Texas treasury notes after the compromise of 1850.

• Author: Pecquet, Gary M.

The Republic of Texas issued substantial quantities of debt, including Treasury Notes, bonds, and special loans, from the time of its independence to its annexation and statehood (1837-45). In 1842, Texas repudiated its debt, including its "Red Back" currency (Pecquet and Thies 2007). In the United States, a debate over annexation and the assumption of the Texas debt weighed heavily in the presidential election of 1844 (Pecquet and Thies 2006). Following James K. Polk's election, Congress agreed to annexation provided that the state of Texas agreed to assume the debt of the Republic of Texas and to pledge its vast public lands against this debt. By 1850, however, the state of Texas had redeemed only an insignificant amount of the debt (via exchange for land scrip). By then, the republic's debt was approximately $10 million. It can be divided into two categories: first, a total of $8.5 million of notes, bonds, and other securities, plus the interest on all of these promises to pay, almost all of which were held by Americans outside of Texas; (1) and, second, a remainder that consisted of liabilities that had been in the process of being recognized at the time of the debt's first repudiation, such as pay vouchers, almost all of which was held by Texans.

At about this time, Texas repudiated these debts again, this time in two steps. In 1848, the state scaled (wrote down) the debt held outside of Texas to an average of 44 percent of its face value. Then, in 1849, the state proposed to swap land scrip that was selling for as little as 15 percent of its face value for the republic's debts at their scaled values (Pecquet and Thies 2006).

In this article, we present a time series of the market value of the republic's liabilities to track the progress of political events in Texas and in the U.S. Congress from the liabilities' second revival in conjunction with the Compromise of 1850 to their ultimate redemption in 1856. By tracking market value, we can precisely identify the events considered at the time to be most informative with regard to redemption. Our research builds on the work of William A. Gouge ([1852] 1969), an economic journalist sympathetic to the holders of the Texas Republic's debt, and is informed by the work of several historians, most notably Holman Hamilton (1957, 1964) and Mark J. Stegmaier (1996). A more recent writer, Richard Burdekin (2006), deals primarily with the prospects of a federal bailout of the Texas debt through the Compromise of 1850. We examine the political climate within Texas and extend the overall analysis to the final redemption in 1856.

An extensive economic literature focuses on "sovereign debt." Does a sovereign state's "reputation for repayment" provide sufficient motivation for it to repay its debts? Jeremy Bulow and Kenneth Rogoff (1989a, 1989b) maintain that debtor nations often fail to repay their debts and that sanctions, such as trade embargoes, are sometimes necessary to enforce creditors' rights against sovereigns. Indeed, debtor nations hardly ever "repay" their debts. In "good years," net capital flow is to debtor nations, and individual loans are "repaid" in the contracting of new loans. In "crisis years," new loans are not extended, and old loans almost always go unpaid (Eichengreen and Lindert 1989, 5). During the debt crisis of the 1980s, for example, "very few debtor nations--perhaps only three ... out of 47 nations--have made net repayments ..., as in the global crisis of the 1930s" (6).

Throughout the nineteenth century, creditor nations frequently enforced their claims on debtor nations by gunboat diplomacy. In this context, defaulting U.S. state governments provide a unique setting for an examination of the "sovereign debt" issue. Under the Constitution, the individual states retained their sovereignty with respect to their own debts, yet they were effectively defended from foreign sanction. Accordingly, only reputation could motivate states to repay their debts. During the 1840s, eight states and one territory subsequently granted statehood defaulted. Five of these states repudiated all or part of their debt (McGrane 1935; Ratchford 1941). William B. English has demonstrated that defaulting and repudiating states tended to have higher debt burdens than the states that did not default. He argues that reputation may be sufficient to motivate repayment if the burden of repayment is small relative to the potential gain from future access to foreign capital. Texas provides the ninth case of a U.S. state that defaulted during this period.

The state of Texas assumed the responsibility for the republic's debt in conjunction with the annexation agreement. As part of the Compromise of 1850, the federal government provided Texas with sufficient funds to repay the republic's debt in exchange for setting the state's western border considerably to the east of the location the state claimed. Some argued that using the funds provided by the federal government to repay the debt would encourage foreign financiers to develop the Texas interior--for example, by constructing railroads. Nonetheless, inducing the state of Texas to settle its debt proved difficult. Ultimately, the federal government itself settled the debt directly.

