The repudiation of state debts; a study in the financial history of Mississippi, Florida, Alabama, North Carolina, South Carolina, Georgia, Louisiana, Arkansas, Tennessee, Minnesota, Michigan, and Virginia

Front matter

yC-NRLF

■LIBRARY

OF THE

Preface

The field of financial liistoiy which is covered by this volume has been lieretofore left almost entirely uncultivated by students of American finance. With tlie exception of an article by Hon. R. P. Porter in tlie International Review for November, 1880, and another contributed to " Lalor's Cyclopaedia," by Geoige Walton Green, and afterwards expanded by the Society for Politr ical Education, as Economic Ti-act No. 11, very little has been written upon it. Neitlier of tliese articles furnishes a statement of facts complete and exhaustive enough to form the basis of accurate scientific judgments, and botli of them omit the discussion of important questions.

The present volume treats of four main topics. Chapter I. presents those features of our constitutional law% state and national, which bear upon the subject of the repudiation of State debts, and

98802

VI pheface.

leads to the conclusion that the holder of a repudiated bond has no efficient means for enforcinor

o

the payment of his dues; Chapters II. to VI., inclusive, describe with considerable detail the history of the various acts of repudiation passed by the twelve States named on the title-page; Chapter VII. attempts a scientific interpretation and explanation of the facts presented; and the closing chapter contains a critical discussion of various remedies for the evil of State defalcation and financial dishonesty.

Tlie term repudiation as herein employed includes cases of the " scaling " of debts and of refusal to pay bonds which were not valid obligations of the States, either from a moral or a legal standpoint. It may perhaps be objected that such an extension of the term is not justified by ordinary usage ; and that the compromise of a debt on terms which reduce the principal and interest, or the refusal to pay bonds which are claimed to represent a just debt but do not^ cannot in justice be termed repudiation. Though the autlior has no desire to attempt t© justify so broad an extension of the meaning of the term on grounds of derivation or usage, it has seemed to him proper to use it on the title-page and elsewhere as generally and

PREFACE. vii

broadly descriptive of the class of financial acts herein treated.

I am under special obligations to Mr. J. R. Berryman, Librarian of the State Law Library of Wisconsin, and to the officials of the State Historical Library of Wisconsin, and of the Congressional Library at Washington, for their kindness in placing freely at my disposal the documents without a study of whicli this book would have been impossible ; also to Mr. Cliarles N. Gregory, and Mr. David Kinley, of Madison, Wis., for reading parts of my manuscript and making many valuable suggestions.

William A. Scott.

Madison, Wis., April 7, 1893.

Contents

PAGE

Preface v

CHAPTER

Appendix

I. Sources of Information .... 265 n. Statistical Tables 275

III. Extracts from the Charter of the Mis-

sissippi Union Bank and the Act supplementary thereto -''^

i.K

X CONTENTS.

APPENDIX PAGE

IV. Extracts from the McCulloch, Riddle-

BERGER, AND DeBT-SETTLEMENT AcTS OF

V. Extracts from the Internal Improvements AND the Debt-settlement Acts of Tennessee 301

VI. Extracts from the " Report of the Joint Investigating Committee on Public Frauds, an*d Election of Hon. J. J. Patterson TO the United States Senate, made to the General Assembly of South Carolina at the Regular Session, 1877- V8» 313

Index 319

THE CONSTITUTIONAL AND LEGAL ASPECTS OF REPUDIATION.

Chapter I. The Constitutional And Legal Aspects Of Repudiation

The study of the chapter of financial history which constitutes the subject of this book, properly begins with an investigation into the rights and privileges of the States of the American Union relative to the payment or non-payment of their debts. We naturally ask at the very outset whether repudiation is in any way connected witli the defects in our constitutional and legal system, or whether it has happened in spite of the best possible laws.

The Federal Constitution and the laws of the States themselves are the sources whence an answer to these questions must be derived. We will begin with the former.

As originally adopted, the Constitution of the United States contained two provisions which have a bearing on this subject. One, in Section 10 of Article I., prohibits a State from passing any law ''impairing the obligation of contracts," and the other, in Section 2, Article III., provides that the judicial power of the United States shall extend " to controversies between two or more States ; between a State and citizens of another State; between citizens of different States ; between citizens of the same State claiming lands under grants of different States ; and between a State or the citizens thereof and foreign States, citizens, or subjects."

