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Three Waves of Debt Repudiations in the USA during19th Century

(By Eric Toussaint) – 7 November

The United States, on three separate occasions, governments have successfully repudiated public debts owed to private bankers. In the 1830s, four of the United States repudiated their debts – Mississippi, Arkansas, Florida and Michigan. |1| The creditors were mainly British. Alexander Nahum 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). |2| 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.” |3| Consequently this unilateral act of repudiation was a success. The justifications for the repudiation were improper use of the borrowed funds and the dishonesty of both the borrowers and the lenders. 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”. |4| The creditors had purchased securities issued by European bankers on behalf of the Confederate States, mainly in London and Paris. Among the creditors was the Banque Erlanger of Paris and its London subsidiary. In 1865, during the Civil War, it organized the issue of the “Erlanger Loans,” which guaranteed holders repayment in cotton from the Southern States provided that the Confederate States won the war. The risk was remunerated by an interest rate of 7% per annum, relatively high for the period.

The bonds were also traded in London. During the Civil War, the Confederate States had stockpiled cotton, which drove prices to a historic level of $1.89 per pound, a record still unequalled two centuries later. Prices increased twentyfold within a few months, but British manufacturers had had enough time to build up their own stocks. In 1870, five years after the end of the war, American cotton had almost returned to its pre-war level of production, and the USA remained world leader in cotton until 1931, as it had been since 1803. But the bondholders were never repaid due to the repudiation decreed by the Federal government and the application of Section 4 of the 14thAmendment to the Constitution. 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 |5| 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.

These three examples of cancellation of public debts show that it is entirely possible for public authorities to repudiate debts. The reasons for each repudiation vary and the third case, whose motivations are in conflict with human rights, only reinforces the idea that governments, if they choose to do it, can force bankers to bear the burden of debt cancellation. Obviously care needs to be taken to ensure that any such repudiation is legitimate and respects human rights.


|1| This article is the third in a series devoted to debt repudiations in the USA, in Cuba and in Costa Rica during the 19th century and before the Second World War. The first is “The USA’s Repudiation of the Debt Demanded by Spain from Cuba in 1898: What about Greece, Cyprus, Portugal, etc.?” ( and the second “What Other Countries can Learn from Costa Rica’s Debt Repudiation” (… ). For a summary of the foreign policy of the United States towards its neighbours in the Americas during the 19th century through the 1930s, see .

|2Les effets des transformations des États sur leurs dettes publiques et autres obligations financières : traité juridique et financier, Recueil Sirey, Paris, 1927 (in French).

|3| On the 11th Amendment, see:…

|4| It is also very important to stress that the 14th Amendment also excludes paying any compensation to slave owners. Four million slaves were emancipated without the slightest compensation being received by their former masters. Source: Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, “Applied Legal History: Demystifying the Doctrine of Odious Debts,” 2009,…

|5| Alabama, Arkansas, Florida, Georgia, Louisiana, North Carolina, South Carolina and Tennessee. For further details see Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, op. cit. To get an idea of the struggle against slavery and racial discrimination during and after the American Civil War, see the interesting film The Free State of Jones, released in 2016:….