Mises Daily Articles
Debt and Repudiation in Mississippi
Most states later reconciled with their creditors; for example, they resumed interest payments and funded interest arrears. Not Mississippi.
Mississippi proceeded to repudiate both issues of bonds, and, further, to undermine the private debts owed to its state-chartered banks.
Back then, nations that defaulted on their international debts put themselves at the risk of invasion. In the sovereign debt-repayment literature, such invasions, and threats to invade, are called gunboat diplomacy.
In an 1843 debate between a probond Mississippi Democrat and an antibond Democrat, the antibond Democrat spoke of British cruisers off the state's shore. At this point, a member of the audience spoke:
Sir, in that event I join my countryman who opposes the payment of the bonds. My sword … sir, the last drop of my blood, shall be spent in resisting the demand. My state, sir, may she be always right, but, right or wrong, the state, sacred, intangible and profane, forever.
In the United States, states are sovereign. They are the final authority when it comes to their debts. So, states seemed immune to invasion for nonpayment, since the US Constitution requires the federal government to defend the states. But, again, in 1843, a Whig and former president, John Quincy Adams, offered a resolution in the US Congress that would deny Mississippi the protection of the federal government if the state was invaded by its creditors.
In the event of such a war, the State involving herself therein will cease thereby to be a State of this Union, and will have no right to aid in her defense from the United States, or any one of them.
Some advocated a federal assumption of state debts, either to preserve the peace, or to maintain the credit of the United States. In 1841, another Whig and US senator, Henry Clay of Kentucky, described a federal assumption of state debts as "wicked." He proposed that the federal government use funds distributed from land sales and from taxes on imported luxuries to help states reconcile with their creditors. Clay later included a scheme to resolve the debt of Texas as part of his proposed Compromise of 1850.
Mississippi, like Texas, might have required special consideration because of the extent of its debt. Some thought that if other states were to reconcile with their creditors, the state of Mississippi might become a pariah within an otherwise creditworthy United States; but it would not be invaded.
While the states within the United States are sovereign with respect to state debts, they are still prohibited by the Constitution from interfering with private debts. But states can undermine this constitutional provision through various subterfuges and delays.
In Mississippi, the legislature enacted a series of interferences, determined to be unconstitutional by both the state supreme court and the US Supreme Court. These interferences, combined with the statute of limitations on collecting debts, enabled the state to effectively repudiate many of the claims of out-of-state (Northern) creditors against its citizens.
This article tracks the repudiation of both state and private debts by Mississippi, from the speculative boom of the 1830s to the depressed conditions of the 1840s.
Boom and Bust
In the early to mid 1830s, Mississippi and other states were increasing the number of their banks, while increasing the authorized capital within them, just as the charter of the Second Bank of the United States was expiring. During this time, the prices of cotton, commodities in general, land, and slaves were rising. As Mississippi's banks, through early 1837, paid in specie, this rise in prices was befuddling.
Everyone is at loss to account for the high prices of ordinary articles of living.…
Why is it, said a planter to his friend not long since, that every species of commodities has risen to double its former value; that now I cannot buy land, or Negroes or provisions, or indeed anything else without paying double the sum that I did three years ago?
Then, in May 1837, the state's banks suspended specie payments.
Chartering new and much larger banks would give relief after banks in Mississippi and several other states stopped paying in specie. Among the new banks were the Mississippi & Alabama RR and Banking Company (a.k.a., "Brandon Bank"), and the Mississippi Union Bank.
The ostensible purpose of the Brandon Bank was to build a railroad eastward, from Jackson to the Alabama border. The Brandon Bank, instead, got massively into the business of extending loans to planters, secured by shipments of cotton. The scheme involved bypassing New Orleans, with which many Mississippi planters had already overextended their credits. Cotton was to be shipped directly from Mississippi to Philadelphia and New York.
Col. Shelton, the president of the Brandon bank, and its directors deserve much credit for the lead they have taken in this relief movement.
It will be seen at a glance that the master stroke of policy pursued by this bank last summer … will give it the command of eastern funds or specie, and thus place it in a better position than any other banking institution in the country.
