Financial Problems under the Articles of Confederation

From the beginning, the young United States also had financial troubles. Congress borrowed money from foreign countries, printed paper currency, and sold undeveloped western lands. None of these tactics was effective in improving the economy.

After the Revolutionary War, the United States was more than 35 million dollars in debt, and that number continued to grow. The money from the sale of western land was paltry. It could have paid only one-fourth of the government's expenses. There were no national taxes, and requests for money from the states were ignored. The state governments were having financial difficulties of their own.

So Congress began to print paper money, and began to issue it in large amounts. Predictably, inflation increased to the point where the paper money became worthless. The paper money was then avoided. People began to prefer European coins, made of gold or silver, as currency. Since there was much less of this money than there had been of the printed money, rapid deflation occurred next, causing a depression.

Massachusetts was the only state that did not follow the trend for printed money, which makes sense because Puritans tended to take their principles seriously. But the hardship sparked Shays' Rebellion, which is discussed further below.

The Land Ordinance and The Northwest Ordinance

Two of Congress's attempts to make money by selling land west of the Appalachians were the Land Ordinance of 1785 and the Northwest Ordinance of 1787. An "ordinance" is a new law, often one that concerns the regulation of land. These two ordinances were the only major laws enacted under the Articles of Confederation, and they can show up in a question or two about American History.

The Land Ordinance of 1785 provided for surveying and dividing territories west of the colonies into towns 6 miles square, and selling 640 acre chunks at public auctions for a minimum of $1 per acre. Almost no one wanted to pay so much money in order to obtain much land, so these chunks were often bought and divided by investors, and then sold to farmers.

The Northwest Ordinance of 1787 was a greater achievement. Keep in mind that the "northwest" in 1787 consisted of the territory north of the Ohio River, east of the Mississippi River, and south of the Great Lakes. It is the land that is now Ohio, Indiana, Illinois, Michigan, Wisconsin and Minnesota (east of the Mississippi River), which was territory located northwest of the 13 colonies.

The Northwest Ordinance established a way to create no less than three and no more than five new states. It established a three-stage process based on population for new states to be created and join the Confederation of colonies. It also specified what type of government the new territories and states must have, a requirement that would later become part of the U.S. Constitution.

A territory was required to have at least 60,000 free men living in it before it could apply for statehood. A republican form of government was required in order for a territory to become a new state. Slavery was prohibited north of the Ohio River (which means it was prohibited virtually everywhere in the Northwest Territory).

The Northwest Ordinance was the first to protect private property against the taking of property by government without just compensation, which was later enacted as part of the Fifth Amendment. The Northwest Ordinance protected other individual rights that would later become part of the Bill of Rights: religious freedom, a right to a writ of habeas corpus (which enables anyone imprisoned to demand a hearing to challenge his imprisonment) and trial by jury (keep in mind that the U.S. Constitution did not exist yet). In addition, the ordinance encouraged public education, but public schools would not become widespread in their modern form until the 1900s.

The Northwest Ordinance was a huge success, establishing how new states could be created in a peaceful and orderly manner. It also put foreign countries, particularly England and France, on notice that the United States owned this territory and would be settling it.

This Ordinance was passed in the summer of 1787, while the Constitutional Convention was meeting in Philadelphia. When the Articles of Confederation were replaced by the Constitution, the Ordinance was passed again under the new Constitution.

The following new territories became new states due to the success of the Northwest Ordinance (with their date of statehood in parentheses): Ohio (1803), Indiana (1816), Illinois (1818), Michigan (1837), Wisconsin (1848), and Minnesota (1858).