A Saga of the New South

Race, Law, and Public Debt in Virginia

Brent Tarter

• Publisher: University of Virginia Press
• Year: 2016
• Print ISBN: 9780813938776
• eBook ISBN: 9780813938769
• Topic: History
• Subtopic: American Civil War History
• Index: History

In the lead-up to the Civil War, Virginia, like other southern states, amassed a large public debt while striving to improve transportation infrastructure and stimulate economic development. A Saga of the New South delves into the largely untold story of the decades-long postwar controversies over the repayment of that debt. The result is a major reinterpretation of late-nineteenth-century Virginia political history.

The post–Civil War public debt controversy in Virginia reshaped the state's political landscape twice. First it created the conditions under which the Readjuster Party, a biracial coalition of radical reformers, seized control of the state government in 1879 and successfully refinanced the debt; then it gave rise to a counterrevolution that led the elitist Democratic Party to eighty years of dominance in the state's politics. Despite the Readjusters' victory in refinancing the debt and their increased spending for the popular new system of free public schools, the debt controversy generated a long train of legal disputes—at least eighty-five cases reached the Virginia Supreme Court of Appeals, and twenty-nine reached the Supreme Court of the United States. Through an in-depth look at these political and legal contests, A Saga of the New South sheds new light on the many obstacles that reformers faced in Virginia and the South after the Civil War.

1 ORIGINS OF THE DEBT CONTROVERSY

By 1 January 1861, which is the date on which calculations of the Virginia public debt became important, the state had sold bonds worth almost $34 million to enable the Board of Public Works to purchase stock in publicly chartered companies that constructed canals, toll roads and bridges, and railroads.¹ The state began the purchases in 1822 but had created about two-thirds of the debt in the 1850s to support construction of railroads. The debt was in the form of bonds that matured in thirty-four years, the maximum term allowed under the Virginia Constitution of 1851, and paid 6 percent annual interest, about typical for state debts incurred at that time.² The money derived from the issue of the bonds paid for investments that were the central component of the state’s program to stimulate economic growth and development by improving travel networks in Virginia and promoting agricultural, industrial, and commercial prosperity.

Most other states did something similar, but Virginia’s public-private partnership was unusual, and in its extent it may have been unique. By purchasing as much as 40 percent of the stock in the railroad and canal companies, the state government assisted materially in rapid capital accumulation and construction, but that made the state vulnerable to the same extent if the companies failed, which some of the railroads chartered in the 1830s and 1840s did. The state government also acquired substantial stock in the banks and in some of the other corporations that it chartered.³

The Virginia debt was by far the largest in any Southern state or any Ohio valley state when the Civil War began—at that time Virginia was an Ohio valley state as well as a Mid-Atlantic state and a Southern state. By small margins the Virginia debt was the third largest in the whole United States, after only Pennsylvania’s and New York’s.⁴ Per capita, the Virginia debt was actually two or three times the Pennsylvania or New York debt, and per taxpayer the Virginia debt was much larger still because about 30 percent of the population was enslaved people, who paid no taxes. In 1861 the debt did not appear to present a potential future problem for Virginia. Its creation reflected the overall confidence of the state’s business and political leaders that Virginia would prosper as a full participant in the increasingly sophisticated and integrated national economy. Railroads were the key to that national and state prosperity, and the taxes and dividends they paid to the state could contribute toward paying off the debt.

The Civil War ruined that optimistic vision for Virginia. The state fractured into two states beginning in 1861 as a direct consequence of the fracture of the nation. In May and June 1861, shortly after a state convention in Richmond submitted an ordinance of secession to the voters for ratification, the first of a series of conventions of men who remained loyal to the United States met in the northwestern city of Wheeling, appointed a new governor and other state officers, and reorganized the state government to restore Virginia to the Union. On 4 July 1861, President Abraham Lincoln recognized the government in Wheeling as the legitimate government of all the loyal people of Virginia,⁵ and the United States Congress seated senators and representatives from the Restored Government of Virginia, as it was commonly called, during the first years of the Civil War.