We use public-choice theory to explain certain political events during this period--in particular, the effectiveness of lobbying in the ultimate resolution of the debt of the Republic of Texas. Mancur Olson (1965) famously explored the endogenous formation of interest groups for the purpose of lobbying, and Gordon Tullock (1980) as well as Kyung Hwan Baik and Sangheck Lee (2001), among others, have revisited the subject. Successful lobbying groups must overcome a free-rider problem, and getting organized takes time. George Stigler developed a model showing that when coalitions are small, the likelihood increases that an individual member will help to bear the necessary common lobbying expenses (1974, 360-62).

The Texas securities were initially held widely. The Republic of Texas expended its notes and bonds to pay employees and purchase supplies. These notes and bonds could be used to pay Texas customs duties and were actively traded in New Orleans (Gouge [1859] 1969, 79). Texas securities were occasionally quoted elsewhere in the country (for example, $10,000 Texas bonds wanted at fair prices, Cincinnati Gazette, April 20, 1841). After 1843, trading activity gradually shifted from New Orleans to New York and Philadelphia, and by 1850 Texas securities were traded only in Philadelphia. Along with this shift in trading location, ownership of the Texas debt became concentrated. Judging by those who exchanged their securities for certificates around 1850, Hamilton found "many" to be "individuals with small sums at stake" (1957, 582). By the time of final redemption in 1856, however, only a few investors and bankers held the overwhelming amount of the Texas debt (590).

Hamilton (1957, 1964), Stegmaier (1996), and Burdekin (2006) have noted the second revival of Texas securities, during 1850, but the evolution of the securities' value from 1850 to their redemption and the role of lobbying in their final settlement (that is, in the passage of the Texas Debt Act of 1855 and the parallel action by the state legislature of Texas) have not been examined closely. Furthermore, prior discussion of the related lobbying has focused almost exclusively on bribery and political corruption, so the possibility that special-interest groups can influence legislature through other means has not been considered.

The Compromise of 1850

In 1849, a diplomatic crisis erupted between Texas and the United States over the state's western boundary. Governor Peter Bell threatened war in assertion of the state's claim to New Mexico and part of present-day Colorado. In his message to the state, he claimed the rights of Texas "over soil, which is ours by conquest," asked the state legislature for authorization to raise an army to subdue eastern New Mexico, and declared, "[I]f the employment of the necessary force to enable her [Texas] to exercise that right over a refractory population [the New Mexicans] should produce a collision with the federal authorities, the fault will not be hers" (Texas State Gazette, December 26, 1849). (2) In 1850, a bill was introduced in the state legislature to authorize the governor to raise an army to march on Santa Fe during the next spring if the federal government had not yet resolved the Texas-New Mexico border in a manner acceptable to the state (Bicknell's Reporter, September 10, 1850; Philadelphia North American, September 14, 1850).

In Washington, D.C., responsibility for dealing with the Texas border crisis lay with the president. Following the death of President Zachary Taylor in 1850, Vice President Millard Fillmore became president. Both presidents defended the federal government's claim to New Mexico and the western territories claimed by Texas. During the Mexican War, federal troops, not Texans, conquered the disputed territories. Moreover, the Treaty of Guadeloupe Hidalgo contained a clause in which the United States promised to defend the rights and property of the people residing in the vast territory ceded by Mexico. Texas politicians were not likely to respect the New Mexicans' rights. To assert the federal claim to the western territories, President Fillmore threatened to call on the armed forces. Hoping to resolve the dispute peaceably, however, he asked Congress to establish the border between Texas and New Mexico and indicated that Congress could compensate Texas for surrendering its claims (Charleston Courier, August 9 and 10, 1850).

Even before Fillmore became president, Senator Henry Clay of Kentucky had attempted to resolve the border crisis by attaching a settlement of that issue to an omnibus bill, which also dealt with funding the Texas debt and other divisive regional issues, such as the organization of the...