Washington Bailed Out States in 1789, but Refused in Early 1840s

choi

Part I.

Thomas J Sargent, An American History Lesson for Europe; Our federal government refused to bail out the states in the 1840s, thus preserving their fiscal independence. Wall Street Journal, Feb 3, 2012 (op-ed).
http://online.wsj.com/article/SB ... 93032770537826.html

Quote:

"About two-thirds of our total debts were owed by the continental government, the other third by the 13 states. If they had been valued at par, federal and state debts together would have constituted about 40% of gross domestic product.

"one of Hamilton's stated reasons for bailing out the states was that most of their debts had been incurred for their contributions to a national public good: acquiring independence from Great Britain.

"Now fast-forward into the next century. To finance canals and railroads, many state governments incurred large debts in the 1820s and 1830s. A financial crisis in the late 1830s pushed many of those state debts into default. Appealing to the precedent set by the 1789 bailout, state creditors asked the federal government to bail out the states once again. After an enlightening debate, in the early 1840s Congress declined, so many states repudiated their debts. * * * Did the federal government do the right thing in refusing to bail out the states in the early 1840s? By doing so, the federal government reset its reputation vis-a-vis the states, telling them in effect not to expect it to underwrite their profligacy. * * * Refusal to bail out the states was thus a pivot point in sustaining a federal system in the United States.

Note:
(a) Articles of Confederation
http://en.wikipedia.org/wiki/Articles_of_Confederation
(an agreement among the 13 founding states that legally established the United States of America as a confederation of sovereign states and served as its first constitution; "Its drafting by the Continental Congress began in mid 1776, and an approved version was sent to the states for ratification in late 1777. The formal ratification by all 13 states was completed in early 1781")
(b) par (n; Latin par equal):
"the face amount of an instrument of value (as a check or note)"
www.m-w.com

The article said "If they [debts incurred by bothe federal governments and 13 states] had been valued at par, federal and state debts together would have constituted about 40% of gross domestic product. But because tax revenues were not big enough to service them, both federal and state debts traded at very deep discounts."

Because debts were traded at deep discount, rather than par value--the value on the debt instrument--the real value of those debts, the value on the streets--was not 40% of the GDP at the time.

(To be continued with Part II)

choi

Part II

Roger Lowenstein, Early Lessons in Extravagance; 'America's First Great Depression' tells the story of how the U.S. dealt with the economic and political crisis that followed the Panic of 1837. Wall Street Journal, June 5, 2012.
http://online.wsj.com/article/SB ... SJ_Books_LS_Books_8
(book review on Alasdair Roberts, America's First Great Depression; Economic crisis and politicaldisorder after the panic of 1837. Cornell Univ Press, 2012)

Quote:

"In 1837, America's economy collapsed. The depression was severe, the first to be visited on the young republic. * * * in the 1840s they included Pennsylvania, Michigan and Mississippi. No fewer than eight states (and Florida, still a territory) defaulted on their bonds.

"The federal government, it is true, was small and inconsequential. 'Easily three-quarters of the federal workforce consisted of Post Office employees.' But state governments played an active part in development. * * * Taxes being unpopular, [state] legislatures preferred to fund such extravagance with debt. And 'no one had a clear idea of how much state governments were borrowing.' Basking in their ignorance, foreigners were eager to lend.

"In one state, Pennsylvania, annual interest charges ballooned to almost $2 million a year—twice as much as the state's yearly revenues.

"Roughly 60% of American cotton was shipped to Liverpool—trade that accounted for almost half of the value of US exports.

"Defaulting states did not begin to honor their debts until the mid-1840s—a few not until after the Civil War.

Note:
(a) The German, Jewish and Swedish surname Lowenstein: German löwe ‘lion’ + stein ‘stone.’
(b) have nothing on sb or sth:
"INFORMAL  to not be as good as someone or something  <He's a good player, but he's got nothing on his brother>"
Cambridge Advanced Learner's Dictionary & Thesaurus
http://dictionary.cambridge.org/ ... othing-on-sb-or-sth
(c) affecting (adj): "evoking a strong emotional response"

All definitions are from www.m-w.com unless otherwise specified.
(d) Samuel Bigger
http://en.wikipedia.org/wiki/Samuel_Bigger
(1802-1846; Indiana governor 1840-1843)

(e) The review mentions "American politics in the often-overlooked years after the Revolutionary generation had departed the scene. They were characterized by one-term presidents (Andrew Jackson was the sole exception)."

list of Presidents of the United States
http://en.wikipedia.org/wiki/Lis ... f_the_United_States
, which is summarized as follows:

........................presidemcy
John Quincy Adams.......1825-1829
Andrew Jackson..........1829-1837
Martin Van Buren........1837-1841
William Henry Harrison..1841-1841 (died when common cold turned into pneumonia)
Jophn Tyler.............1841-1845
James K Polk............1845-1849
Zachary Taylor..........1849-1850 (cause of death uncertain)
Millard Fillmore........1850-1853
Franklin Pierce.........1853-1857
James Buchanan..........1857-1861

(f) gull (vt; obsolete gull gullet): "to take advantage of (one who is foolish or unwary) : DECEIVE"
(g) Daniel Webster
http://en.wikipedia.org/wiki/Daniel_Webster
(1782-1852; US senator from Massachusetts 1827-1841 and 1845-1850)
(h) Second Bank of the United States
http://en.wikipedia.org/wiki/Second_Bank_of_the_United_States
(section 3 Bank's decline)
(i) New York Herald
http://en.wikipedia.org/wiki/New_York_Herald
(published by James Gordon Bennett, Sr; 1835-1924; at New York City)