Credit and Discredit


Bonds of all the states found their way into the hands of foreign buyers. More than two-thirds of Pennsylvania’s $34 million in state securities were held by British and Dutch investors. Moreover, during the boom, Americans freely imported goods on credit so that in 1836 the nation had a $61 million trade deficit. We were, in a word, an international debtor.

The inevitable happened. A depression hit the country in 1837. Tax collections fell off. Many of the grand new projects suffered from delays and cost overruns, underutilization, mismanagement, or quick obsolescence. Many of the banks were flops. Between 1841 and 1843 nine states (Pennsylvania, Maryland, Illinois, Indiana, Michigan, Louisiana, Florida, Mississippi, and Arkansas) went into default, suspending interest payments of as much as half a million and more a year.

Not unnaturally, the foreign bondholders were scornful of the base, uncivilized Yankees who would not honor their commitments. They hired lobbyists to plead their cause in the United States and sent memorials to the American authorities. Some petitioners struck a pleading note, like those who declared that “by far the larger portion of us are persons in the middle ranks of life—officers on half-pay, superannuated clerks, retired tradesmen … aged spinsters, widows and orphans.” Others, like the Reverend Sydney Smith, a veteran America basher stuck with a Pennsylvania bond, were outraged. “Sad is the spectacle … [of] a nation with whom no contract can be made, because none will be kept; unstable in the very foundations of the social life … men who prefer any load of infamy, however great, to any pressure of taxation, however light.”

S & L scandals, junk bonds, defaults—the pattern is familiar to anyone who knows about U.S. banking between 1830 and 1855.

Smith had hit the nail on the head. While members of the American investing classes wanted to see public credit sustained, frontier legislators loathed the idea of taxing constituents to pay off foreign creditors—or what one Mississippi paper forthrightly called “Jew brokers.” Another journal in that state argued that to pay off the bonds, “the beds on which your wives and children sleep, the tables on which you eat your daily bread will be taken by the excise men for the benefit of those who sleep in … mahogany bedsteads, eat with gold knives and forks, and drink champagne as the ordinary beverage of the day.”

Mississippi voters did not talk of default as merely a temporary suspension of payments but as total repudiation of the debt. In the end they elected a legislature that simply nullified the bonds altogether. Michigan, Florida, and Arkansas did likewise, citing various technical legal grounds. The five other delinquents worked out some kind of accommodation. Foreign bondholders learned what Americans already knew—that there was no legal redress. A state cannot be sued without its own consent.

There were some interesting postscripts. One result of the episode was to curb any future efforts by states to get directly involved in building and running public transportation or banking systems. In fact, state constitutions were amended after 1842 to put stringent limitations on state borrowing power to curb any future tendency toward that kind of socialism. On the other hand, if the states were sadder and wiser, foreign lenders were not necessarily so. When there was a fresh railroad building boom in the 185Os, plenty of them bought American securities again. After all, risk is theoretically what capitalism is all about. And in the long run the optimists were right. America’s long-run expansion did reward those lucky enough to get in at the right time—or shrewd enough to get out at the right time.

There is one other nice little sequel. In 1933 about one hundred thousand dollars’ worth of the repudiated Mississippi bonds were given to the Principality of Monaco by descendants of the original holders. They thought that as a foreign nation, Monaco might have standing to sue. Monaco tried—and was turned down by the Supreme Court. Somehow that tickles me. Monaco is basically a royal gambling casino. Its effort to recover ninety-year-old loans made to “developers” who were high rollers without peer—well, that’s the kind of spice to the story that makes a historian love his work.