All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.
To finance the War of Independence, the American states and the Continental Congress sold millions of dollars in public bonds to soldiers, ordinary Americans, and investors both within America and abroad. The Constitutional Convention first addressed the debt issue during its debates on the proposed powers of Congress. On August 21, 1787, the Convention considered this proposal: “The Legislature of the U.S. shall have the power to fulfil the engagements which have been entered into by Congress, and to discharge as well the debts of the US: as the debts incurred by the several States during the late war, for the common defence and general welfare.”
Whether Congress could discharge the state debts was left unsettled because the ensuing debate centered on a different question: Would the new federal government necessarily inherit the debt obligations of the old Continental and Confederation Congresses? There was precedent for such an action in Article XII of the Articles of Confederation, which declared that the Confederation Congress was liable for “monies borrowed and debts contracted by” the old Continental Congress.
Nor was this the only support. Writers on the law of nations, such as Dutch jurist Hugo Grotius, held that the various forms of government were only different means by which political societies achieved the same basic ends. In their view, political societies existed prior to and separate from their particular forms of government (e.g., monarchy or aristocracy), and they could change that form without destroying their existence or altering their fundamental obligations to other countries.
Elbridge Gerry objected that the August 21 proposal only gave the new Congress the “power” rather than the obligation to pay back the debt. He feared that this wording would allow Congress to neglect the rightful return on bonds due to the creditor “class of citizens.” To Oliver Ellsworth and Roger Sherman, such a concern was misplaced because the “US here-tofore entered into Engagements” by Congresses “who were their agents” and “will hereafter be bound to fulfil them by their new agents.”
While Edmund Randolph agreed that the United States was still liable for its obligations, he maintained that the “new Govt” was one of enumerated powers and thus would have only the power given to it by the Constitution. Without an explicit grant of constitutional power, the federal government would be in the strange position of not having the authority to pay off the debts still owed by the country. Unlike Randolph, James Madison held that the obligation to pay debts necessarily conferred the power to pay debts whether or not the Constitution gave the new government such a specific power. Madison argued that the new federal government would receive its constitutional power in domestic matters through enumerated grants from the people of the states; but the states themselves “never possessed the essential rights of sovereignty,” which were “war, peace, treaties,” and other powers over external affairs. Thus, in matters relating to repayment of debts to foreign bondholders, the new national government would inherit its powers directly from the Articles. Thus, Congress did not need an explicit grant of power from the new Constitution. In defending the clause against Anti-Federalist criticism, Madison maintained that its insertion was not a legal or constitutional necessity but was done only “for the satisfaction of the foreign creditors of the United States.” The Federalist No. 43.
Following a motion by Gouverneur Morris on August 25, the convention changed the clause from a grant of power to Congress to an obligation of the United States. The change was then accepted by the convention, which split the power to “pay the Debts,” leaving it in Article I, Section 8, from the obligation to uphold “debts” and “Engagements,” moving the latter to Article VI. A few commentators later thought that “engagements” also referred to the central government’s obligations to the people of the Northwest Territory under the Northwest Ordinance (1787), but none of the Framers in Philadelphia made that connection while debating the clause.
After some political struggles in the early 1790s, the new federal government made good on the bond obligations inherited from the Articles of Confederation, thus vitiating the possibility for serious constitutional controversy. Subsequently, early Supreme Court cases like Ware v. Hylton (1796) and Terrett v. Taylor (1815) settled constitutional issues of contracts and property rights from the preConstitution era, not by interpreting the Debt Assumption Clause, but by invoking the Supremacy Clause of Article VI.
The clause’s purpose, therefore, was less legal than it was to reaffirm the Grotian principle that the nation as a juridical entity maintained its international obligations even through changes in the form of government. Inasmuch as a primary motivation for the calling the Constitutional Convention was to create a solid financial basis for the country to honor its foreign debts, the Debt Assumption Clause had a salutary effect on the United States’ standing in the international community.
David P. Currie, The Constitution in Congress: Substantive Issues in the First Congress, 1989–1791, 61 U. Chi. L. Rev. 775 (1994)
Peter Onuf, Statehood and Union: A History of the Northwest Ordinance (1987)
Ware v. Hylton, 3 U.S. (3 Dall.) 199 (1796)
Terrett v. Taylor, 13 U.S. (9 Cranch) 43 (1815)