The Brandon Bank
has won the good opinion of the whole community.… The bank is now buying large amounts of cotton … and furnishing exchange to those who desire northern funds.… It will be the first bank in the state to resume specie payments.
It is natural that [the New Orleans] banks … should be envious of the Mississippi and Alabama Railroad Bank.… Mississippi … will be the first state to emerge from the commercial thrall which now weighs like an incubus upon the whole country.… The North will struggle for years amid the adverse currents of prostrate credit, but … Mississippi will spring like a Phoenix from the ashes, into a full tide of prosperity.
The Brandon Bank, having diverted a large portion of trade from the brokers and shavers of New Orleans, has become obnoxious to that piratical crew.
The scheme of the Brandon Bank might have worked if the price of cotton had recovered. But, the price of cotton continued to be low.
By early 1838, Brandon Bank money fell to a discount in Natchez (relative to the par of exchange there, which, during 1838, was current Natchez banknotes). Apologists for the Brandon Bank became shrill:
The Brandon Bank, we are happy to add, will soon redeem (as we always believed it would) its notes by northern exchange at 6 percent premium.
The bills of the following banks are not bankable in this city: Brandon, … for which brokers charge 10 percent.
We … advise holders not to dispose of this [Brandon Bank] money at the late and ruinous rates of discount.
The discount on Brandon Bank notes in Natchez continued to increase rapidly, reaching almost 40 percent by the end of the year. Various merchants offered goods "at par" for Brandon money, presumably to discharge their own debts to the bank in the bank's depreciated notes; e.g., "Brandon Money or other of equal value for goods at par — S.J. Boyd."
In August 1838, the state of Mississippi released a report that was damaging to the bank. It showed the bank was capitalized with mortgages on real estate, slaves, and cotton, with little or no "bone fide" capital, and that its directors used it extensively to get leverage in their dealings in cotton.
If the bank's loans had been good, its circulation could have been sopped up by merchants with loans due to the bank, selling their merchandise for the bank's notes. This was not unusual for banks that suffered liquidity problems, but were fundamentally solvent. But, judging by the evolving discount of Brandon Bank notes in Natchez through the next several years, its loans could not be collected.
The last we hear of this bank is when its cashier fled the state — "Gone to Texas." A few years later, its president, Col. Shelton, committed suicide.
As the notes of the Brandon Bank and several other banks lost their value, deflationary pressure returned. So, the focus of relief efforts switched from the Brandon Bank to the Mississippi Union Bank.
Repudiation of the Mississippi Union Bank Bonds
The Mississippi Union Bank was to be a majority state-owned bank, headquartered in the state capital, and capitalized through the issue of up to $10 million in state bonds. Because of the state bond provision, two successive state legislatures had to pass the act to charter the bank. Mississippi Governor A.G. McNutt, a Democrat, signed the bill chartering the bank in February 1838, and later appointed commissioners to sell $5 million of state bonds.
The United States Bank of Pennsylvania famously bought the Mississippi Union bonds, and used them to secure loans from European investors. The Mississippi Union Bank used the proceeds of the bonds to refinance the obligations of Mississippi planters that were due in New Orleans. Planters were also enabled to obtain new credits through the issue of post notes. The inconvertibility of these notes was no great disadvantage since Mississippi's banks were then in suspension.
No one has been injured by the issuance of these post notes, on the contrary, everyone has benefited, and the currency of the state improved. Many who owed executions have been enabled to repay them and save their property from sacrifice. Merchants and foreign creditors have been enabled to collect and procure exchange on the North and New Orleans.
will afford great relief to those who are required to pay money to the Marshall and Sheriff at the fall terms of the courts.… It will immediately revive our currency and resuscitate the depressed condition of all the monetary affairs of the state.
The Mississippi Union Bank,
we have no doubt, will well sustain its own credit and that of the state.
Through 1838, the premium on specie rapidly fell to zero, as the surviving banks of the state prepared to resume specie payments. In October, the Commercial Bank of Natchez resumed on its own. Its notes then rose to a premium against the notes of the other banks of the city. In December, the other banks of Natchez agreed to resume on January 1, 1839. The resumption proved to be at least nominal, as the banks largely replaced their demand notes in circulation with post notes. "The post notes of the various banks are now almost our only currency."
