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Debt, Default, and Revenue Structure: The American State Debt Crisis in the Early 1840s

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  • Arthur Grinath, III
  • John Joseph Wallis
  • Richard Sylla
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    Abstract

    During the 1820s and 1830s, American state governments made large investments in canals, banks, and railroads. In the early 1840s, nine states defaulted on their debts, four ultimately repudiated all or part of their debts, and three went through substantial renegotiations. This paper examines how the states got into the debt crisis and, as a result of their earlier history, how they responded to fiscal pressure in the debt crisis. The explanation is built around revenue structures. States along the developed eastern seaboard were able to avoid politically costly property taxes, while states along the frontier were forced to rely heavily on property taxes. When faced with fiscal pressures, two of the defaulting states -- Maryland and Pennsylvania -- were able to resume debt payments, with back interest, as soon as a property tax was enacted. The other defaulting states, however, already had high property taxes. Without access to new revenue sources, these states were forced to default, and then either renegotiate or repudiate their debts.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Historical Working Papers with number 0097.

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    Date of creation: Mar 1997
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    Handle: RePEc:nbr:nberhi:0097

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    1. Alberto Alesina & Roberto Perotti, 1996. "Budget Deficits and Budget Institutions," IMF Working Papers 96/52, International Monetary Fund.
    2. Heckelman, Jac C. & Wallis, John Joseph, 1997. "Railroads and Property Taxes," Explorations in Economic History, Elsevier, vol. 34(1), pages 77-99, January.
    3. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
    4. James M. Poterba, 1996. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
    5. Henning Bohn & Robert P. Inman, . "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers 10-96, Wharton School Rodney L. White Center for Financial Research.
    6. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
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    Cited by:
    1. Howard Bodenhorn, 2004. "Bank Chartering and Political Corruption in Antebellum New York: Free Banking as Reform," NBER Working Papers 10479, National Bureau of Economic Research, Inc.
    2. David Cutler & Grant Miller, 2005. "Water, Water, Everywhere: Municipal Finance and Water Supply in American Cities," NBER Working Papers 11096, National Bureau of Economic Research, Inc.

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