Repudiation of State Debts

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REPUDIATION OF STATE DEBTS

REPUDIATION OF STATE DEBTS was the subject of agitated discussion in the United States and abroad during the 1840s and the 1870s. In the 1830s various American states incurred heavy debts in the construction of canals and railroads and in the creation of banks. Frequently, in authorizing these loans, the faith of the state was pledged for the payment of the interest and the redemption of the principal. In many cases the laws specified that the bonds should not be sold below par. In negotiating these loans, authorized agents of the states violated the state statutes, and American bankers aided and abetted them. Foreign investors bought these securities with avidity because of the guaranty of the states, the high rate of interest they carried, the high standing of the national credit, and the confidence of foreign bankers in the Bank of the United States. When the American financial structure collapsed in the panic of 1837, European bankers tactlessly suggested that the U.S. government assume the state debts. Whatever merit the scheme might have possessed lost out to the hostility created by its supposedly foreign origin and the scramble for votes in the presidential election of 1840.

Between 1841 and 1842 eight states and one territory defaulted on their interest payments. There were many reasons for the growth of repudiation sentiment at this time. The sneers and jeers of the foreign press at American integrity fanned the flames of national prejudices while the universal indebtedness gave an impetus to the movement in favor of repudiation. Repudiation resulted from a series or combination of forces: speculative mania, ignorance of sound banking, a ruinous depression, blatantly demagogic leadership, and the stupidity of the bondholders in refusing to consider propositions that might have resulted in partial payments of their holdings. Although the meager resources of the American people at that time made it impossible for them to meet their obligations when they fell due, an inability to pay was no justification for refusal to pay.

The second attack of state repudiation came with the funding of the state debts incurred during the Reconstruction era. Governments that were not representative of the southern states issued these bonds. Foreign investors received warnings not to purchase them. The forced repudiation of the Confederate war debts by the Fourteenth Amendment strengthened the southerners' opposition to the payment of the "bayonet bonds," especially since "conquerors of the north" held a large proportion of these securities. The ravages of the Civil War, the misrule of the Reconstruction period, and the hard times following the panic of 1873 increased the heavy burdens of the southern people; but in no case were the debts scaled or repudiated until it was apparently impossible to discharge them.

The Eleventh Amendment to the U.S. Constitution prevented foreign creditors from seeking redress. In December 1933, Monaco, which possessed some repudiated Mississippi bonds, asked to bring suit in the U.S. Supreme Court against the state of Mississippi, but on 21 May 1934 the Court unanimously held that Monaco could not sue Mississippi.