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The Debts We Never Paid
Before condemning the ingratitude of our foreign-aid clients, consider the lamentable plight of those earlier foreigners who invested in an underdeveloped America
December 1964 | Volume 16, Issue 1
Not all these agents and prospectuses were honest. Some extolled the perfectly valid attractions of the Erie Canal, but others urged investment in some malarial mud Hat of the kind so caustically described by Dickens in Martin Chuzzlewit . Many an American community might well erect a statue to the Unknown Swindler who euchred the foreigners into getting it started.
In 1839 and 1840, when times were hard, pressure was brought by foreign investors and by certain Whig newspapers to try to get the federal government to assume the states’ debts, which, alter a decade of borrowing, amounted to more than 150 million dollars. The movement did not get very far, one of the arguments used against it in the press being that if the stales defaulted, English investors woidd be willing to sell the bonds at a fraction of their face value; worthy Americans could buy them up, and when the states were able to resume paying interest, the money would stay in the land of the free instead of going into the coffers of the bloated English.
An attractive theory. But wouldn’t it make the bloated English tighten their purse strings the next time they were asked for funds? Well, il did. When the United Stales government, protesting that it was not responsible for the financial transactions ol the individual states, tried to float a loan in Europe in 1842, there were no takers. Americans travelling abroad were subjected to indignities. “An American gentleman of the most unblemished character,” reported the London Times , “was refused admission to one of the largest clubs in London on the sole grounds that he belonged to a republic that did not fulfil its engagements.” But if the English chose to be stuffy, the agents and their prospectuses could move on to fresh territory. The great American railroad boom of the 1850’s —cut short by the Panic of 1857—attracted a considerable sum of German money. By the time of the mining boom after the Civil War, the English were back enthusiastically in the market. “The average Britisher,” said a journalist of that period, “does not in the least object to being swindled, provided it is done by one of his own countrymen, and if by a body of them with a Duke’s name as director, it is positively delightful.” A notorious swindle like the case of the Emma Mine Company (an enterprise that had been guaranteed respectable by half a dozen members of Parliament, a U.S. senator, a Yale professor, and the American ambassador to the Court of St. James’) probably drew more silver out of the pockets of guileless Englishmen than was ever extracted from the mine itself, out in the wilds of Utah.
Such swindles were of course reprehensible, but not unprecedented in the dog-eat-dog world of finance. What rankled—what rankles still in some quarterswas the way sovereign states, which even at that early date were ever ready to lecture foreign countries on the principles of morality, calmly tore up their obligations.
It is easy to see how the states, even assuming the best will in the world, got themselves into trouble. American prosperity in the 1830’s was dazzling. It was “perhaps the most extraordinary financial period the world has ever seen,” said the North American Review after the crash of 1837. Everything was getting bigger and more efficient. Everybody was making money. Only the vast emptiness of the western sky was the limit. Or so it seemed. The state of Michigan, entering the Union with a population of less than 200,000 citizens, almost all of whom were living on subsistence farms, immediately floated a five-million-dollar loan for public works. Trustingly, it allowed two banks to buy its bonds on the installment plan. The banks had paid about half of the cash value of the bonds when they went bankrupt; not, however, before they had placed the bonds, at full value, as collateral on loans. Although Michigan made several half-hearted attempts to settle up with the bondholders, the result was general dissatisfaction.
In all, eight states defaulted on their obligations in the years 1840-42. Some made heroic efforts to keep up the payments—Maryland scooped up its public school funds, Pennsylvania sold railroads it had built at a cost of thirty million dollars for eleven million dollars. Indiana, where financial difficulties were compounded by wholesale thefts perpetrated by the state officials in charge of the bond sales, entered into long and bitter negotiations with the bondholders and finally agreed to allow them a degree of compensation from the revenues of the canal system that the bonds had built. But within a couple of years, the canals were driven into bankruptcy, partly because of competition from the railroads the state was building alongside them.
Florida was more straightforward and thorough-going. It simply wiped out its debt by legislative fiat. This debt was created while Florida was still a territory, and it was backed up by mortgages on property that the territorial legislature had arbitrarily valued at $15 or more an acre, though the market price was between $1.50 and $5. When the day of reckoning came, the legislature voted that it did not possess “nor was it ever invested with the authority to pledge the faith of the Territory.” Foreign bondholders were by now learning many things about the peculiarities of the American federal system: this particular lesson cost them 3.9 million dollars.