pennsylvania defaults on its debts -- 8/8/14

Today's selection -- from America's First Great Depression by Alasdair Roberts. In 1825, the Erie Canal was opened, and was one of the great successes in U.S. economic history. In this era, massive public projects like this were financed by state debt, not federal, and Eric Canal bondholders were richly rewarded. This set off a stampede of copycat public works projects in other U.S. states, primarily canals and railroads. Soon, so much debt had been issued by U.S. states that nine of them eventually defaulted on their debt, much of which was held by British individuals and institutions:

"Until early 1839, no one had a clear idea of how much [U.S.] state governments were borrowing. It was at that point that the Comptroller of New York, A. C. Flagg, reported on his survey of other state officials. His conservative estimate of the trend was staggering. In the decade running from 1820 to 1830, state governments had borrowed a total of just twenty-six million dollars. In the next five years, new borrowing rose to forty million dollars. And in the next three years -- 1836 to 1838 -- borrowing exceeded one hundred million dollars. In a very short period, American states had accumulated obligations roughly equal to the combined national debt of Russia, Prussia, and the Netherlands. ...

"Pennsyvlania's default was the most spectacular. By the end of 1841, the state had accumulated a debt of forty million dollars, far more than any other state. Interest costs alone were almost two million dollars a year, while total state revenues were less than one million dollars.

"Before the crisis, Pennsylvania had been absorbed in a fatal competition with New York State for the control of inland trade. The success of the Erie Canal, historian Avery Bishop wrote in 1907, 'necessitated the commencement of similar works in other states for the sake of their own self-preservation.' Between 1826 and 1835, the state borrowed twenty-five million dollars to build a network of roads, railroads, and canals that would run from the port of Philadelphia in the east to the Ohio River at Pittsburgh. But New York had geographical advantages that 'made defeat inevitable to Pennsylvania from the beginning.' Even in 1835 the state was not earning enough from its improvements to cover its interest charges. ...

"Earlier than many other states, Pennsylvania tried to raise taxes to cover its mounting interest costs. By 1842, total tax revenue was almost twice what it had been in 1835, but this was still far too little to restore the state's finances. The state also resorted to other tactics to avoid collapse. In April 1840, legislators compelled banks with state charters to lend three million dollars to cover the state's deficit, but the banks themselves were near collapse. A year later, the state treasury began paying many of its creditors with small denomination relief notes, which were often returned to the state for payment of taxes and did little to improve its ability to pay overseas lenders.

"By the end of 1841 the state was desperate. Philadelphia merchant Sidney Fisher wrote in his diary in early December that 'the doctrine of repudiating state debts is spreading rapidly, is spoken of openly and boldly defended by many presses and leading politicians.' A public meeting at the Philadelphia courthouse later that month passed resolutions denying that Pennsylvanians were under any 'moral, legal or political obligation' to repay the 'so-called state debt.' In early 1842, the state met interest payments by scavenging from the assets of the Bank of the United States, which had collapsed in January. By August 1842, the treasury had nothing but its own relief notes, and Pennsylvania finally defaulted. 'The substance of our State is swallowed up,' wrote a correspondent to the local newspaper in Smethport, Pennsylvania, 'and repudiation stares us in the face.' ...

"As America state governments tumbled, the mood of the world's financial center [London] soured. ... No one would buy [U.S. debt]. ... [Former South Carolina governor James] Hamilton was accosted by an aged British pensioner who had put his savings into Mississippi bonds. ... Mississippi would never pay. ... The Times of London reported that '[a]n America gentleman of the most unblemished character was refused admission to one of the largest clubs in London on the sole grounds that he belonged to a republic that did not fulfill its engagements ... No distinction, as we understand, has been made as to the State to which an individual may belong, but the whole United States are looked upon as equally tarnished.' "


Alasdair Roberts


America's First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837


Cornell University Press


Copyright 2012 by Cornell University


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