The meaning of these two clauses in the present connection at first sight seems clear. The casual reader, uninitiated in the technicalities of the law, would affirm unhesitatingly that the first one made it unlawful for a State to repudiate her just debts, and that the second one provided that in case she did thus incriminate herself, she could be brought to justice before the federal courts. However, a more careful examination of the precise language used in the " contract clause," as the first one is called, reveals several difficulties. In the first place, it does not expressly state whether the contracts referred to are those of private individuals, of States, or of both. The natural inference is that it refers to all contracts by whomsoever made ; but the " natural inference " is not always the one which interested parties draw. The next query concerns the meaning of the expression the " obligation of contracts." What is the obligation of a contract? This being explained, we ask in the third place, in Avhat ways can tKe obligation of a contract be violated ? These difficulties must be removed before we can be sure of the precise bearing of the clause in question on the subject under discussion.

Regarding the kinds of contracts referred to, — whether State or individual, or both, — the decisions of the Supreme Court leave no room for doubt. They are unanimous in the declaration that the clause includes cases to which a State is a party. The following are examples of these decisions ; In the case of the State of New Jersey v. Wilson ^ the statement is made that the contract clause of the Constitution " extends to contracts to which a State is a party as well as to contracts betAveen individuals." In Providence Bank v. Billings 2 these words are used : It has '' been settled that a contract entered into between a State and an individual is as fully protected by the tenth section of the first article of the Constitution as a contract betw^een two individuals." The decision in the case of Green v. Biddle^ states that "the Constitution of the United States embraces all contracts, executed or executory, Avhether between individuals, or between a State and individuals ; and that a State has no more power to impair an obligation into which she herself has entered than she can the contracts of individuals." These and other decisions^ which might be quoted leave no doubt concerning the constitutional limitation of the right of States to impair contracts into which they have entered.

The meaning of the phrase " obligation of contracts " is settled by the following declarations of the Supreme Court : " The obligation of a contract consists in its binding force on the party who makes it. This depends on the laws in existence when it is made; these are necessarily referred to in all contracts, and form a part of them as the measure of the obligation to perform them by the one party, and the right acquired by the other." ^ Again it says : " The obligation of a contract, in the constitutional sense, is the means provided by law by which it can be enforced, by which the parties can be obliged to perform it." ^

These decisions clearly indicate that the value of the contract clause depends upon other laws ; namely, those which provide for the enforcement of contracts. If a State owes a debt, her obligation seems to depend entirely upon the laws in existence for the enforcement of contracts against States. If there are no such laws, the contract,

1 Woodruff V. Trapnall, 10 How. 190, 207; and Wolf v. New Orleans, 103 U. S. 358, 367.

2 McCracken v. Hayward, 2 How. 608, 612.

8 Louisiana v. New Orleans, 102 U. S- 203, 206.

though legal, is really worthless if the State sees fit to disregard its provisions.

An additional light is thrown upon the meaning and significance of the clause in question by the decisions of the Supreme Court, which define the various methods by which it may be violated. It has been well established by the precedents of this court that a State may change her remedy for enforcing contracts, provided she furnishes in the new as efficient a one as the old.^ There is surely nothing in the contract clause itself which could prevent this. It simply insists that a change of remedy shall not impair the contract. In actual practice, however, it has been very difficult to draw closely the line between those changes of remedy which impair contracts and those which do not. The Supreme Court has recognized this difficulty, and in the main has succeeded in protecting the right of contracting parties to as efficient a remedy as existed when the contract was made. The following quotation will indicate the practice of the Supreme Court on this point. In the case of Bronson v. Kinzie,2 Chief Justice Taney said: " It is manifest that the obligation of a contract, and the rights of a party under it, may in effect be destroyed by denying a remedy altogether, or may be seriously

1 Antoni v. Greenhow, 107 U. S. 769; Mason v. Haile, 12 Wheat. 370; Bronson r. Kinzie, 1 How. 311; Van Hoffman r. City of Quincy, 4 Wall. 535; Louisiana v. Pilsbury, 105 U. S. 278.

2 See above.

impaired by burdening the proceedings with new conditions and restrictions, so as to make the remedy hardly worth pursuing. And no one, w^e presume, would say that there is any substantial difference between a retrospective law declaring a particular contract or class of contracts to be abrogated and void, and one which took away all remedy to enforce them, or encumbered it with conditions that rendered it useless or impracticable to pursue it. One of the tests that a contract has been impaired is that its value has by legislation been diminished. It is not by the Constitution to be impaired at all. This is not a question of degree or manner or cause, but of encroacliing in any respect on its obligation, dispensing with any part of its force." ^

The intent of the Court to preserve the clause with all its force was well expressed by Justice Strong in Murray v. Charleston,^ when he said : ''It is one of the highest duties of this Court to take care that the pi-ohibition (against impairment of contracts) shall neither be invaded nor frittered away. Complete effect must be given to it in all its spirit." In spite of these strong statements, however, in one important case in which a State attempted to evade her obligations by changing the remedy for their enforcement, the Court gave so loose and broad an inteipretation to this right that the State was able to accomplish her purpose.^

