The anatomy of sovereign debt crises: Lessons from the American state defaults of the 1840s

In theory, sovereign states with taxing powers should not have to default on their debts, but in practice they sometimes do default. In the context of the U.S. state defaults of the 1840s, the paper draws attention to a neglected factor in explanations of sovereign defaults, namely, revenue structure, or the mix of revenue sources used to fund state expenditures. Constraints of revenue structure interacted with political considerations and economic expectations to cause nine states to default on their debts in the early 1840s. We identify two cases of default: developed states that chose to default and less developed states that had little choice but to default.