When West Virginia became a state in June 1863, its constitution and the enabling legislation passed by Congress and the General Assembly of the Restored government of Virginia placed on the new state a responsibility to pay an equitable portion of the debt. However, the two states could not agree after the war about how to ascertain the amount, and after West Virginia adopted a new constitution in 1872, the state declared that it owed nothing to Virginia or to Virginia's creditors.
Funding Act of 1871
If all the old bonds had been exchanged for new bonds, the interest payments would have cost the state more than half its annual revenue, but the Funding Act of 1871 made the interest-bearing coupons on the bonds receivable for taxes, which created a large, new problem. Every dollar in taxes paid with coupons was a dollar that the state could not spend. Within two years nearly half the state's revenue came into the treasury in the form of coupons. The state began running deficits, leaving the new public school system seriously underfunded and even forcing the assembly in 1872 to reduce annual interest payments on the new bonds to 4 percent.
In 1872 the assembly repealed the portion of the Funding Act that made the coupons tax-receivable, but the Virginia Supreme Court of Appeals overturned that law. In Antoni v. Wright (1872), the judges declared that the coupons were contracts between the state and its creditors and that the repeal of the coupon provision was an impairment of the obligations of the contract and therefore a violation of the Constitution of the United States.
Funders versus Readjusters
Virginia's politicians became increasingly divided about how to pay the debt and what to do about the coupons. Those divisions wrecked the dominant Conservative Party, which had been formed late in 1867 to oppose Congressional Reconstruction and the work of the Constitutional Convention of 1867–1868. A majority of political leaders during the 1870s evidently supported some reduction of the interest rate, but bondholders and their attorneys and allies in the General Assembly resisted proposals to reduce the interest rate further or to reduce the amount of principal to be paid and, in effect, repudiate a part of the debt.
While promoting their debt reduction plans, Readjusters appealed to poor white and black voters and created a new biracial political alliance with an emerging egalitarian political creed. It won support from African Americans as well as from many white Republicans, Democrats, and Conservatives. In spite of the poll tax that Conservatives had added to the state constitution in 1876 to reduce African American voting, more African Americans won election to the General Assembly between 1879 and 1885 than immediately after the poll tax went into effect, indicating strong public support for refinancing the debt to provide money for the schools.
In 1878, the Readjusters in the General Assembly passed a bill designed to reduce payment of taxes with coupons and to increase the amount of money in the treasury. It was called the Barbour Bill, after its sponsor, Delegate James Barbour, and required that people pay 70 percent of all their taxes with money. That revenue would be dedicated to paying the operating expenses of the state government and the public schools. People could pay the other 30 percent with money or with coupons, and that revenue was dedicated to paying interest on the debt, even though coupons could not be used for that purpose.
Rise of the Readjusters
That act did not end the debt crisis, however, because the leading Readjusters insisted on reducing the principal and reducing the interest rate even further. In the legislative elections in 1879, Readjusters made the debt and the damage done to the public school system the principal issue, and they won majorities in both houses of the assembly. In 1880 they passed but Holliday vetoed a bill that would have significantly reduced the principal and lowered the interest rate to three percent on fifty-year bonds. It was called the Riddleberger Bill, after its sponsor, Harrison H. Riddleberger, a member of the Senate of Virginia from the Shenandoah Valley.
The Riddleberger Act of 1882 significantly reduced the amount of the debt to be paid. It repudiated all the interest that accrued during the Civil War and Congressional Reconstruction; it deducted from the principal an amount that it declared represented the excessive rate of interest paid under the funding acts of 1871 and 1879; and it reduced the principal further by the estimated amount that the loss of the territory of West Virginia and the abolition of slavery had reduced the state's tax base. The law set the total Virginia public debt at a little more than $21 million and provided for new fifty-year 3-percent bonds to pay that amount. It did not allow the coupons from the bonds to be used for payment of taxes.
In 1882 the Readjusters also passed several laws to make payment of taxes with coupons clipped from the 1871 and 1879 bonds more difficult and expensive. The first two of those laws were called Coupon Killers. In 1883, the U.S. Supreme Court in Antoni v. Greenhow upheld the constitutionality of Coupon Killer No. 1, but in 1885 in Poindexter v. Greenhow declared Coupon Killer No. 2 unconstitutional. Those were two of twenty-seven cases that reached the U.S. Supreme Court, all of them on the question of the constitutionality of the anti-coupon laws that the General Assembly passed between 1882 and 1887, the last of them called the Coupon Crusher.
Debt Payment and Settlement with West Virginia
On January 1, 1937, the state purchased most of the few bonds that remained in circulation and thereby paid off the last remnant of the antebellum public debt. Ironically, the closing of the books on the old debt attracted almost no notice. The decades of raucous and divisive political controversies, financial headaches, and prolonged litigation were all two or three generations in the past. The final payments were so anticlimactic and involved such a relatively small sum of money that they did not remind very many people of all of the tumults and difficulties that the many problems arising from trying to pay the antebellum debt had once produced.