In view of these decisions of the Supreme Court, there can be no doubt concerning the meaning of the clause in question. It certainly refers to the contracts of States as well as to those of individuals, and it lays upon the former a strong moral obligation to pay their just debts. By itself, however, the clause is nothing more than a statement of what ought not to be done. It provides no means of preventing the repudiation of debts, and even when such means are nominally provided by statute, the decision of the Supreme Court to the effect that a remedy may be changed, provided in so doing the contract be not impaired, may give rise to technicalities under cover of which a dishonest State may escape her just obligations.

At this point it becomes necessary to inquire concerning the remedies provided for the enforcement of the contracts of delinquent States. The ability of the defrauded creditor to obtain his rights depends entirely upon these. As we have seen, a State has no legal or moral right to refuse to pay her just debts ; but the question of importance is, what can be done in case she does refuse.

The clause — quoted above from the Constitution as originally adopted — seemed to imply tliat a delinquent State could be brought before the bar of the Supreme Court under such circumstances. This

1 See Virginia Coupon Cases, chap. 6, p. 186.

would certainly have been a first step towards an efficient remedy. But this interpretation of the clause was questioned even before the Constitution was adopted. A controversy on this very point was carried on in the States when this instrument was being discussed with a view to adoption. It was urged by many that it authorized any citizen of the United States to arraign any of the States except his own at the bar of the Supreme Court. Patrick Henry was a prominent representative of this party, and he said that the expression " controversies between a State and citizens of another State" applied to all controversies, whether the State were plaintiff or defendant. Opposed to him were such statesmen as Madison, Marshall, and Hamilton, who claimed that a State could not be sued without her consent, and that the clause in question applied only to the States as plaintiffs. The question in dispute did not come before the Supreme Court until 1793. In that year Georgia was arraigned by one Chisholm,^ much to her embarrassment and disgust, and the Supreme Court decided that the case was proper and within its jurisdiction as defined by Section 2, Article III. of the Constitution. In other words, it supported the proposition that an individual could arraign a State before the bar of the Supreme Court.

This decision caused much excitement and discontent throughout the country. The legislature of Georgia was furious, and at once passed an act condemning to death " without benefit of clergy, any marshal of the United States, or other pei*son, who should presume to serve any process against that State at the suit of an individual; " and when the State of Massacliusetts was sued soon after, Governor Hancock convened the legislature, and that body resolved to take no notice of the suit. The substantial result of this decision was agitation for an amendment to the Constitution. The next session of Congress took the matter under consideration, and passed by a large majority what is now known as the eleventh amendment. The State legislatures without exception subsequently confirmed it. It provides 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 the citizens of another State, or by citizens or subjects of any foreign State." In speaking of this amendment in the case of Florida v. Georgia^ Mr. Justice Campbell said: "Various attempts Avere made in both brairehes of Congress to limit the operation of the amendment, but without effect. It was accepted, without the alteration of a letter, by a vote of twenty-three to two in the Senate, and eighty-one to nine in the House of Representatives, and received the assent of the State legislatures. Georgia ratified the amendment as an explanatory article, her legislature concurring therewith, deeming the same to be the only just and true construction of the judicial power by which the rights and dignity of the several States can be effectively secured. Thus the supreme constitutional jurisdiction of the United States, the concurrent action of Congress and the State legislatures, expressing a consent almost unsinimous, corrected the opinion of the Supreme Court, and intercepted its final judgments in these cases by declaring that the Constitution should not be so construed as to allow them."

This amendment brings us back again to the original question, — What remedy has the holder of a repudiated bond against the State which is his debtor ? If he cannot bring suit against her, what possible method remains by which he may enforce his rights ? Practically, none. The Supreme Court, however, has made desperate efforts to provide one or more, and these must now be examined, although their real utility is exceedingly small. This court has decided, among other things, that the eleventh amendment applies only to cases brought by individuals against States, and not to cases brought by States against individuals. By virtue of this decision, the federal courts may serve as a shield for the protection of the individual when the State attempts to prosecute him unjustly, but it cannot help him when the State has already done him a wrong, and he seeks redress.

