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

Author

Listed:
  • Arthur Grinath III
  • John Joseph Wallis
  • Richard Sylla

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.

Suggested Citation

  • Arthur Grinath III & John Joseph Wallis & Richard Sylla, 1997. "Debt, Default, and Revenue Structure: The American State Debt Crisis in the Early 1840s," NBER Historical Working Papers 0097, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberhi:0097
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    References listed on IDEAS

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    1. Alberto F. Alesina & Roberto Perotti, 1999. "Budget Deficits and Budget Institutions," NBER Chapters,in: Fiscal Institutions and Fiscal Performance, pages 13-36 National Bureau of Economic Research, Inc.
    2. 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.
    3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    4. Henning Bohn & Robert P. Inman, "undated". "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.
    5. Heckelman, Jac C. & Wallis, John Joseph, 1997. "Railroads and Property Taxes," Explorations in Economic History, Elsevier, vol. 34(1), pages 77-99, January.
    6. James M. Poterba, 1996. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Howard Bodenhorn, 2006. "Bank Chartering and Political Corruption in Antebellum New York. Free Banking as Reform," NBER Chapters,in: Corruption and Reform: Lessons from America's Economic History, pages 231-258 National Bureau of Economic Research, Inc.
    2. David M. Cutler & Grant Miller, 2006. "Water, Water Everywhere. Municipal Finance and Water Supply in American Cities," NBER Chapters,in: Corruption and Reform: Lessons from America's Economic History, pages 153-184 National Bureau of Economic Research, Inc.
    3. John A. Dove, 2016. "Do fiscal constraints prevent default? Historical evidence from U.S. municipalities," Economics of Governance, Springer, vol. 17(2), pages 185-209, May.
    4. John A. Dove, 2017. "Property Tax Limits, Balanced Budget Rules, and Line-Item Vetoes: A Long-Run View," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(2), pages 288-317, March.

    More about this item

    JEL classification:

    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913

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