Municipal Defaults: Eighty Years Make a Big Difference

Recent dire predictions of municipal defaults often refer to the Great Depression and how thousands of state and local governments defaulted on their securities. These comments fail to give serious consideration to the history of public finance or to the ways in which things have changed since the 1930s. This paper examines what exactly happened during the Great Depression and contrasts the conditions of that period (and the period that preceded it) with the conditions during and following the Great Recession. It demonstrates that the wave of municipal defaults during the Depression, followed by rapid remediation, can be explained, not by municipal credit difficulties, but, rather, by the unraveling of the banking system and the widespread demolition of the payments system. These disruptions caused a great deal of the difficulty and delay in getting funds to bondholders. Buttressing the argument that comparisons of defaults then and now are not valid is the fact that state and local governments currently operate in an utterly different underlying economic structure than they did 80 years ago.