Where did the First Taxpayers Get the Money to Pay Federal Taxes?

They put their tax debt on their credit cards. No joke.

In contrast with chartal money, the value of which is based on a state’s promise to receive it, to compel payment, and not to create too much of it, the power of bank money emerges from the banks’ ability to deploy less liquid forms of physical and financial capital in support of their IOUs. Banks mobilize mortgages, unencumbered property titles, merchant notes, ship cargo interests and government securities as well as specie — historically the coin of international commerce — to settle their debts, directly or indirectly. Banks also provide the day-to-day management of accounts upon which governments depend.

I’d offer two illustrations of this dependence in the early republic. The first describes the loans the US took from commercial banks in New York and Philadelphia to pay public officials and, significantly, the acceptability of those banks’ own notes in payment of Customs duties, and the Government-provided indicia of their authenticity:

TEMPORARY LOAN OF 1789. On assuming the position of Secretary of the Treasury, Hamilton found himself entirely without funds to meet the ordinary expenses of the Government except by borrowing, until such time as the revenues from duties and tonnage began to come into the Treasury. Under these circumstances he was compelled to make arrangements with the Bank of New York and the Bank of North America of Philadelphia, the Bank of the United States being not in existence, for temporary loans, and it was money received from these banks that paid the first installment of salary due President Washington, Senators, Representatives and officers of Congress during its first session under the Constitution beginning March 4, 1789.

The following letter was sent on September 22, 1789, to Otho H. Williams, Esq., Collector of Customs at Baltimore, and refers to negotiations which had recently been made with the banks mentioned :

“SIR :-In consequence of arrangements lately taken with the Bank of North America and the Bank of New York, for the accommodation of the Government, I am to inform you that it is my desire that the notes of those banks payable either on demand or at no longer period than thirty days after their respective dates, should be received in payment of duties as equivalent to gold and silver, and that they will be received from you as such by the Treasurer of the United States. This measure, besides the immediate accommodation to which it has reference, will facilitate remittances from the several States, without drawing away their specie–an advantage in every view important. I shall cause you shortly to be furnished with such indications of the genuine notes as will serve to guard you against counterfeits, and shall direct the manner of remitting them. In the meantime and until further orders you will please to receive them, transmitting to me a weekly account of your receipts and payments. The Treasurer of the United States will probably have occasion to draw upon you for part of the compensation for members of Congress from your State. These drafts you will also receive in payment of the duties or in exchange for any specie arising from them which shall come to your hands.”
Secretary of the Treasury

via Loans of the United States, Rhodes’ Journal of Banking, Aug 1894, edited from The National Loans of the United States from July 4, 1776 to June 30, 1880, US Government Printing Office, 1881. Emphasis mine.

The second is Hamilton’s Treasury Department Circulars of Feb-March 1793, one to the Collectors of the Customs, the other, cited here, to the Presidents and Directors of the Offices of Discount and Deposit of the Bank of the United States:

Treasury Department February 23d [–March 5] 1793

I have made the following arrangement with the Bank of the united States for the accommodation of the merchants of Philadelphia whose bonds for duties shall become payable between this date and the last day of the ensuing month of march.

The Bank will discount during the period mentioned the notes of such merchants as are indebted to the Custom house, for 30 days, for the respective sums that shall become payable. The Bank will receive those notes from the Collector as cash; they must therefore be drawn in favour of the Collector only.

If a similar arrangement should appear to you, from any existing circumstance requisite to the accommodation of the merchants of New york. I think it proper to mention to you as a facilitation of it, that I will not draw for the sums that have relation to this transaction until about the middle of may next.

I enclose you a letter to the Collector desiring him to furnish you with an abstract of the Bonds which will fall due within the time the arrangement is to continue, specifying names, sums and times when due.3 This letter may be delivered to the Collector if it should be thought proper to adopt the arrangement; if otherwise it may be suppressed.

I have the honor to be very respectfully   Gentlemen   Your obedt Servt A Hamilton

Treasury Department Circular to the Presidents and Directors of the Offices of Discount and Deposit of the Bank of the United States 23 February [5–March] 1793. Emphasis mine.

These illustrate the TABS hypothesis — taxation and borrowing precede spending — contra Kelton. The 1789 letter shows that the US borrowed, from the Bank of New York and the Philadelphia-based Bank of North America, to pay the salaries of the President and members of Congress, in anticipation of customs receipts. The 1793 Circulars show that merchants with customs tax debt were instructed to establish credit lines with the Bank of the United States, effectively putting their tax debts on their credit cards. With the possession of the merchants’ notes, now debts to the Bank, the Bank was able to clear drafts of the US Government in the same amounts. Then, as today, the US issued debt instruments payable in the IOUs of its creditors, not chartal token money, small coin excepted.