The US had a default crisis too, you know

As the Eurozone contemplates the possibility of Greek default, American pundits are boasting about US federalism. American states, they say, would never allow the fiscal irresponsibility that plagues Eurozone countries. And when states do lapse, the country's leaders do a better job of putting accounts back in order.

These pundits ought to know their history. In fact, the US has experienced a very similar crisis, in which one third of state governments defaulted. That crisis only ended after years of wrenching political change.

The trigger was the collapse of a land boom. In the 1830s, Europeans invested on a huge scale in US cotton plantations, banks, canals and railroads. Many state governments served as conduits by borrowing abroad and investing directly in banks and public works. Policymakers stoked the boom with reckless monetary and banking policies.

In 1837, the bubble burst. Banks collapsed, tax revenues evaporated, and improvement projects became white elephants. The first states to renege on their debts were Michigan and Indiana, which defaulted in July 1841. Others—Arkansas, Florida, Illinois, Louisiana, Maryland, Mississippi, and Pennsylvania—soon followed. The federal government refused to bail any of them out.

Damage to the country's credibility was profound. “The eyes of all capitalists are averted from the United States,” wrote the English clergyman Sydney Smith in 1843. “Great and high-minded merchants loathe the name of America.” When the US government itself attempted to borrow, Europeans gave it the cold shoulder. "You may tell your government," James de Rothschild told US agents, "that you have seen the man who is at the head of finances of Europe, and that he has told you that you cannot borrow a dollar."



The country plunged into a severe depression. Development ceased in the west. So too did westward migration, the safety valve that maintained peace in eastern cities. Riots between unemployed Americans and immigrants broke out. "The times are out of joint," wrote Philadelphia merchant Philip Hone. "Riot and violence stalk unchecked through the streets."

The decline in revenues reopened bitter disputes between the north, south and west as longstanding promises, such as the commitment to eliminate tariffs, were broken. Voting in federal elections soared to the highest levels in US history as voters cast out incumbent after incumbent.

Europeans wondered whether the US could survive. “Institutions like those which the American people have adopted,” said the Times, “are ill-fitted for a country where the most obvious interests of the community are sacrificed to the passions or prejudices of the people."

Eventually the country worked through its troubles. States imposed unwelcome taxes to finance their debts, and adopted constitutional prohibitions against further borrowing. Major cities established professional police forces to quell unrest.

Luck also played a part. When revolution spread across Europe in the late 1840s, British investors took a second look at the United States. The repeal of British tariffs on grain also encouraged development in the American west. And the discovery of gold in California in 1848 provided an unexpected boost to the economy.

Between 1837 and 1848, the country made substantial changes in its political order, which in important ways laid the foundation for further economic expansion. But this transformation was long and painful. Pundits who chastise European elites for mismanaging the current crisis should recall that the US, in a similar phase of political development, hardly did better.

Alasdair Roberts is the Jerome L. Rappaport Professor of Law and Public Policy at Suffolk University Law School. His book The Logic of Discipline: Global Capitalism and the Architecture of Government will be published by Oxford University Press this month.