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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
Modern historians have restored some of the reputation of the Reconstruction governments. The older schoolbooks are full of carpetbaggers, illiterate freedmen turned legislators, the forty-cent spittoons in the South Carolina legislature replaced by eight-dollar cuspidors, and so forth. The reconsidered view is that the carpetbag governments passed a good deal of useful legislation, and were not notably more extravagant and corrupt than the North’s state governments of that time—it was the scandalous Gilded Age—or the Grant administration in Washington, not to speak of certain state governments of more recent times. But the southerners who wrested control of their states from Reconstructionists did not take this view. They were revolutionists come to power by force or the threat of force, and their attitude toward their predecessors’ debts was much like the attitude of, say, Che Guevara toward Batista’s.
These new southern regimes were forbidden by the Fourteenth Amendment to pay the debts incurred for fighting the Civil War. It seemed only logical to them to repudiate likewise the debts of the governments that had been imposed by the Northern armies. They were all the happier to do so because great quantities of the carpetbag bonds had been sold in the North. The Yankees, who could no longer be beaten on the battlefield, could at least be squeezed in their tender pocketbooks. That innocent investors abroad would also be squeezed does not appear to have been a consideration.
In courtly Virginia, which until the Civil War had an unblemished financial record, the work of repudiation was known as “readjustment.” Once undertaken, it was carried on with vigor. The former Confederate states not only cancelled all the Reconstruction bonds, they pushed right ahead and scaled down by fifty per cent or more the bonds they had issued before the war began. They probably lost more than they gained in the process, for their credit remained low for a couple of generations, and in the great industrial boom of the half century following Appomattox they had to limp along far behind the rest of the country.
Not that a northern state wouldn’t resort to the same kind of financial shenanigans, when the occasion required. Minnesota had an unfortunate experience constructing railroads in the 1850’s, and did not honor its bonds at all until 1880, when it finally paid fifty per cent of their face value.
But with this action, the great era of financial irresponsibility on the part of state governments may be considered closed. America was by now generating its own surplus capital (though still a debtor nation by some 3.5 billion dollars at the start of the First World War), and was becoming a self-appointed guardian of international financial morality. In the early years of this century, when countries such as Nicaragua and the Dominican Republic had difficulties paying their debts, they were apt to find the United States Marines stationed in their customshouses making collections. Why, asked many a curious widow and orphan in Europe, couldn’t similar measures be taken against Mississippi and Indiana? In the 1840’s, hot-blooded creditors of the states had talked of swooping down with an army from Canada. Cooler heads sought recourse in the law, but the law was little comfort. The courts did indeed agree that the federal Constitution forbade the states to tear up their contracts. But to get their money back, the bondholders would have to sue the states, and the Eleventh Amendment to the Constitution says that a state may not be sued by a private citizen without its consent. None of the delinquent states has ever given its consent.
Ingenious lawyers, glimpsing all those millions of dollars in perfectly valid obligations, have tried again and again to figure out a way of getting into that paradise. But the flaming sword of the Eleventh Amendment has always kept them out. Except once. In 1904 the state of South Dakota found itself in possession of some North Carolina bonds which had been left by a citizen for the use of the state university. In the case of South Dakota vs. North Carolina (192 U. S., 286-354) the Supreme Court held for the plaintiff, and North Carolina had to fork over $27,400. The shock was so great that North Carolina promptly made a deal with some private holders in England to buy off their bonds—at a low price, but paid in hard cash.
Other aggrieved parties have had no such luck. Some private citizens tried deeding defaulted North Carolina bonds to, say, Massachusetts, since one sovereign state may sue another, but the Supreme Court held that this was only a dodge to get around the Eleventh Amendment and would hear nothing of it. No more did it pay attention to the principality of Monaco, which had inherited some bonds and tried to sue the state of Mississippi in 1930.
That same year, the Great Depression was beginning, and Great Britain was trying to get out of paying its war debt to the United States. American politicians and American newspapers swelled with righteous disapproval. Some of the loudest disapproval came from, yes, Mississippi; its Representative John Rankin led the assault on President Hoover’s debt moratorium. “One of the boldest schemes of financial buccaneering ever attempted,” he called it; Governor McNutt would surely have used stronger language.