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



laissez faire.”