DEBTS, STATE. The states constituting the United States have borrowed money for various purposes since they were first organized. One of the problems to be solved during the formation of the new nation's government, from 1787 to 1789, was the disagreement over the assumption by the proposed federal government of the debts incurred by the states during the Revolution. The assumption of debts having been carried out, nearly all the states found themselves debt-free or with such small debts that no problems arose.
Between 1820 and 1840 the states—especially those west of the Appalachian Mountains and east of the Mississippi River—entered into extensive borrowing for "internal improvements." Today this borrowing, which was for canals, turnpikes, railroads, and manufacturing enterprises financed by the states, would be called social over-head capital. The panic of 1837 caused revenues from the projects to decline, and with a reduction in the tax collections of the states, many issues went into default. Large amounts of these bonds had been sold to foreign investors who did not distinguish between the securities of the United States and those of the individual states.
From 1840 to 1860 the states were engaged in repaying funds borrowed earlier. During this period it was common practice to write rigid debt limits into state constitutions. To avoid these restrictive provisions some states created state corporations to construct public works and repay borrowing through user charges. The Pennsylvania and Ohio Turnpike authorities are examples.
With the outbreak of the Civil War in 1861, borrowing by the states increased—to equip militia, to defend the state, to pay bounties to volunteers, and in general to support the war efforts of the Union and the Confederacy. A condition for ending the war was repudiation of the debts incurred by the states of the Confederacy. Again, foreign bondholders suffered losses, as some of the bonds had been sold abroad.
From the post–Civil War period to the 1930s, the states borrowed and paid off debts. Most of the borrowing was to finance public buildings and, toward the end of the period, to finance the construction of highways, which were demanded by the electorate as the popularity of the automobile increased.
The period of the 1930s saw states borrowing to finance general relief expenditures necessitated by the Great Depression. Overall, though, the period was one of repayment of state debts, in contrast to the federal government's extensive borrowing to finance recovery from the depression.
State indebtedness amounted to $3.59 billion in 1940, dropped to $2.4 billion in 1946, but rose to nearly $5.3 billion in 1950. The reduction during 1940–1946 was a direct result of World War II, when no capital improvements that did not further the war effort were undertaken. Rising tax revenues combined with the lower level of expenditures also permitted retirement of debt. The rise in the last half of the 1940s was the result of borrowing for maintenance of facilities neglected during the war, granting of state bonuses to those who served in the military forces during the conflict, and expansion of the states' highway systems.
Between 1950 and 1957 the states' indebtedness increased to $8.5 billion. This increase went for construction of additional facilities for public offices, welfare institutions, and the educational system, and for highways. Indebtedness had risen in spite of the restraints on the economy caused by the involvement in Korea.
During the 1960s the debt of the states more than doubled, from $18.5 billion in 1960 to $39.5 billion in 1969. A further increase in debt to $54.5 billion occurred in 1972. Expanded public works programs and the construction of penal institutions, hospitals, and educational facilities at all levels (and recreational facilities) led to the increase. General price levels were rising during the period, which caused larger amounts to be borrowed to finance a given project. Statutory and constitutional changes also gave legislatures greater flexibility in creating state debt. Debt limits were increased in some states, while others adopted sliding limitations based on average revenue receipts in stated time periods.
The robust economic expansion of the 1990s relieved pressure on state budgets briefly, but by the early twenty-first century state debt soared once again. In 2002, 37 of the 50 states accrued budget deficits. In an effort to reduce debt burdens, many states have turned to state lotteries and casino gambling as revenue sources.
Friedman, Milton. A Monetary History of the United States, 1867– 1960. Princeton, N.J.: Princeton University Press, 1963.
North, Douglass Cecil. Growth and Welfare in the American Past: A New Economic History. Englewood, N.J.: Prentice Hall, 1983.
Chalmers A.Monteith/a. g.