Eric Tousaint’s study of the odious debt doctrine
by Eric Toussaint
Part 8 - Three waves of public-debt repudiations in the USA during the 19th century
In the 1830s, four of the United States repudiated their debts – Mississippi, Arkansas, Florida and Michigan. The creditors were mainly British. Sack writes in this regard: “One of the main reasons justifying these repudiations was the squandering of the sums borrowed: they were usually borrowed to establish banks or build railways; but the banks failed and the railway lines were never built. These questionable operations were often the result of agreements between crooked members of the government and dishonest creditors.” (p. 158).
Creditors who attempted to prosecute the States that had repudiated their debts in a US federal court had their suits thrown out. To justify its rejection of the actions, the Federal justice system used the Eleventh Amendment to the Constitution of the USA, which stipulates that “The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state, or by citizens or subjects of any foreign state.”
Consequently this unilateral act of repudiation was a success. Sack does not mention this decision of the Federal courts, probably because it would have weakened his argument that private creditors should be able to win litigation against a State which does not repay its debts. The justifications for the repudiation were improper use of the borrowed funds and the dishonesty of both the borrowers and the lenders, and Sack correctly sums up this point. There is no mention of any despotic regime.
Following the American Civil War (1861-1865), the Federal government required the Confederate States to repudiate the debts they had contracted in order to carry on the war. That is one purpose of the Fourteenth Amendment to the US Constitution, which stipulates that “[…] neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States”.
The creditors had purchased securities issued by European bankers on behalf of the Confederate States, mainly in London and Paris. The justification for the repudiation was that the loans had served to finance the rebellion of the Southern States, united against the USA in the Confederacy. The issue was not whether the Confederate regime was or was not despotic in nature. It was the purpose of the loans, and above all the fact that they had been contracted by rebel forces, that was cited as justification.
A third wave of repudiations took place in the USA after 1877. Eight Southern States repudiated their debts on the grounds that the bonds issued during the period between the end of the American Civil War and 1877 had been used for illicit loans to corrupt politicians (including former slaves) who were supported by the Northern States. This repudiation was thus decided upon by racist government officials (generally members of the Democrat party) who had returned to power in the South after the withdrawal of the federal troops who occupied the South until 1877. Sack does not mention this repudiation.
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