REPUDIATION BEFORE THE CIVIL WAR.

THE history of the bonded indebtedness of the various States of the Union goes back to the period 1830-40. At the beginning of that decade the aggregate debt of the States amounted to about $13,000,000 only. Then began an era of extravagance, in which several States entered upon a series of reckless undertakings that crippled the resources and ruined the credit of more than one commonwealth whose name had formerly ranked high for commercial prudence and honesty. Two causes united to foster this spirit of prodigal expenditure: a natural demand for necessary internal improvements and an easy means of raising large sums on long loans. By the act of Congress of June 13, 1836, the surplus above $5,000,000 arising from the sale of government lands was allowed to remain on deposit to the credit of, or loaned to, the different States. In this way. nearly $30,000,000 was put out, in three instalments, a fourth, after some $28,000,000 had been paid, being postponed by the act of October, 1847, because of a reduction in revenue, owing to the requirement that land payments. be made in specie and not in notes of the State banks. The great incentive to incur a heavy State debt, the demand for internal improvements, sprang from a natural and healthy cause. The annually increasing tide of immigration began to pour over the vast and fertile areas of virgin soil, in the development of which lay prosperity and fortune. But as yet the means of communication between the granaries of the West and Northwest, the rice and cotton plantations of the South and Southwest, and the markets of trade, were wholly inadequate to meet the needs of the cultivators. Rich in the natural products of the soil, money was so scanty with them that, even for the purposes of ordinary trade between themselves, they had to resort to barter. To the active and industrious farmer, or the keen and ambitious planter, an opening to the markets of the world, by new

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II

means of transportation which should insure quick delivery on reasonable terms, meant individual success and the commercial prosperity of his State. Private ambition and public spirit were skilfully played upon to induce voters to ratify with eagerness what doubtless seemed to many a public duty as well as a private gain. Railways and canals. were begun, turnpikes constructed, river beds widened and "improved," and every scheme which bore on its face the slightest resemblance to a public work claimed the aid of the public credit, and, in the absence of constitutional safeguards, generally got what it claimed. Our national credit abroad stood high. The affairs of government had been economically administered, the interest on our foreign commercial debt promptly paid, and State securities found an easy sale in foreign markets. Good credit, great natural advantages of soil and climate, offering unmistakable promise of limitless development, and, above all, a pay-day far ahead in the dim future, with only the interest account to provide for from time to time, proved temptations too strong for the young and growing communities. Within the twelve years succeeding 1830 the aggregate debt of the States had risen to over $200,000,000, an increment of more than 1600 per cent. It was distributed as follows: *

In May, 1838, after the passage of the general banking law, authorizing the United States Comptroller to issue bank-notes on a pledge of the evidence of public debt of the several States, a circular was issued by the Comptroller, Mr. Flagg, requesting the financial officer of each State to return its indebtedness under authorized loans. According to their replies, it appeared that even then the aggregate

* It is impossible to state with accuracy the exact amount of the debt during this period. The table given is taken from an article by Robert P. Porter, "International Review," 1880, p. 556. Compared with other statements, the figures seem by no means exaggerated.

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debt, inclusive of the sums deposited with the several States by the United States ($28,101,644.97), amounted to $198,907,824.32. This indebtedness had been incurred for the benefit of railroads, canals, banks, turnpike companies, and kindred speculations. The operations of the States have been so extensive and varied," said Hunt's Merchants' Magazine, in 1839 (vol. i., p. 174), "that it is not an easy matter to get at the precise amount of stock issued and authorized to be issued. It is probable, however, that the aggregate amount of stock authorized by all the States is even greater than the amount stated in the tables."

