Hamilton issued a bold proposal. The federal government should pay off all Confederation (state) debts at full value. Such action would dramatically enhance the legitimacy of the new central government. To raise money to pay off the debts, Hamilton would issue new securities bonds).
Hamilton proposed that the federal Treasury take over and pay off all the debt that states had incurred to pay for the American Revolution. The Treasury would issue bonds that rich people would buy, thereby giving the rich a tangible stake in the success of the national government.
When the war ended, the United States had spent $37 million at the national level and $114 million at the state level. The United States finally solved its debt problems in the 1790s when Alexander Hamilton founded the First Bank of the United States in order to pay off war debts and establish good national credit.
The new U.S. Government attempted to pay off these debts in a timely manner, but the debts were at times a source of diplomatic tension. In order to pay for its significant expenditures during the Revolution, Congress had two options: print more money or obtain loans to meet the budget deficit.
Among the many challenges George Washington faced as the first President of the US, one of the most pressing was the national debt incurred during the Revolutionary War. When Washington took office, the federal government was essentially bankrupt, and its bonds nearly worthless.
Shortly after the American Revolutionary War (1775-1783), public debt grew to more than $75 million and continued to swell considerably over the next four decades to nearly $120 million. However, President Andrew Jackson shrank that debt to zero in 1835.
1837: Andrew Jackson
(In 1835, the $17.9 million budget surplus was greater than the total government expenses for that year.) By January of 1835, for the first and only time, all of the government's interest-bearing debt was paid off.
George Washington took the easy way out by printing more money and borrowing from himself. The government hadn't yet begun to tax, so progress in paying back the money was slowed. So, more money was printed. This action wasn't a concern until wars began to pile up.
In other words, state IOU's — the money borrowed to finance the Revolution — were viewed as nearly worthless. Hamilton issued a bold proposal. The federal government should pay off all Confederation (state) debts at full value. Such action would dramatically enhance the legitimacy of the new central government.
1775 - Paying for the American Revolutionary War was the start of the country's debt. 1781 - The Department of Finance was created. 1783 - The U.S. debt totaled $43 million. Congress was given the power to raise taxes to cover the Government's costs.
England's Seven Years' War (1756–1763) and its counterpart waged in America, the French and Indian War (1754–1763), doubled Britain's national debt. In order to recoup some of the losses Britain incurred defending its American colonies, Parliament decided for the first time to tax the colonists directly.
Firstly, many Southern states were already in the process of paying off their war debts and some, namely Virginia, had nearly paid off their debts in full. These states did not want to pay taxes to subsidize the debts of other states who had not yet begun to pay.
Parliament passed the Stamp Act on March 22, 1765, to pay down a national debt approaching £140,000,000 after defeating France in the Seven Years War (1763). A year earlier, Parliament passed the Sugar Act, their first revenue-raising measure. Both taxes promised dire consequences in a post-war economy.
Hamilton's critics claimed that his scheme would provide enormous profits to speculators who had bought bonds from Revolutionary War veterans for as little as 10 or 15 cents on the dollar. For six months, a bitter debate raged in Congress, until James Madison and Thomas Jefferson engineered a compromise.
The Compromise of 1790 was a compromise among Alexander Hamilton, Thomas Jefferson, and James Madison, where Hamilton won the decision for the national government to take over and pay the state debts, and Jefferson and Madison obtained the national capital, called the District of Columbia, for the South.
France bitterly resented its loss in the Seven Years' War and sought revenge. It also wanted to strategically weaken Britain. Following the Declaration of Independence, the American Revolution was well received by both the general population and the aristocracy in France.
They had recently come through their own revolution successfully in large part because they were willing to borrow heavily to pay their bills. Still, the Founders generally disapproved of debt and believed that the amount the country owed should be limited.
British Debt
Ironically, this was one of the key factors that caused the revolution in the first place. Britain had acquired a massive debt fighting the French and Indian War. It attempted to pay down that debt by taxing colonists through the Stamp Act, generating far more resentment than revenue.
Many of the Founding Fathers had similar money troubles; George Washington and James Monroe died in debt. So did Alexander Hamilton, who was so poor that mourners at his funeral had to pass around a hat to gather the cash needed to bury him.
Not everyone agreed with Hamilton's plan. Thomas Jefferson was afraid that a national bank would create a financial monopoly that might undermine state banks and adopt policies that favored financiers and merchants, who tended to be creditors, over plantation owners and family farmers, who tended to be debtors.
There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.
Payment of US national debt
On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.
US Treasurys Owned by China, in USD Billions
As of Oct. 2022, China owns $769.6 billion of the total $7,565 billion U.S. national debt.
As of January 2023, the five countries owning the most US debt are Japan ($1.1 trillion), China ($859 billion), the United Kingdom ($668 billion), Belgium ($331 billion), and Luxembourg ($318 billion).