Issue 6
1. I Stat. 138, Section 1.Section 7 of a May 8, 1792 Act (I Stat. 281 @ 283) established aseparate fund "for the gradual reduction of the public debt" from this"residue of…monies". This fund was later denominated
The Sinking Fund 
by Section 8 of the Act of March 3, 1795 (I Stat 433 @ 434).The 1795 Act also created (in Section 16)
The Surplus Fund 
; a fundfor money which had been appropriated for some use but remainedunexpended after its appropriation period lapsed (generally, two years).
Distributed by:FoundationForLiberty.org
w
 
ww.FoundationFor
 
Liber
 
ty.org
1500 Highway 2
Copyright 2004, 2005 by Beacon of Liberty, LLC.
Leavenworth, WA 98826
www.BeaconofLiberty.org
 
The 6% stock was divided into a stock which paidinterest
immediately 
and also a stock which
deferred 
the
interest payments. For the sum subscribed (specie value)
of the old loan principal, two-thirds of that amount wasissued in stock certificates which paid current interest atsix percent per annum (interest payable quarterly). Theremaining one-third was paid in 6% deferred stocks, which began paying (6%) interest after the year 1800.Up to eight percent of the initial amount of thecertificate could be paid off in any one year (6% ininterest; therefore 2% in principal, initially).
2
The third type of stock issued was the
3% stock 
given for overdue
interest 
payments. Section 5discussed the 3% stock certificates given in exchange forthe "IOU" certificates (Indents of Interest) earlier givenin lieu of interest payments.
3
These new certificates were subject to redemption at the pleasure of Congress(in the interim they paid 3% interest, payablequarterly).Section 6 appointed a Commissioner in each Stateto issue the stock certificates and keep track of the stock 
subscriptions 
4
and interest payments.Section 9 allowed any of the original lenders whodid not desire to give up their old debt claims to keepthem rather than to subscribe to the new securities(under different terms). Section 10, however, yetrequired them to obtain new certificates offering thesame old terms. The stated purpose for this latter action was to confirm the authenticity of the certificates againstcounterfeits. A major benefit of this action wasverification of the amount of the old outstanding certificates, which was then in question.Section 12 required the financial officers keeping track of the government securities take an "oath oraffirmation for the diligent and faithful execution of their trust" prior to entering upon the execution of theiroffices, as well as a requirement to become "bound withone or more sureties…not less [than] five thousand, normore than ten thousand dollars, with condition for theirgood behaviour".The 1790 Act also proposed a loan of $21,500,000for assumption of State debts.
Section 13
limited the scope of this loan only tothe State debts associated with fighting the war, reading that:
"no such certificate shall be received, whichfrom the tenor thereof, or from any public record, act,or document, shall appear or can be ascertained tohave been issued for any purpose, other thancompensations and expenditures for services orsupplies towards the prosecution of the late war, andthe defence of the United States, or of some partthereof during the same."
The amount allowed for each State was as follows:Section 15 provided that the loan certificates which would be given in payment of the State debts also bedivided into 6% (interest payable and deferred) and 3%stock. The difference from the previous stock issued was that the stock issued here (for the State debts) didnot vary due to whether it was in payment of principalor interest (they were combined for a total dollar figureowed). From this total dollar figure, two-thirds of thisamount was for stock which paid 6% interest. Of the6% stock, two-thirds of this two-thirds was also dividedinto
interest-paying 
and one-third into
interest-deferred 
.The other third of the total dollars owed was issuedin stock which paid 3% interest quarterly untilredemption was provided by law.
5
B.O.L. Volume III:Issue 6:Page 2
2. Many people wanted to invest; i.e., they did not want to part withtheir stock. The Act was written which gave the government the
right 
,
but not the
duty 
, to buy back stock annually to the dollar amountequal to 8% of the initial certificate amount, less interest owing.3. Any workable definition of a
bankrupt 
would have to includethose individuals or entities which were not even able to payinterest, but instead gave vouchers for interest owed. Here IOU'swere initially given, then discounted, and later replaced.4. Just as one may
subscribe 
to a newspaper or magazine andoften either pay for the subscriptions up front or in (monthly,quarterly, or in semi-annual) payments, so too could lenderssubscribe to stock but then give partial payment for it at regularintervals.
$21.5 Million Assumption of State Debts
StateAmoun
New Hampshire$300,000Massachusetts$4,000,000Rhode Island &Providence Plantations$200,000Connecticut$1,600,000New York$1,200,000New Jersey$800,000Pennsylvania$2,200,000Delaware$200,000Maryland$800,000Virginia$3,500,000North Carolina$2,400,000South Carolina$4,000,000Georgia$300,000Total
$21,500,000
 Assumption of State Debts
5. Overall, the 6% stock of the United States consisted of previously-incurred debt principal of the United States and amixture of both principal and interest of the war debts of theStates. The 3% stock of the United States consisted of the overdueinterest of the United States, as well as a portion of the principaland interest of the State's war-related debts.
 
