The Shame of Pennsylvania

And other deadbeat states





William Wordsworth, the most benign of poets laureate and best remembered for his idyllic view of daffodils and country maidens, was capable, when provoked, of flashes of baleful fire. Thus, in a sonnet published in 1943, he proclaimed that

All who revere the memory of Penn

Grieve for the land whose wild wood his name

Was fondly grafted with a virtuous air,

Renounced, abandoned by degenerate Men

For state-dishonour black as ever came

To upper air from Mammon's loathsome den.



These "degenerate Men" were the citizens of the commonwealth of Pennsylvania, and their reputation was low in the England of the early 1840's. "I never meet a Pennsylvanian at a London dinner," wrote the Reverend Sydney Smith in a letter to a newspaper, "without feeling a disposition to seize him and divide him; to allot his beaver to one sufferer and his coat to another - to appropriate his pocket handkerchief to the orphan, and to comfort the widow with his silver watch. Broadway rings and the London Guide, which he always carries in his pockets. How such a man can set himself down at an English table without feeling that he owes two or three pounds to every man in the company, I am at a loss t conceive: he has no more right to eat with honest men that a leper has to eat with clean men."

The reason for these outbursts? Pennsylvania, caught in the great depression that began with the Panic of 1837, had stopped paying interest on its bonds, thousands of which add been sold to English middle-class families like the Wordsworths and the Smiths. It is hard for us today to imagine proper Pennsylvania doing anything of this sort. And, it is only fair to mention at once, it did resume payments in full in a couple of years, and received a commendatory footnote in Wordsworth's collected works. The Wordsworth family held on through the dark period of non-payment. Sydney Smith, on the other hand, sold his holdings at a forty percent loss and sourly announced that he was switching to Abyssinian securities. But few defaulting states showed as much conscience as Pennsylvania.

Our schoolbooks and our political orators tend to leave us with the impression that the American pioneer of the nineteenth century went west and opened up the country with nothing more than his axe, his Kentucky rifle and his McGuffey's Reader. If he had, he would have been condemned to a wretched semibarbarous life in a log hut, trading surplus swine to an occasional peddler for calico and gunpowder. To open the way to the glorious and profitable future that lay ahead, he needed two mechanisms which are now in ill repute among his descendants: Bureaucratic Planning, in the form of canals and railroads which could take his produce to market cheaply, and Foreign Aid, in the form of capital from overseas to pay for it.

The huge construction projects necessary were far beyond the means of private enterprise. There was little or no surplus capital in the United States available for investment. New York State found the solution by borrowing seven million dollars, mostly in England, to build the Erie Canal. This as so spectacularly successful - it opened the markets of the world to western grain, it made New York City the business capital of the country, and in addition it made enormous profits - that every other state from staid old Pennsylvania to savage little Arkansas out in its wilderness, wanted to do likewise. The federal government at this period did not believe in spending money on public improvements, and so it was up to the states to draw up their own projects and raise their own funds.

Unlike the Pakistanis and Ghanaians of a century later, the impecunious leaders of 19th-century states could not wheedle money out of rival Great Powers. But there was plenty of money lying around in western Europe. The burgeoning bourgeoisies there was beginning to cash in on the profits of the Industrial Revolution, and the money-markets of London and Amsterdam were awash in funds looking for investment opportunities. In Europe there were always wars or the threat of wars, and capital might go up in smoke at any minute. But across the Atlantic was the brand-new land of America, with no enemies except bands of ragged Indians, unlimited resources, and moreover willing to pay considerably higher rates of interest than European borrowers. The American states needed cash desperately just to keep a minimum of government activity and commerce going, and though most of them could get away with paying six percent interest, others were forced to go up to ten, fifteen, and even higher. The state of California, starting from scratch in 1850 with a nonexistent treasury, offered thirty-six percent interest on its first bond issue.

Every report from America emphasized the growth, the fantastic growth. And the Americans were generally believed to be thrifty and reliable. Hadn't the government in Washington paid off the entire national debt in 1835 and started passing out its annual surplus in loans to the states? (Those loans, incidentally, are still on the books, no state having ever offered to repay them.) No wonder that all England -bankers, dukes, clergymen, widows, orphans, poets laureate - hurried to invest. And to urge investor on even more, the bond-issuing states sent over special agents, fast-talking Yankees, to pass out prospectuses and spread the good tidings of perpetual profits.

Not all these agents and prospectuses were honest. Some extolled the perfectly valid attractions of the Erie Canal. But others urged investment in malarial mudflats of the kind so caustically described by Dickens in Martin Chuzzlewit. Many an American community might well erect a statue to the Unknown Swindler who euchred the foreigners into getting it started.

In 1839 and 1840, when times were bad, pressure was brought by certain Whig newspapers to try to get the federal government to assume the states' debts, which after a decade of borrowing amounted to more than 150 million dollars. The movement did not get very far, one of the arguments used against it in the press being that if the states defaulted, English investors would be willing to sell the bonds at a fraction of their face value; worthy Americana could then buy them up, and when the states were able to resume paying interest, the money would stay in the land of the free instead of going into the coffers of the bloated English.

