As the Eurozone contemplates the possibility of Greek default, American pundits are boasting about US federalism. American states, they say, would never allow the fiscal irresponsibility that plagues Eurozone countries. And when states do lapse, the country’s leaders do a better job of putting accounts back in order.
These pundits ought to know their history. In fact, the US has experienced a very similar crisis, in which one third of state governments defaulted. That crisis only ended after years of wrenching political change.
The trigger was the collapse of a land boom. In the 1830s, Europeans invested on a huge scale in US cotton plantations, banks, canals and railroads. Many state governments served as conduits by borrowing abroad and investing directly in banks and public works. Policymakers stoked the boom with reckless monetary and banking policies.
In 1837, the bubble burst. Banks collapsed, tax revenues evaporated, and improvement projects became white elephants. The first states to renege on their debts were Michigan and Indiana, which defaulted in July 1841. Others—Arkansas, Florida, Illinois, Louisiana, Maryland, Mississippi, and Pennsylvania—soon followed. The federal government refused to bail any of them out.
Damage to the country’s credibility was profound. “The eyes of all capitalists are averted from the United States,” wrote the English clergyman Sydney Smith in 18…