Alasdair Roberts: A Precipitous Situation, Not Without Precedent

Alasdair Roberts is the Jerome L. Rappaport Professor of Law and Public Policy at Suffolk University Law School. His book The First Great Depression will be published by Cornell University Press in 2012.

Unless Congress acts, the United States will reach a statutory limit on federal debt in early August. The US Treasury might then default on its loans. This, says Treasury Secretary Timothy Geithner, would be “an unprecedented event in American history’’ that would inflict catastrophic damage on the economy.

But it isn’t entirely unprecedented. While the federal government has never defaulted, we’ve had a very similar experience.

Between July 1841 and December 1842, eight of the country’s 26 states defaulted on their loans. Other states and the federal government also struggled to avoid insolvency. The entire nation quickly became a pariah in international financial markets.

In 1842 the country was in the midst of its first great depression. A real estate bubble fueled by easy credit had burst in 1837. American banks that financed this speculation collapsed two years later. The economy ground to a halt.

Many states were caught up in the mania of 1836-37. They borrowed in Europe and competed with each other to build infrastructure that would open their markets. Legislators spent indiscriminately. Every new canal, railroad, and turnpike was supposed to pay for itself. But when the economy collapsed, so did the projects....