The notes of Natchez banks actually in circulation lacked convertibility. The inconvertibility of Mississippi Union Bank notes was, again, no great disadvantage. "Union Bank money has been in good demand at a handsome premium upon the post notes of our city banks."
From 1838 to 1839, the quotations I have uncovered indicate that Mississippi Union Bank notes passed current in Jackson, Lexington, and Yazoo.
During 1839, the state attempted to sell additional bonds to out-of-state investors for the Mississippi Union Bank and the state-supported Mississippi RR & Banking Company. In February 1839, the state transferred its holdings of Planters Bank stock to the Mississippi RR & Banking Company, to enable it to advance the work on its road projected from Natchez to Jackson. The president of the company, a former and future governor, John A. Quitman, traveled to Europe to sell bonds secured by the stock. But nothing came from this effort.
In the summer of 1839, Governor McNutt executed the remaining $5 million of Mississippi Union Bank bonds, and commissioned its president, another former governor, Hiram G. Runnels, to sell the bonds to northern investors. Again, out-of-state investors balked.
The end of the speculative bubble may have been inevitable. The rebuff of the Mississippi bond offers made it clear that the speculative bubble would not be reinflated. But, it was unhelpful for the second issue of Mississippi Union Bank bonds, when the governor, in his annual message of 1839, questioned the actions of the commissioners he had appointed to sell the first issue of Mississippi Union Bank bonds.
The commissioners in the sale of the bonds exceeded their instructions, but no doubt obtained as much for them as could have been had at the time of the sale. An anxious desire to place the bank into speedy operation was certainly commendable, but at the same time no violation of the charter should have been sanctioned.
The Union Bank, whose means and credit are greater than any other institution, and alone promises some hopes of relief was denounced in such terms as brought about distrust of the institution, and caused the paper of that bank to flow back upon it in the shape of demands for exchange. The bank thus crippled … was compelled to cease its loans.
By 1840, the focus of relief had shifted from gaining renewed and additional credit, to avoid repaying debt.
In 1840, Governor McNutt's annual message described the potential burden that repaying the Mississippi Union bonds posed to the taxpayers, due to the poor financial condition of the bank.
Even with the most able and prudent management, [the bank] can never hereafter be made useful.… I have come to the conclusion that it is our duty to place the institution over in liquidation.
The faith of the State is pledged for the whole capital stock, and the property of all her citizens may hereafter be taxed to make up its losses and defalcations.
After which he asked rhetorically,
Have we a right to borrow of posterity, and will a future generation redeem our pledges?
Two months later, McNutt proclaimed that the Mississippi Union Bank bonds had been sold below par, because the entire amount of the loan was not paid immediately over to the state, but was received in installments over several months. According to McNutt, the below-par sale contravened the state constitution and voided the transaction.
(Table 1 tracks the key events through the next 35 years about debt repudiation in the state of Mississippi.)
The Bank War and the Repudiation of Private Debts
As well as repudiating the Mississippi Union Bank bonds in 1840, the state effectively repudiated the debts owed to the state banks. Beginning that year, legislative acts and the courts disabled the state banks from collecting debts by becoming hypertechnical when it considered pleas from other banks.
We believe that few if any of our banks have been able to obtain verdicts at the late sessions of our courts, where the cases were defended.
It is said to be almost impossible to collect a debt by judicial proceeding in this State. The whole tenor of legislation for several years has been directed against creditors.
The state supreme court would later say, "the process of collection was very slow from 1840 to 1843."
The bank war began in 1840 with an act repealing the post-note law of the state. It required banks to resume specie payments or else have their charters voided. Another provision in the act prohibited banks from selling — or "negotiating" — debts owed to them. These would presumably sold to others either in a better position to collect on the debt or to profit on a foreclosure sale.
The provision prohibiting banks from transferring debts owed to them was upheld by the state supreme court.
Negotiability is an incident or quality attached to notes by law [that is to say, it is not a liberty], not by charter. It does not constitute an essential ingredient in a note.
