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Funding Act of 1790 facts for kids

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The Funding Act of 1790 was a very important law passed on August 4, 1790. Its main goal was to help the new United States government pay off the money it owed. This debt came from the American Revolution, when the states borrowed money to fight for independence.

Before this act, each state had its own debts. The Funding Act meant the new federal government would take on, or "assume," these debts. This helped the states and made the national government stronger. It was a big part of a deal called the Compromise of 1790.

Why the Act Was Needed

After the American Revolution, the new United States government started in 1789. A major challenge was figuring out how to pay off the huge war debt.

The first United States House of Representatives asked Alexander Hamilton, who was the first Secretary of the Treasury, to create a plan. Hamilton worked for President George Washington. On January 9, 1790, Hamilton presented his "First Report on the Public Credit." This report became the basis for how Congress decided to handle the national debt. The Funding Act of 1790 focused mainly on paying off the debts that the individual states owed.

What the Act Did

The Funding Act allowed the federal government to take over the debts that states had from the war. In return, the government issued new federal bonds, which are like IOUs. This was essentially a big loan to pay off the old debts.

Here’s how the loan worked:

  • For most of the debt, two-thirds of the money would start earning 6% interest each year from January 1, 1791.
  • The remaining one-third would start earning 6% interest from 1801.
  • Any unpaid interest from before would earn 3% interest from January 1, 1791.

The Act said the federal government would take on a total of $21.5 million of state debts. However, not all states used their full amount, so the government actually assumed about $18.3 million.

Here is a list of how much debt each state was allowed to have assumed:

State Debt amount authorized for assumption
New Hampshire $300,000
Massachusetts $4,000,000
Rhode Island and Providence Plantations $200,000
Connecticut $1,600,000
New York $1,200,000
New Jersey $800,000
Pennsylvania $2,200,000
Delaware $200,000
Maryland $800,000
Virginia $3,500,000
North Carolina $2,400,000
South Carolina $4,000,000
Georgia $300,000

The Act also helped pay off debts from the earlier Articles of Confederation government. For every $90 of old debt turned in, people would get $60 in new bonds earning 6% interest. They would also get $30 in bonds that would start earning interest after 1801.

Finally, this plan helped settle accounts between the states and the national government by 1793. The goal was to make sure each state shared the cost of the war fairly.

How the Act Changed Things

When the federal government took over the states' debts, it allowed the states to lower their own taxes. Many states, like Maryland, Pennsylvania, New York, Virginia, and Massachusetts, saw their taxes go down.

However, the federal government then had to impose its own taxes to pay for the assumed debts. So, while state taxes went down, federal taxes went up.

The Funding Act also gave states a new source of income. They earned money from the federal bonds they held. This income made up almost one-fifth of some states' total revenue. This extra money helped states invest in businesses and grow their economies directly.

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