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Govt+state rail are the canals of the 21st century.?

I came across this site last week: EconJournalWatch – http://econjwatch.org/ at: http://econjwatch.org/articles/some-possible-consequences-of-a-us-government-default

 I put the excerpt supporting my subject title below, but you can read it or the article if you wish, but basically what happened is after the building of the Erie canal was such a success, a big splurge of canals were built and financed by the states which coincided with a fanancial panic which followed a recovery, followed  a second financial panic(starting to sound familiar) in which 8 states defaulted temporiarily or outright.

Interestingly enough, afterward; the states rewrote their constitions to be more financially responsible and things like publicly financed canals took on a decidely private turn.

Now, it looks like many states and DC have yet to learn that which they need to and its quite likely we have to live through another recession while they learn it , but considering we’re in the information age now and the US has learned this lesson before and gotten their financial house in order; I’m a little optimistic that the US will do it again in the next few years.

 From the article:

“After the War of 1812, New York State began construction of a canal

connecting the Hudson River with the Great Lakes. The Erie Canal, completed

in 1825, was one of those rare instances where a socialist enterprise actually made

a good profit; it encouraged other states to emulate New York. An orgy of canal

building resulted. Usually, state governments owned and operated these new

canals. In those few instances where the canals were privately owned, the states

contributed the largest share of the financing. By 1840, the canal boom had blessed

the United States with 3,326 miles of canals at an expense of $125 million, a large

sum in those days. Virtually all the new canals were a waste of resources and did not

deliver the hoped-for monetary returns. Instead the heavy state investments, when

added to budget growth stimulated by the War of 1812, led to massive borrowing

 

 

 

Then in May of 1837 a major financial panic engulfed the country’s 800

 

banks, forcing all but six to cease redeeming their banknotes and deposits for

 

gold or silver coins. The panic brought on a sharp depression that was quickly

 

over (McGrane 1924; Rezneck 1935). Amazingly, after recovery, the outstanding

 

indebtedness of states nearly doubled, with a third of that invested in statechartered

 

banks in the Midwest and South (Wallis, Sylla, and Grinath 2004). By the

 

end of 1839, a second bank suspension spread to half the country’s banks. Over

 

the next four years nearly a quarter of state banks failed, the country’s money stock

 

(M2) declined by one-third, and prices plummeted 42 percent (Hummel 1999;

 

Temin 1969). The state governments faced financial stringency, and during the

 

deflation of 1839-1943 many became desperate. By 1844, $60 million worth of state

 

improvement bonds were in default. Four states—Louisiana, Arkansas, Michigan,

 

and Mississippi—as well as the territory of Florida repudiated debts outright, while

 

four others—Maryland, Illinois, Pennsylvania, and Indiana—defaulted

 

temporarily. New York and Ohio escaped similar straits only by taking

 

extraordinary measures (Ratchford 1941; Wallis 2002).

 

 

 

Rather than having disastrous long-run effects, this combination of default

 

and repudiation generated a widening circle of benefits. To begin with, it prompted

 

state governments to make major fiscal reforms. As John Joseph Wallis (2001,

 

1) reports: “Beginning with New York in 1846, almost two-thirds of the states

 

wrote new constitutions in the next ten years. The constitutions restricted state

 

investment in private corporations; limited or banned incorporation by special

 

legislative act; created general incorporation laws for all types of business; altered

 

the way state and local governments issued debt; put absolute limits on the amount

 

of debt governments could issue; and fundamentally changed the structure of the

 

property tax.” As Thomas J. Sargent asks in his Nobel Prize lecture (2011), how

 

likely would have been such reforms if the state governments had been bailed out

 

by the national government, as many in Congress wished to do at the time?

 

States became wary of investing in internal improvements or anything else.

 

 

 

This ensured that the states left development of the railroad network primarily to

 

the market. Nearly all the previously state-owned lines were unloaded. Although

 

the state and especially the local governments continued to subsidize railroads

 

through some direct investment and in less conspicuous ways, private sources

 

ended up providing three-quarters of all the capital for American railways prior to

 

1860 (Fishlow 1972, 496). Indeed, the period after the fiscal crisis was when the

 

states finally threw off their mercantilist heritage and, for the first time, moved

toward

 

laissez faire.”

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