During 1840, the notes of the Mississippi Union Bank fell to a discount of more than 50 percent in Natchez (relative to current Natchez banknotes). So did the notes of non-Natchez Mississippi banks traded in that market not already quoted at such a discount. The notes of the Mississippi RR & Banking Company also fell to a discount of more than 50 percent during 1840, leaving that place with only one bank whose notes remained current, the Commercial Bank of Natchez.
Starting in June 1840, the governor began issuing proclamations that the charters of various banks in the state were void because they did not redeem their notes in specie. By year's end, the governor had voided the charters of nine out of the state's 22 incorporated banks. He believed that eight others had not complied with the new banking law (and risked having their charters voided), and that only five were in compliance.
Continuation of the Bank War
The bank war continued with the so-called "quo warranto" law of 1843. This law suspended foreclosure on debts owed to a bank if the bank was accused of violating its charter. A trustee would be appointed, as distinct from a receiver, for winding up the affairs of a bank whose charter was voided. Certain Democrats argued that by voiding a corporate charter,
The debts due to or from the corporation are all extinguished. Neither the stockholder, nor the directors, nor trustees of the corporation can recover those debts.
Our state will be the first where the crimes of corporations will be thoroughly probed and the law bearing upon them clearly demonstrated and settled.
If the judges in our courts decide that the debtors to the bank are released from their obligations by reason of certain illegal acts on the part of the banks, … the people would abide by it without a murmur.
The Whig press argued, contrariwise, that the amended method of winding up the affairs of shuttered banks would retire the liabilities of the banks through the process of collecting upon their assets.
It is altogether a mistake to suggest that this act … abrogate[s] the debts of the banks. It is one of the most speedy and effectual modes of collecting the debts and settling with the creditors of the banks that we have yet had in Mississippi.… In a very short time, there will be no such thing as a Mississippi bank note to be found, the circulation will have been returned in payment for indebtedness to the banks.
After the law of 1843, writs of quo warranto were served to almost all the remaining banks in the state. The state supreme court upheld the quo warranto provision of the law of 1843. The next year, the court upheld the debt collection provision of the law. In a 2-to-1 decision, the court affirmed both provisions: suspending foreclosure on a writ of quo warranto, and providing for a trustee to collect the debts owed to the bank. The latter provision showed that "avowed and ostensible object of the former was to preserve the assets of the banks pending litigation," and therefore the former was not interference with contract.
The Democratic press reacted predictably:
The decision if carried into effect will cause much suffering and distress among those indebted to the banks, without benefitting any but the assignees, lawyers and a few capitalists who have bought up the paper of the bank at a mere nominal sum, and will extortion upon those who are compelled to have it to pay their liabilities.
The state legislature responded to the decision by passing a new banking law, the so-called Briscoe Bill. The Briscoe Bill created a two-year right of redemption for property sold in foreclosure. It gave debtors the right to pay the bank before foreclosure in (presumably depreciated) banknotes, but required that at foreclosure, only gold and silver could be bid for the property. These provisions favored debtors at the expense of note holders and shareholders.
The state supreme court soon declared the Briscoe Bill was unconstitutional and interfered with contracts.
The Democratic press, again, reacted predictably:
The dead bodies of the banks are hereby galvanized and set on foot once more, and in the most pernicious way. A host of irresponsible lawyers and assignees … have been set upon the community … at an untold expense to the honest and hard-working men of the state … by this decision, the banks have been re-chartered.
The next year, in 1848, the US Supreme Court decided an appeal from the 1844 decision of the state supreme court, which upheld the provision of the law of 1840 prohibiting banks from negotiating debts owed to them. The US Supreme Court overturned the state supreme court, ruling that negotiating debt owed to banks was a long-established practice, and that this right was vested in a chartered bank unless specifically excluded. The Supreme Court's decision recognized that if banks had the right to negotiate debts, it would let them offset the bank's debt against the debts owed to the bank. It would ease winding up the bank's business in a way that preserved the interests of the creditors and owners of the bank.
With the Supreme Court's 1848 decision, it might seem that after the lapse of many years, still-uncollected debts would be resolved under the rule of law. However, in 1850, the state supreme court considered a case involving the Commercial Bank of Natchez, which had been suspended under laws later determined to be unconstitutional, from collecting a long-overdue debt. The court decided, 2-to-1, that an unconstitutional suspension of foreclosure did not suspend the statute of limitations on debt collection. The court's decision weighed the state's interest in enforcing contracts under the rule of law, against the state's interest in avoiding, what would otherwise be, endless litigation.
