Foreign Credit and Fiscal Stability: Dutch Investment in the United States, 1781-1794

Abstract

IIHE importance of foreign credits and subsidies to war and peacetime finance during the Confederation is well established. Compared to the nominal value of paper currency and interest-bearing note issues, those credits and subsidies produced rather little. But a more accurate comparison would be based on the specie value of fiat money and domestic loan certificates, and would acknowledge the difficulty of finding domestic resources for such essential foreign purchases as military supplies. Little attention has been given foreign borrowing in the early years of the federal government, another critical period in which domestic resources were inadequate. In attempting to achieve financial stability for the new regime, Alexander Hamilton had to cope with a bequest from the Confederation combining a debt-revenue ratio unparalleled in Europe with tenuous or wholly exhausted domestic credit resources. Nor until the mid-1790s could sufficient tax revenues be collected, for the authority given Congress by the Constitution could not be transformed quickly into enough income to meet military, naval, administrative, debt service, and other expenditures. Save default, the only option left was to turn to the reputation for financial dependability which, ironically, had been built for the Confederation on the Amsterdam capital market since 1781. Hamilton's program of national public finance, an adept compromise among conflicting interests, succeeded not merely because it satisfied many potential antagonists, but because Hamilton, recognizing the necessity of foreign credit, took advantage of Dutch loans and the readiness of Dutch rentiers to invest heavily in the American domestic debt. Revenue and expenditure reconstructions show that Hamilton's establishment of a reliable system of public finance was funded substantially by foreign capital, for which there was no substitute, and from which important monetary and economic benefits were also drawn.