Militia Soldier Payment

When Washington was first inaugurated President in April 1789, the US federal government was new and essentially bankrupt due to the debts it inherited, per Article VI of the Constitution of 1787, from the previous government. That government had run into debt fighting the American Revolution and could not begin to repay it after the war because its ability to tax was severely restricted by the Articles of Confederation and a stagnant economy. Its myriad bonds traded at pennies on the dollar in illiquid and inefficient markets. The debt was considered so onerous that a few people spoke of repudiation, at least of the domestically-held portion of it.

When Washington left office in March 1797, the federal government’s bonds had been consolidated into just three types that traded at or near their par (face value) in efficient, liquid, broker-dealer markets in Boston, New York, Philadelphia and elsewhere. Yields were sometimes only slightly higher than on British Consols, but the bonds still attracted significant foreign investment. Although the nominal level of the debt rose slightly during Washington’s two terms, robust economic growth meant that many Americans began to consider the debt more of a blessing than a burden because it helped to cement the interests of thousands of bondholders, many influential at home or abroad, to the new national government.

The sea change in the nation’s finances was made possible by the reform program of Treasury Secretary Alexander Hamilton, a compliant Congress and Washington’s firm leadership. With Hamilton’s urging, the federal government established revenues from tariffs, tonnage duties and other sources that it dedicated to the repayment of new bonds issued in exchange for the mishmash of instruments issued by the federal and state governments during and since the Revolutionary War. The federal government also chartered a central bank, the Bank of the United States (1791-1811), to help it to smooth its cash flows and to make interest payments on the new bonds. That bank also helped to generate economic growth by providing merchants and other businesses with short-term loans and by promoting macroeconomic stability.