An attractive theory. But wouldn't it make the bloated English tighten their purse strings the next time they asked for funds? Well, it did. When the United States government, protesting it was not responsible for the financial transactions of the individual states, tried to float a loan in Europe in 1842, there were no takers. Americans traveling abroad were subjected of indignities. "An American gentleman of the most unblemished character," reported the London Times "was refused admission to one of the largest clubs in London on the sole grounds that he belonged to a republic that did not fulfil its engagements." But if the English chose to be stuffy, the agents and their prospectuses could move on to fresh territory. The great American railroad boom of the 1850's - cut short by the Panic of 1857 - attracted a considerable sum of Germany money. By the time of the mining boom after the Civil War, the English were back enthusiastically in the market. "The average Britisher," said a journalist of that period, "does not in the last object to being swindled, provided it is done by one of his own countrymen, and if by a body of them with a Duke's name as director, it is positively delightful." A notorious swindle like the case of the Emma Mine Company (an enterprise that had been guaranteed respectable by half a dozen members of Parliament, a U. S. Senator, a Yale professor, and the American ambassador to the Court of St. James') probably drew more silver out of the pockets of guileless Englishmen than was ever extracted from the mine itself, out in the wilds of Utah.

Such swindles were of course reprehensible, but not unprecedented in the dog-eat-dog world of finance. What rankled - what rankles still in some quarter - was the way the sovereign states, which even at that early date were ever ready to lecture foreign governments of the principles of morality, calmly tore up their obligations.

It is easy to see how the states, even assuming the best will in the world, got themselves into trouble. American prosperity in the 1830's was dazzling. It was "perhaps the most extraordinary financial period the world has ever seen," said the North American Review after the crash of 1837. Everything was getting bigger and more efficient. Everybody was making money. Only the vast emptiness of the western sky was the limit. Or so it seemed. The state of Michigan, entering the Union with a population of less that 200,000 citizens, almost all of whom were living on subsistence farms, immediately floated five-million-dollar loan for public works. Trustingly, it allowed two banks of buy its bonds on the instalment plan. The banks had paid about half of the cash value of the bonds when they went bankrupt; not, however, before they had placed the bonds, at full value, as collateral on loans. Although Michigan made several half-hearted attempts to settle up with the bondholders, the result was generally dissatisfaction.

In all, eight states defaulted on their obligations in the years 1840-42 Some made heroic efforts to keep up their payments - Maryland scooped up its public school funds, Pennsylvania sold railroad which it had built a cost of thirty million dollars for eleven million dollars. Indiana, where financial difficulties were compounded by wholesale thefts by the state officials in charge of the bond sales, entered into long and bitter negotiations with the bondholders and finally agreed to allow them a degree of compensation from the revenues of the canal system that the bonds had built. But within a couple o years, the canals were driven into bankruptcy, partly because of competition from the railroads the state was building alongside them.

Florida was more straightforward and through-going. It simply wiped out its debt by legislative fiat. This debt was created while Florida was still a territory, and it was backed up by mortgages on property that the territorial legislature had arbitrarily valued at $15 or more and acres, though the market price was between $1.50 and $5.. When the day of reckoning came, the legislature voted that it did not possess "now was it ever invested with the authority to pledge the faith of the Territory." Foreign bondholders were by now learning many things about the peculiarities of the American federal system; this particular lesson cost them 3.9 million dollars.

In 1841 Arkansas defaulted on its bonds, a constitutional amendment (some forty years later) made il illegal to ever repay them. And in Mississippi, the story was even worse. This state had, during the 1950's, chartered two banks, the Planters' and the Union, and issued some eighteen million dollars on bonds to get them going. These banks financed the great cotton plantations which covered most of the fertile land in the state. . After the Panic of 1837 a touch of recklessness crept into their mode of operation. They speculated strongly in cotton futures, and the most carefree investor might have been disturbed to learn that the Union Bank was refusing to show its books to the state examiners because "their minds were biased."

But as long as price of cotton was going up nobody cared. The English were delighted to buy the bonds, and the Mississippians were even more delighted to sell them. When news came that five millions dollars' worth had been unloaded on the London exchange in 1838, "the smoke of great guns," says the Encyclopedia of Mississippi History, "filled the capital city [Jackson] with a pillar of cloud by day and bonfires and illuminations lighted it with a pillar of fire by night."

