Working Paper: NBER ID: w10753
Authors: John Joseph Wallis; Richard E. Sylla; Arthur Grinath III
Abstract: In 1841 and 1842, eight states and the Territory of Florida defaulted on their sovereign debts. Traditional histories of the default crisis have stressed the causal role of the depression that began with the Panic of 1837, unexpected revenue shortfalls from canal and bank investments as a result of the depression, and an unwillingness of states to raise tax rates. This paper shows that none of these stylized facts fits the experience of states at all well. The majority of state debts in default in 1842 were contracted after the Panic of 1837; most states did not expect canal investments to return substantial revenues by 1841 and so could not experience unexpected shortfalls in those revenues; and, finally, most states were willing to raise tax rates substantially. The relationship between land sales and land values explains much of the timing of state borrowing and the default experience of western and southern states. Pennsylvania and Maryland defaulted because they postponed the imposition of a state property tax until it was too late.
Keywords: sovereign debt; repudiation; emerging markets; debt crisis; U.S. states
JEL Codes: N2; N4; H1; H2; H3; H7; F3; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Property tax rates (R51) | state revenues (H71) |
| Land value fluctuations (R52) | state borrowing decisions (H74) |
| Expectation of rising land values (R21) | borrowing behavior (G51) |
| Failure of banks (F65) | states' decisions to repudiate debts (H74) |
| Timing of state borrowing (H74) | default experience (Y60) |
| Delaying property taxes (H26) | financial crises (G01) |