Today China factory activity shrinks for fourth month (Reuters)
About us
Eurostoxx50
STRESS TESTS
Follow Thecorner News on Twitter
about the corner

The Corner gives you the economic news you need to make investment decisions and understand what’s happening from a collection of voices.

Find out more

team

This Time is Not So Different: The Euro Crisis and the 1840s

World economy

BERKELEY | By Carola Binder | The author compares the fiscal crisis in the 1840 in the US with what happened in the euro zone. Back in the XIX century state governments in America saw infrastructure projects fail and land values and tax revenue fell further, eroding their fiscal positions, making it harder for them to issue bonds and forcing them to pay higher interest rates. Something similar to what Greece is suffering.

New in TheCorner

Are you interested in economic news?

In the United States, the 1840s were “an era of fiscal crisis following a decade of fiscal exuberance,” according to a paper by Arthur Grinath, JohnWallis, and Richard Sylla. This paper was written in 1997, but its insights into a sovereign debt crisis of long ago provide interesting parallels to today.

In the 1820s and 1830s, state governments made large investments in canals, railroads, and banks. New York and Ohio were the first two states to start canal projects. At first, the expected revenue from the projects was low or uncertain, so New York and Ohio raised taxes to service the canal debt. But the Erie and Ohio canals were highly successful, so subsequent canal construction was financed without corresponding tax increases. New York, Ohio, and other states expected internal improvement projects to produce future revenue, so they didn’t feel the need to raise taxes when they began new projects. States were easily able to issue bonds to domestic and foreign (especially British) investors to finance their projects:

“Both state borrowers and lenders, foreign and domestic, anticipated that states could tax land if their bank and transportation projects failed. After 1836, increasing land values and taxable acreage were the common factor underlying state fiscal policies, bank investments, and transportation improvements nationwide. Northeastern states knew they had large amounts of untaxed land, rising in value. It was a fiscal reserve against which they could borrow to finance extensions of their transportation systems. Western states, north and south, were in the midst of the greatest land boom in American history. If northwestern states were uncertain about just when transportation investments would generate revenues, they nonetheless anticipated that many more, and more valuable, acres could soon be taxed. States were thus confident that property tax proceeds would provide adequate fiscal resources to service the debts they incurred. Investors in state bonds concurred.”

State government bonds were considered safe assets because it seemed inconceivable that a state government could default– their investments were expected to be profitable, and even if they weren’t, the states had plenty of potential to increase their tax revenue, especially since land value was rising. Grinath et al. quote Illinois Governor Ford as saying “Mere possibilities appeared to be highly probable, and probabilities wore the livery of certainty itself.”

*Read the rest of the article here.

Help us with a Share

Leave a Reply

*