The Right to Default

I mentioned in a prior post that I’ll be giving a talk later this year on dysfunctional state constitutions, and part of that talk will examine whether a state has the right to default on its bonds.  Research shows that many have defaulted in the past (following the Panic of 1837, the Panic of 1873, and the Great Depression).  The issue is whether Congress can step in and compel a state against its will to accept a federal bailout.

At first blush, I think that the answer is no unless Congress concludes that a default means that a State is no longer a “Republican Form of Government” under Article Four.  New York v. United States stands for the proposition that Congress generally cannot to direct a state legislature to implement a federal program.  That is what cramming a bailout down a state’s throat would do, since the state legislature would, in effect, be forced to spend federal money.

I suppose that Congress could just assume the deadbeat state’s debts, as Alexander Hamilton did with respect to the state debts that preceded 1789.  I don’t know whether any of those states opposed assumption.  If they all consented, then that does not provide a helpful precedent.  If some states were against that action, though, then what Hamilton did almost certainly would support a similar action now.

You may also like...

2 Responses

  1. Logan says:

    Would the size of the State government matter at all? For instance, California defaulting on it’s debt would be a lot worse for the country as a whole than if Vermont did.

  2. Hasan Diwan says:

    Logan, if any state were bailed out, Gerard’s point that the sate is no longer a “Republican form of government” holds true and it would be a violation of New York vs. United States. On the other hand, which state would deny a federal bailout and sue over it?