This point was elaborated by Chief Justice Marshall in the case of Cohens v. Virginia.^ In this case the State sued Cohens for negotiating United States lottery tickets on the basis of a Virginia statute which forbade the sale of such tickets in the State. The State courts found him guilty, and fined him. The case was brought before the Supreme Court on a writ of error, and in arguing the writ it was claimed that cases between a State and one of her own citizens were never intended to be cognizable in the federal courts. In reply to this. Chief Justice Marshall said : " This is very true, so far as jurisdiction depends on the character of the parties ; and the ai-gument would have great force if urged to prove that this court could not establish the demand of a citizen upon the State; but it is not entitled to the same force when urged to prove that this court cannot inquire whetlier the Constitution or laws of the United States protect a citizen from prosecution instituted against him by a State." To establish the same point, the case is supposed of an export duty being levied by a State. " If a citizen should pay such a tax," said the Chief Justice, '^ and then sue the State for the recovery of his money, the federal courts could not protect him. But if he refused to pay the duty, and the State attempted to levy upon his property or entered upon judicial proceedings against him, the courts of the United States could

14 BEPUniATION OF STATE DEBTS.

restrain the State and shield the man from harm." In summing up his argument, Chief Justice Marshall said: " The amendment, therefore, extends to suits commenced or prosecuted by individuals, but not to those brought by States." Justice Matthews in the case of Poindexter v. Greenhow ^ concurred in this opinion in the following passage quoted from his decision : " This immunity from suit secured to the States is undoubtedly a part of the Constitution of equal authority with every other, but no greater, and to be construed and applied in harmony with all the provisions of that instrument. That immunity, however, does not exempt the State from the operation of the constitutional provision that no State shall pass any law impairing the obligation of contracts; for it has long been settled that contracts between a State and an individual are as full}- protected by the Constitution as contracts between individuals. It is true that no remedy for a breach of its contract by a State by way of damages as compensation, or by means of process to compel its performance, is open, under the Constitution, in the courts of the United States by a direct suit against the State itself on the part of the injured party, being a citizen of another State, or a citizen or subject of a foreign State. But it is equally true that whenever in a controversy between parties to a suit, of which these courts have jurisdiction, the question arises upon the validity of a law by a State impairing the obligation of its contract, the jurisdiction is not thereby ousted, but must be exercised with whatever legal consequences to the rights of the litigants may be the result of the determination." ^

In view of these decisions it cannot be doubted that States can be brought before the federal courts in suits which they themselves commence, but it is doubtful whether this fact is capable of bringing much consolation to holders of repudiated bonds. Only under exceptional circumstances can they find relief in this fact, for it is seldom that the repudiation of debts by a State compels her to bring suit against persons. Such acase,^ however, occurred in Virginia. The State had made the" coupons of her bonds receivable for taxes and other dues ; and, after her repudiation, she refused to receive them, and levied upon the property of those who refused to pay after making a tender of their coupons. This was a case in point; and the Supreme Court declared that a tender of the coupons released the citizen from further obligation, and that the law forbidding the receipt of coupons for taxes was unconstitutional.

1 See besides, in confirmation of this point, Fletcher v. Peck, 6 Cranch. 87; New Jersey v. Wilson, 7 Cranch. 104; Green v. Biddie, 8 Wheat. 1, 84; Providence Bank v. Billings, 4 Pet. 514; Woodruff V. Trapnall, 10 How. 190; Wolff v. New Orleans, 103 U.S. 358; Jefferson Branch Bank v. Skelly, 1 Black, 436.

2 Poindexter v. Greenhow, 114 U. S. 270.

A second source of relief to individuals under certain circumstances is suggested in those passages of the decisions quoted which make it possible for the Supreme Court to decide upon the constitutionality of State laws which may be involved in suits which come under its jurisdiction. If a State law is once declared unconstitutional by the Supreme Court, it no longer possesses binding force, and cannot be referred to by courts in deciding cases, or be pleaded as protection by State officers whose acts may be called in question by injured persons. In the case of Louisiana v. Pilsbury,^ it was held that til e legislation of a State impairing the obligation of contracts made under her authority is null and void ; and the courts, in enforcing the contracts, will pursue the same course and apply the same remedies as though such invalid legislation had never existed. This applies to laws embodied in State constitutions as well as to statute laws, for the Supreme Court has repeatedly held that the constitution of a State is a law within the meaning of the prohibition that no State shall pass a law impairing the obligation of contracts.^ This provision, which may be regarded as a part of our constitutional law, has an important bearing

2 See Miss. & Mo. R.R. Co. v. McClure, 10 "Wall. 511; Mechanics & Traders' Bank u. Thomas, 18 How. 384; White u. Hart, 13 Wall. 640; Detinas v. Merchants' Mut. Ins. Co., 14 Wall. 0(»r, Gunn r. Barry, 15 Wall. 010; Davis v. Gray, 10 Wall. 203; Fisk V. Police Jury, 116 U. S. 13L on the subject under discussion when considered in connection with the right of individuals to sue State officers in cases in which they could not sue the States directly. This right inheres in precisely those cases in which a State officer attempts to enforce an unconstitutional law. Such a law does not exist, according to the interpretation put upon the Constitution by the Supreme Court ; and an officer who attempts to enforce it makes himself liable to the charge of misdemeanor, and may be prosecuted and punished.

