State Constitutional Reform and the Structure of Government Finance in the Nineteenth Century

Abstract

Investment in physical and social infrastructure is one of the most obvious ways that governments can promote economic development. In the nineteenth-century American governments built or supported the building of roads, highways, toll roads, canals, railroads, bridges, river and harbor improvements, water and sewage works, schools, libraries, and other public buildings. Governments chartered, and sometimes invested in, thousands of corporations. These included the banks and insurance companies that formed the basis of the nation’s financial network, and the manufacturing firms that would, by the end of the century, transform the United States into a modern industrial economy. From 1800 to 1840, almost all of this activity was promoted by state governments. Corporations were chartered by special acts of state legislatures. State governments made the vast majority of government investments in transportation systems as well as in banks, and several states were actively involved in the management of transportation and financial companies. States had incurred a bonded debt for infrastructure investments of roughly $200 million in 1840; eight times local government debt in that year. States increasingly relied on “asset finance” to secure their revenues. That is, states earned income from investments or taxed business activities and did not rely on the property tax. By 1835, over a third of the state governments had abolished their state property tax entirely.

An earlier version of this chapter was presented at the Cliometric Society meetings in Toronto, 1997. I acknowledge the support of the National Science Foundation for support of this research. Funding was provided by grants SES-8419857, SES-8706814, SES-8908272, SBR-9108618 and SBR-9709490. Comments by Robert Whaples, Jac Heckelman and Richard Sylla have been very helpful.