Credible Commitments and Constitutional Constraints: State Debt Repudiation and Default in 19th Century America

43 Pages Posted: 19 Jun 2011 Last revised: 6 Sep 2014

See all articles by John A. Dove

John A. Dove

Troy University - Manuel H. Johnson Center for Political Economy

Date Written: June 1, 2011

Abstract

Between 1839 and 1842 the United States suffered through an acute debt crisis. Over this period eight states and one territory defaulted, five of which outright repudiated all or parts of their debts outstanding. However, for many of those same states reentry into capital markets occurred relatively rapidly and at rather favorable terms. The question then remains, how and why was this possible? This current work attempts to explain this phenomena by suggesting that soon after default or repudiation many states enacted constitutional amendments meant to significantly constrain and credibly commit future governments from overextending credit and simultaneously to pursue time consistent public policy. I explore this by examining the impact that these newly imposed constitutional amendments, which limited both the type and amount of debt as well as created stronger procedural safeguards for issuing debt, had on average bond prices from New York market data. Overall, my results show that newly constrained states had higher average bond prices than states that did not impose constitutional limits on debt financing, thus suggesting that markets did in fact perceive these constitutional changes to be binding and credible. These results are robust to a number of specifications.

Keywords: Sovereign Debt, Default, Credible Commitments, Constitutional Constraints

JEL Classification: D78, H63, H73, N41

Suggested Citation

Dove, John A., Credible Commitments and Constitutional Constraints: State Debt Repudiation and Default in 19th Century America (June 1, 2011). Constitutional Political Economy, Vol. 23, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=1866790

John A. Dove (Contact Author)

Troy University - Manuel H. Johnson Center for Political Economy ( email )

Bibb Graves Hall
Troy, AL 36082
United States

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