It has been claimed ^ that in all cases in which the eleventh amendment prohibits a State from being made a party defendant to a suit, suit may be brought against the officers intrusted with the execution of the law ; but it is hardly possible to support this claim with clear evidence drawn from the decisions of the Supreme Court. The cases usually referred to in support of this view do not authorize so broad a generalization. In the leading one, that of Osborn'v. United States Bank (9 Wheat. 738), suit was brought to restrain the auditor of the State of Ohio from levying a tax upon the United States Bank in pursuance of a statute of the State ordering such a tax to be collected. It was claimed by the defendants that the case could not be entertained b}- the Supreme Court on account of the prohibition contained in

1 D. H. Chamberlain on "The Constitutionality of Repudiation," in North American Review for March,1884.

the eleventh amendment. In answer to this the Court said: "The objection is that, as the real party cannot be brought before the Court, a suit cannot be sustained against the agents of that party ; and cases have been cited to show that a Court of Chancery will not make a decree unless all those who are substantially interested be made parties to the suit. This is certainly true where it is in the power of the plaintiff to make them parties; but if the person who is the real principal, the person who is the true source of the mischief, by whose power and for whose advantage it is done, be himself above the law, be exempt from all judicial process, it would be subversive of the best established principles to say that the laws could not afford the same remedies against the agent employed in doing the wrong which they would afford against him could his principal be joined in the suit.

In the case of Davis v. Gray (16 Wall. 203) this decision was confirmed in the following words : —

" (1) A circuit court of the United States in a proper case in equity may enjoin a State officer from executing a State law in conflict with the Constitution or a statute of the United States, when such execution will violate the rights of the complainant.

"(2) Where the State is concerned, the State should be made a party if it could be done ; that it cannot be done is a sufficient reason for the omission to do it, and the court may proceed to decree against the officers of the State in all respects as if the State were a party to the record."

A second confirmation of this opinion was made in the case of Board of Liquidation et al. v. McComb (92 U. S. 531) in the following words : " On this branch of the subject the numerous and well-considered cases heretofore decided by this court leave little to be said. The objections to proceeding against State officers by mandamus or injunction are : first, that it is, in effect, proceeding against the State itself; and, secondly, that it interferes with the official discretion vested in the officers. It is conceded that neither of these things can be done. A State, without its consent, cannot" be sued by an individual i and a court cannot substitute its own discretion for that of executive officers in matters belonging to the proper jurisdiction of the latter. But it has been well settled that when a plain official duty, requiring no exercise of discretion, is to be performed, and performance is refused, any person who will sustain personal injury by such refusal may have a mandamus to compel its performance ; and when such duty is threatened to be*violated by some positive official act, an}^ person who will sustain personal injury thereby, for which adequate compensation cannot be had at law, may have an injunction to prevent it. In such cases the writs of mandamus and injunction are somewhat correlative to each other. In either case, if the officer plead the authority of an unconstitutional law for the nonperformance or violation of his duty, it will not prevent the issuing of the writ. An vmconstitutional law will be treated by the courts as null and void."

That the Supreme Court did not intend in these cases to lay down the principal that State officers may be made parties defendant to a suit in all cases in which the State could not be sued is evident from the decision in the case of Louisiana v. Jumel (107 U. S. 711), in which the above-mentioned cases are r^iewed, and the following statement subversive of the principle mentioned is made ; " The remedy sought, in order to be complete, would require the court to assume all the executive authority of the State, so far as it reLated to the enforcement of this law, and to supervise the conduct of all persons charged with any official duty in respect to the levy, collection, and disbursement of the tax in question until the bonds, principal and interest, were paid in full, and that, too, in a proceeding in which the State, as a State, was not and could not be made a party. It needs no argument to show that the political power cannot be thus ousted of its jurisdiction, and the judiciary set in its place. When a State submits itself, without reservation, to the jurisdiction of the court in a particular case, tliat jurisdiction may be used to give full effect to Avhat the State has, by its active submission, allowed to be done ; and if the law permits coercion of the public officers to enforce any judgment that may be rendered, then such coercion may be employed for that purpose. But this is very far from authorizing the court, when a State cannot be sued, to set up its jurisdiction over the officers in charge of the public moneys, so as to control them, as against the political power in their administration of. the finances of the State."