10/15/12 - america defaults on its debts

In today's selection -- from America's First Great Depression by Alasdair Roberts. In the 1830s, following the spectacular success of the Erie Canal, most American states began borrowing massive amounts of money to finance their own canal and railroad expansion. These states were seeking to grow their own economies and "hold their own" against neighboring states making similar infrastructure investments. The loans took the form of bonds issued primarily to British and other European investors. In most cases the interest payments alone on these bonds were close to equaling the annual revenues of these states -- but the states were convinced that the revenues from expanded business activity would pay for the debt, as it had for the Erie Canal. The inevitable happened and the states began to default. It was a period in which the American federal government had essentially no debt and was much smaller than its states' governments, and the governments of states were viewed as the more appropriate place for borrowing and the major activities of government:

"[By 1839], nine [state and territory] governments [including Pennsylvania, Illinois, Louisiana, Mississippi, Michigan, Indiana, Maryland, Arkansas, and the territory of Florida], responsible for two-thirds of all the American government debt in private hands, were routinely missing interest payments, attempting to sidestep creditors, or flatly repudiating their obligations. Across the Atlantic, investors were outraged.

Yankee Doodle borrows cash,
Yankee Doodle spends it,
And then he snaps his fingers at
The jolly flat who lends it.
Ask him when he means to pay,
He shews no hesitation,
But says he'll take the shortest way, 
And that's repudiation! 

(Literary Gazette, London, January 1845)


"As American state governments tumbled, the mood in the world's financial center soured. ... 'Great bitterness of feeling is very naturally felt' by the mass of investors in American bonds, the American minister to London, Edward Everett, reported. 'Many have by their investments lost all the earning of active life and the fund on which they relied for their support in old age. That this feeling should find vent in the popular press is natural.' The Times of London reported that '[a]n American gentleman of the most unblemished character was refused admission to one of the largest clubs in London on the sole grounds that he belonged to a republic that did not fulfill its engagements. . . . It is not too much to expect that the example will be followed in other establishments. No distinction, as we understand, has been made as to the State to which an individual may belong, but the whole United States are looked upon as equally tarnished.'


"That defaulting states would be barred from financial markets was to be expected. But non-defaulting states -- and the U.S. government itself -- were alarmed by the prospect that they, too, would be denied loans. Shortly after the first defaults, President John Tyler delivered his first annual address to Congress, urging overseas investors to recognize that each state was autonomous, and 'should in no degree affect the credit of the rest .... [T]he foreign capitalist will have no just cause to experience alarm as to all other State stocks because anyone or more of the States may neglect to provide with punctuality the means of redeeming their engagements.'


"The address, quickly reproduced in London, had no effect. Joshua Bates, head of American trade at Barings Bank in London, confided to the bank's agent in Boston in December 1841 that British investors 'in their anguish are crying out against all American stocks, and we shall never be able to sell any more. ... I have come to the conclusion (which had best be concealed perhaps) not to sell any more American stocks. . . . I believe it will only be wasting our time to have anything to do with them.' Barings' principal competitor, the House of Rothschild, was even cooler on American securities. Anthony de Rothschild, a partner in the London branch of the family's bank, urged his brothers to sell all U.S. investments. 'Let us get rid of that blasted country -- as much as we profitably can. It is the most blasted & the most stinking country in the world -- & we must get rid of it.'


Alasdair Roberts


America's First Great Depression: Economic Crisis and Political Disorder after the Panic of 1837


Cornell University Press


Copyright 2012 by Cornell University Press


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