Within three years a different sound was coming out of Mississippi. Estates that had cost $30,000 were being sold for $3.200. The banks were broke. The balance in the state treasury in 1842 was thirty-four cents. Governor Alexander McNutt,described in the histories of the time as a man "of slovenly appearance and intmperate habits," had in 1839 proclaimed that "the honor of the state must be preserved unsullied," He discovwered in 1841 that there had been certain technical defects in the sale of the bonds: they were not suppowed to be sold below par, but some of them had been - perhaps because there were different definitions of the word "par" in America and England. Consequently he moved to declare all the bonds null and void. The legislature rebuffed him that year, but thought better of it later. In 1852, the state's High Court of Errors and Appeals ruled the bonds were a legal obligation, despite any irregularities in their sale; the only practical effect of this decision was to deprive the judges of any chance of ever being elected to office in Mississippi. Sacred obligations were all very well in their way, but not if they meant that people were going to have to pay taxes. "The beds on which your wives and children sleep," said a newspaper, :the tables on which you eat your dally bread, will be taken by the excise men for the benefit those who sleep in splendid brick palaces, who sleep in mahogany bedsteads, eat with gold knives and forks, and drink champagne as the ordinary beverage of the day." Are we going to make our children serfs, asked the Governor, to "Baron Rothschild, with the blood of Judas and Shylock in his veins, who has advanced money to the Sublime Porte and taken as security a mortgage upon the holy city of Jerusalem and the sepulcher of our Savior?' That was the kind of talk that appealed to the voters, and a series of electoral triumphs established "the sacred truth that the toiling millions never should be burdened with taxes to support the idle few."

This action of Mississippi received great criticism from the world at large. A learned judge tried to explain to the more learned British bondholders that it was unfair to judge Mississippi as you would Londoners. They were more like Highland chieftains: "They mean to pay, but they did not expect when they contracted the debt to distress themselves about the payment. If a friend wants a thousand dollars for a loan or a gift, he can have it, he can have it, perhaps a creditor wants it also."

Friends before creditors remained the watchword as the years went by. In 1875 an articles was added to the Mississippi state constitution forbidding any payment on either the Planters' or the Union Bank bonds. It was added at the suggestion of General Adalbert Ames, then governor, a man detested as a vile carpetbagger by the conservative Democrats. But by 1890, when the Democrats regained control of the state government and rewrote the constitution, they were careful not to leave out the repudiation clause.

By that time, buyers of state bonds had many fresh wounds to weep over. All the states that had joined the Confederacy came out fo the Civil War in financial chaos. Their treasuries held nothing but worthless paper. Half of their taxable property had been destroyed by the invading armies or set free by the emancipation of the slaves. The Reconstruction governments imposed by Northen armies had to borrow money to get a semblance of normal life going again. Bonds were issued more or less haphazardly, and squads of agents were dispatched to Europe to unload them for what they could get. Prudent investors noted that the regimes issuing these bonds were not very stable and that if they were overthrown, their paper would not be worth any more than the Confederacy's. But there were plenty of imprudent investors.

Modern historians have restored some of the reputation of the Reconstruction governments. The older schoolbooks were 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 carpetbaggers passed a good deal of useful legislation, and were not noticeably more extravagant and corrupt than the North's state governments of that time - it was the notorious 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 the Deconstructionists 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, Fidel Castro toward Colonel 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 governments that had been imposed by the Northern armies. They were all the happier to do so because great quantities of the carpetbag debts had been sold in the North. The Yankees, who could no long 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 out with vigor by all the former Confederate states. They not only canceled all the Reconstruction bonds, they pushed right ahead and scaled down by fifty percent or more the bonds they had issued before the war began. They probably lost more than they gained in the process, for their credit plummeted and remained low for a couple of generations, and in the great industrial boom 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 am unfortunate experience constructing railroads in the 1850's, and did not honor its bonds until 1880, when it finally paid fifty percent 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 the 20th century, when countries like Nicaragua and the Dominican Republic had difficulties paying their debts, they were apt to find the United States Marines stationed in their customs houses 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 no 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 pay off their bonds - at a low price, but 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 have used stronger language.

In March 1930, Lord Redesdale, father of the Mitford girls, rose in the House of Lords to move that the repudiated American state debts, which he estimated to amount, with accrued interest, to seventy-eight million pounds, be applied against the British war debt, thus enabling the United Sates to rub out "a painful and shameful page" from their history and "raise them from the level of Russia." (Russia at that time was the only sovereign nation to have repudiated its debts.) The Earl of Limerick supported Lord Redesdale and pointed out that the interest, if compounded, would bring the sum due to over one billion dollars. Lord Ponsonby, for the government, which was anxious not to disturb the London Naval Conference then in progress, held that the state debts were the result of private transactions and that for the British government to attempt to collect them would be impractical; and Lord Redesdale reluctantly subsided.

And there the matter rests. Still in their owners' strongboxes and solicitors' files they lie, the gaily engraved obligations of the deadbeat states. And there, while we go on lecturing defaulters and admonishing new states to meet their obligations, they will go on lying. The descendants of the widows and orphans of the 1840's still subscribe to the annual bulletins of the Council of Foreign Bondholders, and yearly scan the melancholy news. There may be grounds of hope for some sort of accommodation with various Central American defaulters. But on the Planters' Bank bonds of Mississippi, like the czarist Russian four percents, the news is always bad.



American Heritage, December 1964