It is poorly known that in the 19th century, the U.S. government, on three separate occasions, successfully repudiated public debts owed to private bankers.
First, in the 1830s, four states repudiated their debts—Mississippi, Arkansas, Florida and Michigan. The creditors were mainly British. The Russian-born Alexander Nahum Sack (1890-1955), a professor of Russian law specialized in international financial legislation, wrote 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.”
Second, and more importantly, following the U.S. Civil War (1861-1865), the U.S. federal government, unwilling to inherit the vast debt of the Confederates, summoned them to repudiate the debts they had contracted in order to carry on the war, mainly on “Cotton bonds,” sold to foreign speculators backing slavery.
Abraham Lincoln was shot and assassinated on April 14, 1865 dying on April 15. On Nov. 9, 1865, in an article titled “The Rebel Debt,” the New York Times, wrote:
“The debts of the Confederate government, contracted for the purposes of war, and for all other purposes, were swept away when the Confederacy fell. All its currency, bills, bonds, treasury notes, and ‘promises to pay’ of every kind, became worthless to the holders, even though those holders had given for them real property or services of a positive value. After the fall of Richmond, hundred-dollar bills, based on the faith and credit of the Confederacy, were sold for a nickel cent a piece, and thousand-dollar notes were exchanged evenly for three-cent shinplasters. There is little if any talk in any part of the South about assuming any part of this debt. Its magnitude is appalling, and the states of the South did not become responsible for it in their individual capacity. On its face it was declared to be payable upon the establishment of the independence of the Southern Confederacy—thus linking its fortunes with that of the rebel government; and it was but logical that the Confederacy’s credit should cease to have a value when the Confederacy itself ceased to have an existence.”
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 [German] Banque Erlanger of Paris and its London subsidiary. The risk was remunerated by an interest rate of 7% per annum, relatively high for the period. The Civil War debt held by individual Confederate states (South Carolina, Mississippi, Florida, Alabama, Georgia, Louisiana, and Texas) at the end of the war has been estimated at close to $67 million. Even larger, the debt of the Confederate States of America, which was reported to be $1.4 billion on October 1, 1864. And, if one adds in compensation for freed slaves (which was a rumored demand of Confederates), valued at $1.75 billion in 1860, the total bill the Confederacy might have presented to the Union amounted to $3.2 billion.
The New York Times article goes on: “But there has appeared in many of the states, and still appears in some of them, a strong party desirous of assuming the payment of the debts contracted by the various States individually, in aid of rebellion, and while members of the Confederacy. … It is the repudiation of these which has been effected in Mississippi, Alabama, North Carolina, and, as appears by this morning’s telegrams, also in Georgia, at the suggestion of the President; and it is the failure to repudiate this debt by South Carolina, which has disappointed the intelligent supporters of the President’s policy of reconstruction. This debt has been the subject of earnest debate in the Georgia State Convention now in session at Milledgeville; and it was in reference to this debate that the President [Andrew Johnson] sent a dispatch to the Provisional Governor of Georgia, in which was pointedly and vigorously set forth the course that ought to be followed by the convention.
