Debt restrictions and municipal indebtedness in American cities: evidence from the Roaring Twenties

Widespread municipal defaults in the late 19th century prompted U.S. states to pass laws restricting the amount of debt cities could incur. These restrictions generally did not bind until the 1920s, when suburban growth spurred local governments to invest in infrastructure, most of which was financed by bonds. We study the relationship between several major debt restrictions – debt limits, supermajority voting referenda, and debt exceptions – and municipal indebtedness in the Roaring Twenties. We find that cities that faced more restrictive debt rules were less indebted by 1929. We also find that debt limits reduced the amount of capital spending in cities during the 1920s and 1930s, while stricter voting rules reduced the likelihood of municipal default in the 1930s. These rules thus determined not only the degree of debt accumulation in early 20th century cities, but also their infrastructure investment and financial health.