The state itself was reduced to issuing unbacked "state warrants" to its officers, members of its legislature, judges, and other employees, which could only be passed at discounts of one-third to one-half. Its auditor, and its treasurer, embezzled. A former governor was indicted for fomenting an invasion of Cuba, and a sitting governor joined with Texas in threatening war against the United States over the Texas–New Mexico border. And, one of its two US senators, Jefferson Davis, emerged as the chief spokesman for the doctrine of repudiation.
|1840||Governor's attempt to sell a second issue of Union Bank bonds fails, as does an attempt to sell bonds in state-supported Mississippi Railroad & Banking Co.|
|1840||State legislature passes a bill to prohibit sale of notes by banks that favors debtors as opposed to creditors of banks, because it disrupts the process of offsets by which illiquid but solvent banks were able to wind up their business at no nominal loss to their creditors|
|1841||State defaults on interest payments on Planters and Union Bank bonds, governor issues a proclamation repudiating Union Bank bonds, which is rejected by the state legislature|
|1841||Governor proceeds to void charters of banks that do not resume specie payments, this will eventually leave the state with only two banks: Commercial Bank of Manchester and Northern Bank, many banks are closed with their notes "dead in the hand," some proceed to a relatively orderly winding up of their business|
|1841||Northern owners of Vicksburg Commercial & Railroad Bank lend the bank more money to complete construction of its road, securing the loan with the assets of the bank|
|1842||After a sweeping victory by antibond Democrats, state legislature joins in the governor's repudiation of Union Bank bonds|
|1843||State legislature passes a bill (the so-called quo warranto law) suspending debt collection by banks when they are accused of violating their charter|
|1843||Jefferson Davis's first run for political office, he gives a qualified endorsement to repudiation of Union Bank bonds|
|1843||Rumors of British seizure of Mississippi's cotton crop, John Quincy Adams proposes a resolution in US Congress to not defend any state that is invaded for debt-repudiation|
|1844||A lower court disallows the securing of the loan to the Vicksburg Commercial & Railroad Bank|
|1844||State supreme court, in Payne vs. Baldwin, upholds the act of 1840, saying the sale of notes was not a grant of a right by a corporate charter, but merely something allowed by law|
|1845||State supreme court upholds the act of 1843, saying the right to collect debts owed to the bank was not violated but only suspended|
|1846||State supreme court, in Nevitt vs. Bank of Port Gibson, rules that trustees of banks whose charters are voided can indeed collect debts due those banks|
|1846||Planters, Agricultural, and Commercial Banks of Natchez surrender charters, and proceed to liquidation|
|1846||State legislature passes the so-called Briscoe Bill, which favors debtors in the collection of debts by bank trustees|
|1847||State supreme court overturns the act of 1846|
|1848||State offers land for Planters Bank bonds at $6 per acre (3 times their value in current funds), obtains few takers|
|1848||State supreme court overturns a lower court and upholds the securing of a loan to the Vicksburg Commercial & Railroad Bank by the bank's assets; after this decision, the assets of the bank, including its road from Vicksburg to Jackson, are sold at a sheriff's auction|
|1848||US Supreme Court overrules the state supreme court's 1844 decision in Payne vs. Baldwin|
|1849||Jefferson Davis gives a vigorous defense of the repudiation of Union Bank bonds, says claims of foreign bondholders are "baseless" and that bankers shed "crocodile tears" for widows and orphans whose money is invested in bonds|
|1850||State supreme court rules that statute of limitations continued to run on debts the collection of which was in suspension due to unconstitutional interference with contract|
|1852||State legislature submits a vote on a direct tax to pay the Planters Bank bonds, which the people soundly defeated|
|1853||With the debt of the bank paid off, state supreme court rules that trustee of Commercial Bank of Natchez had no power to collect debts due the bank for the benefit of the bank's shareholders|
|1853||State supreme court upholds both Planters and Union Bank bonds|
|1875||New state constitution repudiates both Planters and Union Bank bonds|