Foreign Debt

The Problem

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Although the Articles of Confederation allowed the Continental CongressContinental Congress (1774-1789) A convention of delegates representing the thirteen colonies (and later states) that became the governing body of the nation until the passage of the Constitution. to issue money, without the revenue from taxes, the money was almost worthless. Due to their dire situation, Congress looked to their foreign allies to help them finance the war.1 The states were able to receive financial assistance from the French, Dutch, and Spanish totaling 8 million dollars, which in today’s money is 139 million dollars.2 The states struggled to pay back the amount they borrowed from their foreign allies. Congress borrowed the money in the first place because their own money was worthless and they could not tax, so in paying back their foreign allies, they had few resources to rely on. The huge amount of debt combined with the small amount of hard currency available produced a significant problem for the states.

The Players: International Involvement

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Desperate times calls for desperate measures and in order to win the Revolutionary War, the American colonies needed help. Congress created the Secret Committee of Correspondence in 1775 to inform European countries that the colonies were seeking independence from Britain and needed assistance.3 France was a key player in the colonies’ victory in the war. Due to the efforts of Benjamin Franklin, the French government would secretly ship war supplies to the colonies by using fake corporations to receive funds and supplies. On February 6, 1778, France and the rebellious colonies signed a Treaty of Alliance and a Treaty of Commerce, which made France more active in the war. Between 1778 and 1782, France supplied the colonies with arms, money, ammunition, uniforms, and offered troops and naval support. Even during negotiations to end the war, France provided the colonies with an additional loan despite facing financial troubles in their own country.4 Along with France, Holland provided a lot of financial support to the colonies during the war effort and supported their independence from Britain. The British had tried to prevent trade between Holland and the colonies, which made Holland ally with the colonies during the war.5 In addition, the Spanish government made large financial contributions to prominentprominent (adjective) leading, important, or well-known patriots such as John Jay. In 1780, the Spanish king Carlos III issued a Royal Order asking all Spaniards living in the Americas to make a donation to support the American cause, which received high levels of participation and popular support.6

The Result: Difficulty of Repayment

If obtaining the loans was difficult, paying back the loans would prove even more difficult.7 States had their own difficulties obtaining revenue by taxation to meet their own functions, so Congress rarely received revenue from the states, if they got any at all.8 When the paper money that states used lost its value, many people could not afford to meet their needs and also pay taxes. States were not the only ones affected by the depreciationDepreciation (noun) a loss in value over time of money, but also many creditors lost money when their debtors could not pay them back. Due to the limitation of funds, Congress defaultedDefaulted (verb) failure to perform an act or obligation legally required on the payments to France in 1785 due to its inability to obtain any revenue from taxes, which helped cause the French Revolution. The little revenue that Congress could amass went to paying back the Dutch because the Dutch were the most likely source of future loans, which Congress successfully obtained in 1787 and 1788.9

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The End Game

Under the Articles of Confederation, Congress was able to borrow money from foreign countries, but had to rely on states to pay back its debts. Congress could not tax the states to collect the revenue that it so desperately needed. The European countries that had been so helpful and generous with their funds allowed the states to gain independence and the states struggled to pay them back. There were several consequences if the states did not pay back their foreign debt. First, the states would be unable to receive any more loans from their foreign allies. Second, the states would seem weak as an independent nation. Third, the states' inability to pay back their debts might lead to war with their lenders. There are various perspectives that offer explanations of why the finances under the Articles lead to such debt and poverty. Many American leaders during that time discussed solutions for the best way to reduce the debt. If the new nation wanted to remain independent, it was essential that they demonstrate to Europe that they could govern themselves, and most importantly, repay their debts. Under the Constitution, Congress was able to lower the amount of foreign debt because of their new power of taxation.


Discussion Questions

• What are some of the reasons why foreign countries would loan money to the colonies? What are some reasons why they wouldn’t?
• Why would France risk bankrupting itself to help the American colonists defeat Britain?
• What would have happened if the American colonies could not obtain foreign loans?

Bibliography for Foreign Debt

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