By 1836 the State of Indiana had already loaned a large portion of the surplus revenue derived from the United States, and in that year an act was passed appropriating the sum of $10,000,000 for a gigantic internal-improvement scheme, covering no less than seven different enterprises, including canals, banks, and railways. When we find that there were only 100,000 voters in the State at this time, the outlay, even if kept within the proposed limit, seems stupendous. Yet the expenditure was far beyond the expectations of the promoters. "The original plan of internal improvement was, as a matter of course, considerably extended, and it very soon became evident that $20,000,000 would not more than half suffice to complete any portion, in consequence of the necessity of spending all the money that could be got in all parts of the State at once. The negotiation of the bonds was also a source of most fearful jobbing, which resulted in serious losses to the State."-Merchants' Magazine, 1847, p. 577. One of the bond commissioners, a Dr. Coe, was also one of the largest stockholders in the Morris Canal Bank, the heaviest customer for the State bonds. According to the report of a legislative investigating committee, Dr. Coe received. from his own company over $100,000 in commissions and profits; one item of which was 398 bonds, received by the company at par when they were worth about fifteen cents

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on the dollar-a difference of about $32,680! Within a very short time the pressure began to be felt. Depression in foreign commercial centres caused a tightness of the money market all over the world. By 1841 Indiana found herself without the means of defraying the running expenses of government. The money for the civil list had to be raised, and the State was again forced to go upon the market as a borrower, pledging her bonds at ruinously low rates. "The majority of the 100,000 voters then occupying Indiana," says a writer, six years later, "were small farmers living in log huts, depending on the sale of surplus pork and grain for the purchase of their necessaries; and the expectation of drawing $1,000,000 per annum from such sources to pay the interest or principal of debts contracted for legislative purposes was not realized. The capital employed in trade in Indiana was scarcely $3,000,000, and it was proposed to draw fifty-per-cent. of that every year to pay interest!" In 1841 the interest account fell behind, and an attempt was made to settle by an issue of seven-percent. five-year bonds, but these the creditors, who had already begun to distrust the State's pledges, refused to accept in exchange for their interest coupons to any appreciable amount. The distress spread so that it seemed to affect every department of government. The assessment for tax purposes was wretchedly conducted on a wholly erroneous system of valuation, until finally the people became convinced that the taxes could not be paid. From this to hopeless and acknowledged insolvency the plunge was rapid. In June, 1839, the tax of thirty cents, levied in 1838 to meet the internal-improvement interest, was reduced to fifteen cents, and by 1840, after various fruitless attempts at settlement and compromise, all efforts to pay the State interest had been abandoned.

Ohio began her borrowing in 1825 by pledging all the canal profits as security for loans authorized for the benefit of internal-improvement schemes. Under the

law of 1836-7 she had gone on increasing her expendi tures, loaning the State credit to turnpike and other companies, subscribing for their stock, and running into debt with contractors. Her credit fell, and yet it was impossible either to go ahead or to give up the work without money. In 1841 the Legislature passed an appropriation bill of $2,301,625. The commissioners of the canal fund were authorized to raise $981,000 of this amount with which to meet the demands of the contractors, at any rate of interest, and the remainder on six-per-cent. bonds, payable in 1860. The bankers of London and New York would not touch the loan, and it was finally proposed, at an extra session of the Legislature convened for the purpose, to raise the rate of interest to ten-per-cent. and go into the foreign market on the best procurable terms! Under this provision the State was squeezed like a sponge. Fortunately her immense resources proved equal to the terrible strain. The people

were honest, the sophisms of repudiation gained little ground, and the Legislature by various enactments provided for the interest and a sinking fund with which to meet the principal.

Even the Eastern States were affected by the universal mania for reckless expenditure which obtained throughout the country during the years 1834-6. Massachusetts pledged her credit without taking care to provide sure means of payment, and found herself in 1847 with over $6,000,000 outstanding indebtedness on loans and subscriptions to railroads alone. The enterprises proved successful, however, and she was never heavily pressed to make good her guaranty. Maine, a lumber and fishing State, with a soil for the most part unadapted to raising grain, acting upon an absurd theory of encouragement to home producers, actually went into debt at the rate of three dollars per head of her population, to pay bounties for the cultivation of wheat and corn, and distributed in one year over $150,000 in premiums on the production