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 was 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 the Ghanaians of today, the impecunious leaders of nineteenth-century states could not wheedle money out of cold-warring Great Powers. But there was plenty of private money in western Europe. The bourgeoisie 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 waiting for lucrative investment opportunities. In Europe there were always wars or the threat of wars, and capital might go up in smoke any minute. But across the Atlantic was the brand-new land of America, with no enemies except ragged Indians, with unlimited resources, and moreover willing to pay considerably higher interest than European borrowers. The American states needed cash desperately, just to keep a minimum of governmental activity and commerce going, and though most of them could get away with paying six per cent interest, others were forced to go up to ten, fifteen, and even higher. The state of California, starting life from scratch in 1850, with a nonexistent treasury, offered thirty-six per cent on its fhst 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 at Washington paid oft 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 ever having offered to repay them.) No wonder that all England—bankers, dukes, clergymen, widows, orphans, poets laureate-hurried to invest. And to urge investors 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 some malarial mud Hat 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 hard, pressure was brought by foreign investors and by certain Whig newspapers to try to get the

federal government to assume the states’ debts, which, alter 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 stales defaulted, English investors woidd be willing to sell the bonds at a fraction of their face value; worthy Americans could 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 were asked for funds? Well, il did. When the United Stales government, protesting that it was not responsible for the financial transactions ol the individual states, tried to float a loan in Europe in 1842, there were no takers. Americans travelling abroad were subjected to 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 German 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 least 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 quarterswas the way sovereign states, which even at that early date were ever ready to lecture foreign countries on 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 than 200,000 citizens, almost all of whom were living on subsistence farms, immediately floated a five-million-dollar loan for public works. Trustingly, it allowed two banks to buy its bonds on the installment 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 general dissatisfaction.

In all, eight states defaulted on their obligations in the years 1840-42. Some made heroic efforts to keep up the payments—Maryland scooped up its public school funds, Pennsylvania sold railroads it had built at a cost of thirty million dollars for eleven million dollars. Indiana, where financial difficulties were compounded by wholesale thefts perpetrated 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 of 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 thorough-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 an acre, though the market price was between $1.50 and $5. When the day of reckoning came, the legislature voted that it did not possess “nor 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 it illegal ever to pay them. And in Mississippi, the story was even worse. This state had, during the 1830’s, chartered two banks, the Planters’ and the Union, and issued some eighteen million dollars in 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 commissioners because “their minds were biased.”

But as long as the 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 million 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 intemperate habits,” had in 1839 proclaimed that “the honor of the state must be preserved unsullied.” He discovered in 1841 that there had been certain technical defects in the sale of the bonds: they were not supposed to be sold below par, but some of them had been—perhaps because there were different definitions of the word “par” in America and in 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 that 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 daily bread will be taken by the excise men for the benefit of 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 sepulchre 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.”

The action of Mississippi received great criticism from the world at large. A learned judge tried to explain to the more civilized British bondholders that it was unfair to judge Mississippians 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, though perhaps a creditor wants it also.”

Friends before creditors remained the watchword

as the years went by. In 1875, an article 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 Adelbert Ames, then governor, a man detested as a vile carpetbagger by the conservative Democrats of the state. 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 of 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 Proclamation. The Reconstruction governments imposed by Northern arms 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 are 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 carpetbag governments passed a good deal of useful legislation, and were not notably more extravagant and corrupt than the North’s state governments of that time—it was the scandalous 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 Reconstructionists 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, Che Guevara toward 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 the governments that had been imposed by the Northern armies. They were all the happier to do so because great quantities of the carpetbag bonds had been sold in the North. The Yankees, who could no longer 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 on with vigor. The former Confederate states not only cancelled all the Reconstruction bonds, they pushed

right ahead and scaled down by fifty per cent or more the bonds they had issued before the war began. They probably lost more than they gained in the process, for their credit remained low for a couple of generations, and in the great industrial boom of the half century 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 an unfortunate experience constructing railroads in the 1850’s, and did not honor its bonds at all until 1880, when it finally paid fifty per cent 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 this century, when countries such as Nicaragua and the Dominican Republic had difficulties paying their debts, they were apt to find the United States Marines stationed in their customshouses 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 not 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 buy off their bonds—at a low price, but paid 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 surely 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 States to rub out “a painful and shameful page” from their history and “raise them from the level of Russia.” (Russia, at the 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 impracticable; and Lord Redesdale grouchily 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 for hope of some sort of accommodation with various Central American defaulters. But on the Planters’ Bank bonds of Mississippi, like the czarist Russian four per cents, the news is always bad.