THE REPUDIATION OF STATE DEBTS.

THE REPUDIATION OF STATE DEBTS.

The debt of Mississippi was small and that of Texas was not excessive, and neither made any attempt to repudiate the obligations. The $4,000,000 issued in Florida for state aid to railroads was large for the small population and the scanty resources of that State, but this issue was declared unconstitutional by the Supreme Court of Florida. The Reconstruction debt of Alabama was large, about $20,000,000, besides accrued interest which the State could not pay. In 1873, the carpetbag government attempted to fund these bonds at twenty-five cents on the dollar. The Funding Act of 1876 repudiated $4,700,000 outright, reduced the bonds loaned to one railroad from $5,300,000 to $1,000,000, gave land in payment of $2,000,000 more, scaled other bonds one-half, and funded still others at par excluding interest. About $13,000,000 in all was repudiated and the State was left with a debt of less than $10,000,000. ¹

¹ W. A. Scott, The Repudiation of State Debts, p. 63, but see also W. L. Fleming, Civil War and Reconstruction in Alabama, p. 580 ff.

During 1868 and 1869 bond issues to the amount of nearly $28,000,000 were authorized in North Carolina, but not all of this amount was issued. From the $13,313,000 which was outstanding at the end of the carpetbag régime, the State had received little or no benefit. Interest was not paid upon this sum or upon the previous issues, and the total debt increased rapidly. Unsuccessful attempts to compromise with the creditors were made in 1874 and 1875, but not until 1879 was the matter settled. The Reconstruction bonds were repudiated outright, and the legitimate debt of the State was funded at from fifteen to forty cents on the dollar. No provision was made for the unpaid interest. This compromise did not include the pre-war bonds issued to aid the North Carolina Railroad. This corporation was a going concern, and as the result of a suit the stock had been sequestrated. A compromise with the holders of these bonds was made at eighty per cent of par and interest. As a result of this wholesale repudiation the debt of the State was so reduced that it could be carried. In all over $22,000,000 besides other millions of accrued interest were repudiated. ¹

¹ J. G. de R. Hamilton, Reconstruction in North Carolina, pp. 448-449, 659-661.

Not all of the creditors of the State accepted the compromise at once, but the offer was left open and, as the years went on and the State showed no signs of a change of intention, the bondholders gradually recognized the inevitable. In 1893, nearly fifteen years after this offer had been made, more than $1,000,000 of the old bonds were still outstanding. In 1901, a New York firm presented to the State of South Dakota ten of the class which had been made convertible at twenty-five cents on the dollar. That State brought suit in the Supreme Court of the United States and collected the amount sued for. ² No progress has been made in collecting the special tax bonds issued during Reconstruction though some New York bond houses hope against hope, and the Council of the Corporation of Foreign Bondholders in its annual reports plaintively regrets the perversity of this and other Southern States.

² South Dakota v. North Carolina, 192 U. S. Rep., p. 286

South Carolina presented such a carnival of incompetence and corruption that the total amount of bonds issued has never been accurately determined. Apparently there was a valid debt of about $6,666,000 in 1868, which was increased to about $29,000,000 within three years. The carpetbag Legislature of 1873 repudiated $6,000,000 of this debt, and attempted to compromise the remainder at fifty per cent, but the State could not carry even this reduced amount. Judicial decisions destroyed the validity of some millions more, and finally the debt, reduced to something more than $7,000,000, was funded. The debt of Georgia was increased directly and by indorsement of railroad bonds. The Legislature of 1872 declared $8,500,000 void and in 1875 repudiated about $600,000 more.

Louisiana suffered most from excessive taxation. At the beginning of the carpetbag period the debt was about $11,000,000, but railroad and levee bonds were issued rapidly. Though a constitutional amendment in 1870 forbade the State to contract debts in excess of $25,000,000, the Legislature went steadily on until in 1872 the debt was variously estimated at from $41,000,000 to $48,000,000. In 1874, when W. P. Kellogg was Governor, the State began to fund valid obligations at sixty cents on the dollar. By action of the courts the debt was reduced to about $12,000,000 bearing interest at seven percent. The State could not pay the interest on this sum, and the constitutional convention of 1879 made drastic reductions in the interest rate. Both New York and New Hampshire, acting ostensibly for themselves but really in behalf of their citizens, brought suit, but the Supreme Court threw out the cases on the ground that the actions were attempts to evade the constitutional provision forbidding a citizen to bring an action against a State. The bondholders still refused to accept the reduction, and the Supreme Court in 1883 described the ordinance as a violation of the contract of 1874 but a violation without a remedy. Meanwhile the Legislature, after consultation with the bondholders, had agreed to a slight increase in the rate of interest; and in 1884, this compromise was ratified by an amendment to the constitution.