In August 1861, the last of the series of conventions in Wheeling authorized the creation of a separate, new state and summoned a convention that met in November to draft a constitution for what became West Virginia. The authorizing resolution pledged that the “new State shall take upon itself a just proportion of the public debt of the Commonwealth of Virginia, prior to the 1st day of January, 1861, to be ascertained by charging to it all State expenditures within the limits thereof, and just proportion of the ordinary expenses of the State government, since any part of said debt was contracted, and deducting therefrom the monies paid into the treasury of the Commonwealth from the counties included within the new State within the same period.”⁶

The language about the debt that the constitutional convention included in the new constitution that became effective on 20 June 1863 was broader and less specific, leaving the new state more leeway to decide what to do and how to do it. Article VIII, Section 8, of the Constitution of West Virginia declared, “An equitable proportion of the public debt of the Commonwealth of Virginia, prior to the first day of January in the year one thousand eight hundred and sixty-one, shall be assumed by this State, and the Legislature shall ascertain the same as soon as may be practicable, and provide for the liquidation thereof, by a sinking fund to pay the accruing interest, and redeem the principal within thirty-four years.”⁷ Throughout the process of creating the new state, western Virginians clearly understood that promising to pay a portion of Virginia’s antebellum debt was essential to gain support of Northern financiers and political leaders for admission of West Virginia into the Union.⁸

In May 1862 the General Assembly of the Restored Government of Virginia gave its consent, as required by the Constitution of the United States, for the formation of the new state out of the old.⁹ It also appropriated one hundred thousand dollars for deposit in the West Virginia treasury at the time of statehood, and it ordered that all dividends and “all money from any source whatsoever due the State” and all taxes collected prior to statehood from the counties and cities that were to become West Virginia be paid to the new state. As if with the resolution adopted in Wheeling in August 1861 for a negotiated agreement of the respective portions of the debt in mind, the law concluded, “All of the appropriations made by this Act, shall be charged to the State of West Virginia, in the settlement between the States of Virginia and West Virginia.”¹⁰

In the next session of the Restored Government’s assembly early in 1863, the legislators passed An Act Transferring to the Proposed State of West Virginia, When the Same Shall Become One of the United States, All This State’s Interest in Property, Unpaid and Uncollected Taxes, Fines, Forfeitures, Penalties and Judgments, in Counties Embraced Within the Boundaries of the Proposed State Aforesaid.¹¹ The assembly also replaced the 1862 law making the $100,000 appropriation with an appropriation of $150,000 and an allocation of all the money collected or owed to Virginia within the new state as of the date of statehood, but it omitted the reference to a future settlement between the two states.¹²

Early in 1864, the General Assembly of the Restored Government, which moved in the summer of 1863 from Wheeling to Alexandria, summoned a constitutional convention, principally for the purpose of abolishing slavery in the loyal state of Virginia. Article IV, Section 27, of the new constitution that took effect on 7 April 1864 prohibited the government from creating a debt for any purpose other than self-defense in time of war or insurrection. It also stated that the “general assembly shall provide by law for adjusting with the state of West Virginia the proportion of the public debt of Virginia, proper to be born [sic] by the states of Virginia and of West Virginia respectively; and may authorize, in conjunction with the state of West Virginia, the sale of all lands and property of every description, including all stocks and other interests owned and held by the state of Virginia in banks, works of internal improvement, and other companies at the time of the formation of the state of West Virginia, and no ordinance passed by the convention which assembled at Wheeling . . . adjusting the public debt between Virginia and West Virginia, shall be binding upon this state.”¹³ That left the government of the loyal state of Virginia just as unrestrained as the government of the new state of West Virginia with respect to how to pay the debt.

During the war, the government of the Confederate state of Virginia in Richmond refused to recognize the legal existence or legitimacy of the Restored Government of Virginia, which remained one of the United States, or the government of the new state of West Virginia.¹⁴ The collapse of the Confederacy in the spring of 1865 and the simultaneous collapse and disappearance of the government of the Confederate state of Virginia left the Restored Government of Virginia as the only government of what remained of the old commonwealth.¹⁵ Afterwards, acting under the Constitution of 1864, the sole remaining government of Virginia attempted to negotiate with West Virginia about how to calculate the two states’ respective portions of the whole debt and how to pay the principal and accruing interest. At the same time, though, the General Assembly of Virginia took several steps that alienated authorities in West Virginia and made them less willing to negotiate with any authorities in Virginia. Early in 1866 the assembly repealed the laws giving consent for the formation of West Virginia and authorizing referenda in Berkeley and Jefferson Counties, among others, to allow the residents to decide whether their counties would be part of Virginia or part of West Virginia.¹⁶ The attorney general of Virginia filed suit against West Virginia in the Supreme Court of the United States to negate West Virginia’s acquisition of Jefferson and Berkeley Counties and to prohibit the government of that state from collecting taxes in those counties pending the outcome of the suit.¹⁷ By filing the lawsuit, Virginia implicitly recognized the constitutional existence of West Virginia in spite of the repeal of the authorization law, and the Supreme Court’s decision in favor of West Virginia in 1870 validated the constitutionality of the creation of West Virginia and its acquisition of the two counties.¹⁸