During the next thirteen years, in a series of eight unanimous opinions that Chief Justices Melville W. Fuller and Edward D. White as well as Associate Justices Oliver Wendell Holmes Jr. and Charles Evans Hughes issued, the Supreme Court established that West Virginia was, indeed, liable for a portion of the old debt. The judges ascertained the amount at about $12.7 million but later reduced it after West Virginia asked to be given credit for a portion of the assets of the old state at the time the new state came into being. The Supreme Court fixed the rate of interest that West Virginia should have paid during the interim and added that amount to the principal, bringing the total back to about $12.4 million.
On April 1, 1919, the West Virginia Legislature passed a funding bill to pay a somewhat lesser amount than the Supreme Court had established. The amount was agreeable to Virginia and to the bankers and owners of the certificates, so the two states therefore did not have to take the case back to the Supreme Court. West Virginia issued $13.5 million in bonds that matured in twenty years and paid 3.5 percent annual interest to pay the certificate holders, to pay Virginia more than $1 million for certificates that it owned, and to pay owners of certificates who were not parties to the suit. The long Virginia debt controversy was finally settled.
1822–1861 - Virginia accrues about $34 million in public debt subsidizing the construction of canals, toll roads, and railroads.
1871 - Virginia's pre–Civil War public debt, with interest, totals more than $45.6 million.
March 30, 1871 - The General Assembly passes "An Act to Provide for the Funding and Payment of the Public Debt," or the Funding Act of 1871.
March 1872 - The General Assembly repeals the portion of the Funding Act that permits people to pay taxes with coupons.
August 22, 1872 - West Virginia voters ratify a new state constitution that declares the state owes nothing to Virginia or Virginia's creditors. Virginia is more than $45 million in debt, much of it due to internal improvements undertaken before West Virginia became a state.
February 22, 1878 - The General Assembly passes what comes to be known as the Barbour Bill, after James Barbour. It requires that a portion of the state's tax revenue be collected in money and not in coupons in order that the money can be spent on the public schools. The governor vetoes it.
February 25–26, 1879 - The Readjuster Party is founded at a convention in Richmond with the goal of "readjusting," or reducing the amount the principal of and the rate of interest on the state debt.
March 28, 1879 - The General Assembly passes the McCulloch Act, refinancing the state debt. Opponents dub it the Broker's Bill because they believe bond brokers and the owners of state-issued bonds are the chief beneficiaries.
March 1, 1880 - The General Assembly passes a bill to reduce the rate of interest on the debt to 3 percent for fifty years and to repudiate about one-third of the principal. The governor vetoes it.
March 14, 1881 - Almost 300 African American Republicans convene in Petersburg and decide to endorse the Readjuster Party in the important 1881 general election.
February 14, 1882 - The governor signs the Riddleberger Act, named after Harrison H. Riddleberger. It provides for fifty-year, 3-percent bonds on the debt, reduces the principal by about a third, and prohibits the payment of taxes with coupons.
March 5, 1883 - In Antoni v. Greenhow, the U.S. Supreme Court upholds the constitutionality of a Virginia law making it difficult and expensive to pay taxes using coupons clipped from state-issued bonds from 1871 and 1879.
April 20, 1885 - In Poindexter v. Greenhow, the U.S. Supreme Court declares unconstitutional a Virginia law making it difficult and expensive to pay taxes using coupons clipped from state-issued bonds from 1871 and 1879.
Early 1890s - A consortium of New York bankers led by Frederic P. Olcott acquire $23 million worth of 1871 and 1879 Virginia-issued bonds that have tax-receivable coupons and propose to exchange them for $19 million of bonds without such coupons.
1892 - The General Assembly passes the Olcott Act, authorizing the state to issue $19 million worth of bonds that pay 2 percent interest for ten years and 3 percent for ninety years.
June 14, 1915 - In Virginia v. West Virginia, the U.S. Supreme Court rules that West Virginia owes Virginia a share of the combined states' pre–Civil War debt, or $4,215,622.28, before interest.
January 1, 1919 - West Virginia's share of Virginia's pre–Civil War debt, after interest, is $14,562,867.16.
April 18, 1919 - West Virginia officials deliver to the Virginia Debt Commission, in Washington, D.C., checks totaling $1,062,869.16, toward the state's share of Virginia's pre–Civil War debt.
July 3, 1919 - West Virginia officials deliver to the Virginia Debt Commission, in Richmond, $12,366,500 in bonds toward the state's share of Virginia's pre–Civil War debt. Another $1,133,500 in bonds is held in escrow.
July 30, 1919 - With the release of funds kept in escrow, Virginia and West Virginia officials agree that the latter state has paid its share of Virginia's pre–Civil War debt.
January 1, 1937 - Virginia purchases all remaining bonds associated with the Olcott Act of 1892 and thereby repays the last remnant of pre–Civil War public debt.
Cite This Entry
- APA Citation:
Tarter, B. The Virginia Debt Controversy. (2016, July 19). In Encyclopedia Virginia. Retrieved from http://www.EncyclopediaVirginia.org/Debt_Controversy_The_Virginia.
- MLA Citation:
Tarter, Brent. "The Virginia Debt Controversy." Encyclopedia Virginia. Virginia Foundation for the Humanities, 19 Jul. 2016. Web. READ_DATE.
First published: October 31, 2014 | Last modified: July 19, 2016
Contributed by Brent Tarter, founding editor of the Dictionary of Virginia Biography.