State Debt, State Capitalism, and State Reform: Infrastructure Politics and Fiscal Constitutionalism in the United States, 1818-1848

 The history of internal improvements in the United States exposes perennial questions of American political development. It asks us to examine complex interdependences, to explore relationships between State and economy, to discern interactions between constitutional structures and constitutional change, to uncover tensions between path-dependency and institutional development, and to elucidate exchanges between politics and political economy. To illuminate these intersecting dynamics, this study examines the prodigious period of infrastructural expansion stimulated by subnational government promotion of internal improvements in the early 19^th century United States. It explores the political, economic, and societal processes by which people, voters, public officials, and corporations first construct, and then reconstruct systems of public finance, public administration, and political economy, and examines their long-run impacts on the constitutions, institutions, and structures of American government.

During the 1820s and 1830s, a rage for internal improvements sweeps across the new American republic. For political and constitutional reasons the federal government fails to maintain any sustained developmental program (see chapter 2), yet American State governments invest heavily in transportation infrastructure. Subnational government promotion encourages rapid, if uneven, development, and the United States quickly become world leaders in canal and railroad construction.

Government promotion at the subnational level, more often than not, entails significant entanglement between state and economy. To promote infrastructural development, American State governments grant exclusive privileges, provide public funding, and transfer eminent domain powers to private corporations. In exchange for government assistance, corporations relinquish significant planning authority, priority setting autonomy, and managerial control to governments.

Subnational infrastructure policies entangle public and private institutions in a complex web of fiscal interdependence. While individual projects display substantial variation, a general administrative paradigm emerges. The State serves as both underwriter and investor. The corporation acts as both agent of public policy, and pursuer of private profit. Given these distinct yet intertwining roles, a delicate symbiosis develops between State and economy.  

Buoyed by popular enthusiasm, governments, corporations, policy makers, and promoters proclaim the commensal benefits of public investment in internal improvements. Society benefits from otherwise unrealized economic growth and improved transportation. The State benefits by exchanging present public capital for future economic rents. 

Institutionalized systems of state capitalism present an illusory panacea. Optimistic projections rest on forecasted economic growth. The Erie Canal’s initial success generates imitative enthusiasm across the nation. Enticed by prospective reward, States and localities borrow large sums for ambitious projects.

In 1837, economic crisis follows a downturn in the global business cycle. Deepening depression turns economic collapse into a political crisis. Highly leveraged State governments suddenly struggle to meet interest payments. Several default outright; others suspend payments to creditors.

People, corporations, and governments react to the crisis. Enthusiasm turns to backlash. At the national level, politicians clamor for federal assumption. At the subnational level, political movements propose constitutional reforms to fiscally restrain their governments. Constitutional conventions amend fundamental laws limiting state borrowing capacities, creating general incorporation laws, and reinforcing economic due process rights.

These reforms refashion both political and economic orders. Reformers repudiate state capitalism in favor of a more lassie-faire economic order, but restrictions on government do not spring from libertarian concerns for corporate freedom. Instead, reformers reject corporate welfare, and cameralism as a danger to political liberty. Fiscal constitutionalists aim to separate government and economy not to liberate business from regulatory burden, but to protect taxpayers from future private sector bail-outs.