Neither of the Virginia state governments paid any significant amount of interest on the debt during the Civil War. Even though the United States Army helped rebuild some of Virginia’s railroads soon after the end of the war and the railroads began making profits within two years, they paid no dividends to the state.¹⁹ Nor did the state receive dividends from banks it had chartered before the war. Some of them no longer existed. The economic condition of Virginia at the end of the war seriously reduced the options for political leaders who hoped to resume payment of the interest. The poor condition of the state government and the poorer condition of the state’s economy made payment on the principal and rapidly accumulating outstanding interest on the debt both more urgent and more difficult. If the state could not recover rapidly, tax revenue would likely remain too low to permit payments on the debt, but without establishing a new, good reputation for financial probity by paying the debt, neither the state nor the state’s bankers and businessmen could hope to attract adequate private capital from outside the state with which to revive the economy.

One of the complicating factors was the abolition of slavery, which destroyed a very valuable source of prewar tax revenue. Nearly half a million Virginians lived in slavery when the Civil War began, and those people were taxable property, the most valuable property in the whole state, only the land itself excepted. Since the seventeenth century the government had relied on money collected from taxes on that property for a large portion of its revenue. Local governments had too. Had the rapid increase in the value of slave property as a consequence of the brisk demand for laborers in the lower Mississippi valley continued the trend established during the 1850s, the value of the state’s slave property might even have eclipsed the value of its land. The importance of slavery to the Southern economies was widely recognized, but the equally important influence of slavery on Southern taxation may not have been so conspicuous at the time.²⁰ The postwar consequences of the reductions in revenue were immediately obvious in Virginia and elsewhere.²¹ Without the unpaid labor of slaves, both the productive value and the taxable value of the land also dropped.

Throughout much of the controversy about the Virginia debt, people alluded to the damaging effects of the abolition of slavery on public revenue and consequently on the ability of the state to raise sufficient money to pay the interest and principal. Many, perhaps a majority, of white Virginians believed that the federal government and the Northern states were responsible for the Civil War, the abolition of slavery, and the loss of the western counties to West Virginia. Those people concluded that Northerners should not receive payment on the part of the state’s debt that they owned or should have their payments reduced by an amount proportional to the reduced value of the taxable property in the postwar state of Virginia. Some of those people advanced arguments similar to those that Thomas Jefferson and Patrick Henry, among others, had made following the American Revolution and that were derived from principles of contract law. Because it had been the deliberate policy of the British government then to carry away slaves and destroy property in Virginia, which had eliminated some of the resources with which Virginia’s planters could have paid their prewar debts to British merchants, the planters could not or should not be required to pay those old debts.²² Many influential post–Civil War Virginians saw an irresistible parallel between the actions of the British and those of the United States.

The economic consequences of the defeat of the Confederacy and the abolition of slavery were profound throughout the South. Many white Southerners as well as some banks and other businesses had invested their capital in Confederate securities, but the end of the war made those investments and all the slave capital equally worthless. The old planter families and owners of mid-sized farms who attempted to operate with hired rather than with enslaved laborers encountered new problems with their private finances. They had to learn how to operate in a free labor economy and could no longer lease enslaved laborers or borrow money using their slaves as collateral. Neither could railroads or canals, timber companies, mine operators, or other businesses that had owned or leased enslaved laborers before the Civil War.

Many old credit relations changed with the abolition of slavery, and freed people and white farmers also operated in a changed credit environment. They all needed to borrow money from time to time or ran up bills for purchase of seeds or supplies. Shar...

Table of contents

• Cover Page
• Title Page
• Copyright
• Contents
• Acknowledgments
• Introduction
• 1. Origins of the Debt Controversy
• 2. The Funding Act of 1871
• 3. Funders and Readjusters
• 4. The Readjuster Party
• 5. Readjustment, Reform, and Reaction
• 6. The Coupon Killers
• 7. The Coupon Cases
• 8. The Coupon Crusher
• 9. The Olcott Act of 1892
• 10. Unfinished Business
• 11. Virginia v. West Virginia
• 12. Legacies of the Debt Controversy
• Notes
• Index