When the patriots at Lexington "fired the shot heard 'round the world," the thirteen Colonies found themselves suddenly in the midst of war, but with practically no funds in their Treasuries. The Continental Congress was without power to raise money by taxation, and had to depend upon credit bills and requisitions drawn against the several Colonies. France was the first foreign country to come to the aid of struggling America, the King of France himself advancing us our first loan. All told, France's loan was $6,352,500; Holland loaned us $1,304,000; and Spain assisted us with $174,017. Our loan from France was repaid between 1791 and 1795 to the Revolutionary Government of France; the Holland loan during the same period in five annual installments, and the Spanish loan in 1792-3.
Our first domestic war loan of £6,000 was made in 1775, and the loan was taken at par. A year and a half later found Congress laboring under unusual difficulties. Boston and New York were held by the enemy, the patriot forces were retreating, and the people were as little inclined to submit to domestic taxation as they had formerly been to "taxation without representation." To raise funds even a lottery was attempted. In October, 1776, Congress authorized a second loan for $5,000,000. It was not a pronounced success, only $3,787,000 being raised in twelve months. In 1778 fourteen issues of paper money were authorized as the only way to meet the expenses of the army. By the end of the year 1779 Congress had issued $200,000,000 in paper money, while a like amount had been issued by the several States. In 1781, as a result of this financing and of the general situation, Continental bills of credit had fallen 99 per cent.
Then came Robert Morris, that genius of finance, who found ways to raise the money which assured the triumph of the American cause. By straining his personal credit, which was higher than that of the Government, he borrowed upon his own individual security on every hand. On one occasion he borrowed from the commander of the French fleet, securing the latter with his personal obligation. If Morris and other patriotic citizens had not rendered such assistance to the Government, some of the most important campaigns of the Revolutionary War would have been impossible. Following came the Bank of Pennsylvania, which issued its notes—in effect, loans—to provide rations and equipment for Washington's army at Valley Forge. These notes were secured by bills of exchange drawn against our envoys abroad, but it was never seriously intended that they should be presented for payment. The bank was a tremendous success in securing the money necessary to carry out its patriotic purposes, and was practically the first bank of issue in this country.
With the actual establishment of the United States and the adoption of the Constitution, Alexander Hamilton came forward with a funding scheme by which the various debts owed to foreign countries, to private creditors, and to the several States were combined. In 1791, on a specie basis, our total debt was $75,000,000. The paper dollar was practically valueless and the people were forced to give the Government adequate powers to raise money and to impose taxes. Between that date and 1812 thirteen tariff bills were passed to raise money to meet public expenditures and pay off the national debt.
THE WAR OF 1812.
For some time previous to the actual outbreak of the War of 1812 hostilities had been predicted. In a measure, this enabled Congress to prepare for it. And although the war did not begin until June of 1812, as early as March of that year a loan of $11,000,000, bearing 6 per cent. at par, to be paid off within 12 years from the beginning of 1813, was authorized. Of this, however, only $2,150,000 was issued, and all was redeemed by 1817. The next year a loan of $16,000,000 was authorized and subscribed. This was followed, in August, by a loan of $7,500,000 which sold at 88-1/4 per cent.
At the end of the war the total loans negotiated by the Government aggregated $88,000,000. The nation's public debt, as a result of this war, was increased to $127,334,933 in 1816. By 1835, either by redemptions or maturity, it was all paid.
MEXICAN WAR LOANS
The Mexican War net debt incurred by the United States was approximately $49,000,000 and was financed by loans in the form of Treasury notes and Government stock. The Treasury notes, under the act of 1846, totaled $7,687,800 and the stock $4,999,149. The latter paid 6 per cent. interest. By act of 1847 Treasury notes to the amount of $26,122,100 were issued, bearing interest in the discretion of the Secretary of the Treasury, reimbursable one and two years after date, and convertible into United States stock at 6 per cent. They were redeemable after Dec. 31, 1867. Economic developments following this war led to a period of extraordinary industrial prosperity which lasted for several years. A change in the fiscal policy of the Government, with overexpansion of industry, however, resulted in a panic in 1857 and a Treasury deficit in 1858. The debt contracted in consequence of the Mexican War was redeemed in full by 1874.
The situation had not improved to any great extent when Lincoln took office on March 4, 1861, and by mid-November of that year a panic was in full swing. The outbreak of the civil war found the Treasury empty and the financial machinery of the Government seriously disorganized. Public credit was low, the public mind was disturbed, and raising money was difficult. In 1862 the Legal Tender act was passed, authorizing an issue of $150,000,000 of legal-tender notes, and an issue of bonds in the amount of $500,000,000 was authorized.