Section 20 of the 1790 Act pledged and appropriatedout of the monies arising out of the revenue laws of theUnited States the payment of interest on the stock createdby the new loans (including however, the following caveat:"Subject nevertheless to such reservations and priorities asmay be requisite to satisfy the appropriations heretoforemade").Section 21 further pledged the "faith of the UnitedStates" to provide "such additional and permanent funds asmay be requisite towards supplying any such deficiency,and making full provision for the payment of the interest which shall accrue on the stock to be created by virtue of the loans aforesaid".The final Section of the 1790 Act, Section 22, touchesupon the issue perhaps most relevant for determining a possible future appearance of America, for it indirectly touches on the subject of the 650 million acres of land yetowned by the United States Government today. How this
one-quarter of the land mass of the United States is handled
plays an critical role in the future development of America.
Section 22
of the August 4, 1790 Act states:
"
And be it further enacted 
, That the proceeds of thesales which shall be made of lands in the westernterritory, now belonging, or that may hereafter belong tothe United States, shall be, and are herebyappropriated towards sinking or discharging the debts,for the payment whereof the United States now are, orby virtue of this act may be holden, and shall be appliedsolely to that use until the said debts shall be fullysatisfied."
This Section declares that "the proceeds of thesales…of lands in the western territory" shall and will beused towards "sinking or discharging the debts" of theUnited States "until the said debts shall be fully satisfied".The coeval act of responsibly borrowing money requires, as stated by Hamilton, making sure that thenecessary means are in place to pay it off.
6
The corollary todiscussing the power to borrow money is to simultaneously discuss and provide the manner for extinguishing thatdebt. Congress did not then improperly hamper futuregenerations with irresponsible borrowing and recklessspending, especially on purposes outside their proper corefunctions as expressly delineated.The 1790 Act making a provision for Debtsestablished that the
revenue laws 
(Taxes, Duties, Impostsand Excises) would not only be the means used to fund thecurrent expenses of government, but would also be used forpaying theint
 
er
 
e
 
stdue on the said loans.This Act of August 4, 1790 also established as law andfact the fundamental rule that
the sale of the Western lands of the United States 
 would be the means relied upon for
 paying off  
the
principal
of the loans.The "western territory" of the United States was the
unapportioned 
land generally West of the Appalachian
Mountains, East of the Mississippi River (see "Acquisitions"
map following, "State Cessions" portion).
7
This area devolved
upon several of the 13 original States under the 1783 Treaty 
of Paris ending the Revolutionary War, based upon theoriginal charters or subsequent land claims of the Colonies.In Article I of the 1783 Treaty, King George IIIrelinquished "all claims to the government, propriety andterritorial rights of the same, and every part thereof".
8
 Article II precisely described the boundaries of the landrelinquished (here, generally, North to the Great Lakes andSt. Lawrence River [excepting the Canadian provincesSouth of the river], West to the Mississippi River, andSouth to the Northern line of then-Spanish Florida).This 1790 law To borrow Money, however, was hardly the first, nor even the most authoritative, statement of thisprinciple that Western lands be sold to extinguish debts.Discussion had occurred at length over the these Western lands in the Continental and the ConfederateCongresses — many States thought it proper that thelands should be ceded to the United States so that they could be sold off for debt reduction for the benefit of all(six of the States having no Western lands).The cession of the States’ Western lands to the UnitedStates was tied in spirit with the assumption of the Statedebts (the United States received collective
assets 
as they also assumed collective
liabilities 
).
 
B.O.L. III:6:3
The Purpose of the Public Lands
"The proceeds of the sales…of lands in the western territory" were earmarked solely for"discharging the debts" of the United States. Alexander Hamilton proposed it as a "A fundamental maxim...that the creationof debt should always be accompanied with the means of extinguishment".
6
6. American State Papers, Finance Series, Volume I, 1
st
Congress, 2
nd
Session, House Document # 6 "
Public Credit 
", Pg. 15 @ 24. 1790.7. Lands not apportioned for taxation purposes; i.e., lands not yetpopulated. Settlement inland further than 50 miles from the coast linewas then yet rare (except up navigable rivers).8.
Definitive Treaty of Peace Between the United States of America and his Britannic Majesty 
, Volume VIII, United States Statutes at Large,Pg. 80 @ 81. September 3, 1783.

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