The debt of Arkansas was not so difficult to settle. The issue of about $7,500,000 for railroads and levees during Reconstruction was declared unconstitutional in 1877-78, and the so-called Holford bonds, issued in aid of banks, were repudiated by the constitutional convention of 1884. The total amount repudiated and declared void by the courts was nearly $13,000,000. Tennessee also struggled with a debt which it was unwilling and perhaps unable to pay. The amount, which in 1861 was about $21,000,000, incurred principally in aid of railroads and turnpikes, was largely increased under Republican rule, and most of the money received for the bonds was stolen or wasted. No interest had been paid during the War, and the accrued interest was funded in 1865, 1869, and 1873. The debt was somewhat reduced by permitting the railroads to pay their debt in state bonds which they purchased cheaply on the market. Other defaulting railroads were sold, but the State still could not meet the interest. Many discussions with the creditors were held, but the people had the idea that much of the debt was fraudulent and they consequently voted down proposals which they thought too liberal to the creditors. The question temporarily split the Democratic party, but after much discussion a long act was passed in 1883 which finally settled the matter. A part of the debt, with interest, was funded at 76 to 80 cents on the dollar. The major part was funded at 50 cents on the dollar with interest thereafter at three per cent.

The financial difficulties of Virginia excited more interest than did those of any other commonwealth, for this State had the largest pre-war debt. Its $33,000,000 with accrued interest had amounted to about $45,000,000 in 1870. In 1871 the question of settlement was taken up; one-third of the debt was assigned to West Virginia, and the remainder was funded into new bonds bearing interest at five and six per cent. The coupons were made receivable for taxes and other debts due the State. The amount recognized was beyond the ability of the State to pay, and many members of both parties felt that some compromise must be made. So many of the coupons were paid in for taxes that money to keep the Government going was found with difficulty. Various attacks on the privilege were made, but these "coupon killers" were usually declared unconstitutional by the Supreme Court of the United States. Meanwhile the contest had split the State. Some were in favor of paying the whole debt according to the agreement of 1871; others wished to reduce the interest rate; while the radicals wished to repudiate part of the debt and reduce the rate of interest upon the remainder. The last named faction, under the leadership of H. H. Riddleberger, organized a political party known as the Readjusters and in 1879 captured the Legislature. Riddleberger then introduced a bill which scaled down the debt to less than $20,000,000, but it was vetoed by the Governor. Two years later the new party captured both Governorship and Legislature and sent General William Mahone to the United States Senate, where he usually voted with the Republican party.

The Legislature repassed the Riddleberger bill, which the creditors refused to accept, and an ingenious "coupon killer." Similar acts were passed in 1886 and 1887. The United States Supreme Court, before which these acts were brought, pronounced them unconstitutional in that they impaired the obligation of contracts, but the Court also stated that there was no way in which the State could be coerced. Meanwhile the credit of the State was nonexistent, and all business suffered. In 1890 a commission reported in favor of compromising the debt on the lines of the Riddleberger Act and, in 1892, $19,000,000 in new bonds were exchanged for about $28,000,000 of the older issue. Interest was to be 2 per cent for ten years and then 3 per cent for ninety more.

West Virginia steadfastly refused to recognize the share of the debt assigned to her on the ground that the principal part had been incurred for internal improvements in Virginia proper, and that one-third was an excessive proportion. The matter dragged along until the Supreme Court of the United States decided in March, 1911, that the equitable proportion due by West Virginia was 23.5 per cent instead of one-third. West Virginia, however, made no move to carry out the decision, and in 1914 Virginia asked the Court to proceed to a final decree. A special master was appointed to take testimony, and on June 14, 1915, the Supreme Court announced that the net share of West Virginia was $12,393,929 plus $8,178,000 interest. The State, by a compromise with Virginia in 1919, assumed a debt amounting to $14,500,000.