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Debt, Default, and Revenue Structure: The American State Debt Crisis in the Early 1840s

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  • Arthur Grinath III
  • John Joseph Wallis
  • Richard Sylla

Abstract

During the 1820s and 1830s, American state governments made large investments in canals, banks, and railroads. In the early 1840s, nine states defaulted on their debts, four ultimately repudiated all or part of their debts, and three went through substantial renegotiations. This paper examines how the states got into the debt crisis and, as a result of their earlier history, how they responded to fiscal pressure in the debt crisis. The explanation is built around revenue structures. States along the developed eastern seaboard were able to avoid politically costly property taxes, while states along the frontier were forced to rely heavily on property taxes. When faced with fiscal pressures, two of the defaulting states -- Maryland and Pennsylvania -- were able to resume debt payments, with back interest, as soon as a property tax was enacted. The other defaulting states, however, already had high property taxes. Without access to new revenue sources, these states were forced to default, and then either renegotiate or repudiate their debts.

Suggested Citation

  • Arthur Grinath III & John Joseph Wallis & Richard Sylla, 1997. "Debt, Default, and Revenue Structure: The American State Debt Crisis in the Early 1840s," NBER Historical Working Papers 0097, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberhi:0097
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    1. Laves, Walter H. C., 1935. "Foreign Bondholders and American State Debts. By Reginald C. McGrane. (New York: The Macmillan Company. 1935. Pp. vii, 410.)," American Political Science Review, Cambridge University Press, vol. 29(4), pages 686-687, August.
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    6. Heckelman, Jac C. & Wallis, John Joseph, 1997. "Railroads and Property Taxes," Explorations in Economic History, Elsevier, vol. 34(1), pages 77-99, January.
    7. James M. Poterba, 1996. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Jiri Jonas, 2012. "Great Recession and Fiscal Squeeze at U.S. Subnational Government Level," IMF Working Papers 2012/184, International Monetary Fund.
    2. Stephen Haber, 2008. "Differential Paths of Financial Development: Evidence from New World Economies," NBER Chapters, in: Understanding Long-Run Economic Growth: Geography, Institutions, and the Knowledge Economy, pages 89-120, National Bureau of Economic Research, Inc.
    3. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
    4. Nicolas Ziebarth, 2013. "Are China and India Backwards? Evidence from the 19th Century U.S. Census of Manufactures," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 86-99, January.
    5. John A. Dove, 2017. "Property Tax Limits, Balanced Budget Rules, and Line-Item Vetoes: A Long-Run View," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(2), pages 288-317, March.
    6. Howard Bodenhorn, 2006. "Bank Chartering and Political Corruption in Antebellum New York. Free Banking as Reform," NBER Chapters, in: Corruption and Reform: Lessons from America's Economic History, pages 231-257, National Bureau of Economic Research, Inc.
    7. Alistair K. L. Milne, 2011. "Limited Liability Government Debt for the Eurozone -super-†," CESifo Economic Studies, CESifo Group, vol. 57(1), pages 44-78, March.
    8. David M. Cutler & Grant Miller, 2006. "Water, Water Everywhere. Municipal Finance and Water Supply in American Cities," NBER Chapters, in: Corruption and Reform: Lessons from America's Economic History, pages 153-183, National Bureau of Economic Research, Inc.
    9. Lorenzo Bini Smaghi, 2013. "Sovereign Risk," Chapters, in: Andreas Dombret & Otto Lucius (ed.), Stability of the Financial System, chapter 10, Edward Elgar Publishing.

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    More about this item

    JEL classification:

    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913

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