The Virginia Debt Controversy

At issue was whether or how to pay almost $34 million in debt that the Commonwealth of Virginia incurred when it sold bonds between 1822 and 1861 to raise money to subsidize construction of canals, toll roads, and railroads. The state sold most of the bonds during the 1850s for railroad construction and used the money to purchase stock in the corporations that the General Assembly created for constructing what at the time were called internal improvements. Most of the debt was in the form of bonds that paid 6 percent annual interest and matured in thirty-four years. The Virginia debt was by far the largest of any southern state when the Civil War began, and by small margins it was the third largest in the United States, after only Pennsylvania and New York. Per capita or per taxpayer, it was actually two or three times the Pennsylvania or New York debts. At that time, 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 an integral participant in the increasingly sophisticated and integrated national economy. Railroads were the key to that national and state prosperity.

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.

The government of the Confederate state of Virginia paid almost no interest on the debt during the Civil War. With the accruing interest, the debt rose to more than $45 million in March 1871, when the General Assembly passed "An Act to Provide for the Funding and Payment of the Public Debt." Commonly called the Funding Act of 1871, it authorized the state to issue new bonds to replace the bonds then in circulation but for only two-thirds of the face value of the old bonds. Without asking West Virginia's permission, Virginia's legislators declared that West Virginia owed one-third of the prewar debt of the old state. That further alienated West Virginia, which until 1919 did not agree to pay anything. The Funding Act required owners of old bonds to exchange them for the new bonds, which also paid 6 percent interest and were to mature in thirty-four years, and also required the state to issue certificates with the new bonds that declared that the other third of the principal would be paid after Virginia and West Virginia agreed on how to pay it.

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.

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.

The two opposing factions were called Funders and Readjusters. Funders insisted that full payment of the debt would encourage northern and foreign financiers to invest in Virginia and stimulate economic growth. Funders also argued that the state's honor was at stake and that repudiation of any part of the debt would bring financial ruin and make economic recovery after the financial panic of 1873 impossible. Readjusters advocated a more radical reduction of the interest rate and also a reduction in the amount of principal to be paid. They argued that the people needed relief from the budget deficits that might require higher taxes and that threatened to cripple the new public school system that was popular with both white and black Virginia families. Readjusters denounced the Funders as Bourbons, after the aristocratic opponents of reform in Revolutionary France.

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.

William Mahone became the leader of the Readjusters. He had been a general in the Confederate army and was one of the state's most important railroad executives, founder of what became the Norfolk and Western. A short man with a long beard and inexhaustible energy, Mahone was a skilled and domineering manager. He welcomed Republicans, old Democrats, disappointed Conservatives, white farmers and working men, and African Americans into the Readjuster coalition. He and the principal Readjuster leaders embraced the new public school system, supported education and suffrage for African Americans, and appealed as well for support from white working class men and farmers.

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.

During debate in the Senate of Virginia, John W. Daniel declared that he would prefer that all the schools in Virginia and even his own house be burned rather than divert revenue from paying the debt into the school fund as the bill required. Governor Frederick W. M. Holliday vetoed the bill and in the process denounced the new public school system as an expensive luxury that the taxpayers should not have to support if it meant not paying interest on the debt. Daniel's speech and Holliday's veto message gave Readjusters political ammunition to denounce the Funders as agents of out-of-state creditors and therefore as enemies of the welfare of ordinary Virginians.

In February 1879, Mahone and the Readjusters formally created the Readjuster Party to prepare for the legislative elections that fall. In the spring of 1879 following negotiations between members of the General Assembly and a committee representing the bondholders, the legislators passed and Holliday signed a bill designed to replace the bonds issued in 1871 with new bonds that matured in forty years. Those bonds paid three percent interest for the first ten years, four percent for the next twenty, and five percent for the last ten. The assembly made the coupons from those bonds receivable for taxes, too. The law was called the McCulloch Act, after former Secretary of the Treasury Hugh McCulloch who represented the bondholders. Some Readjusters called it the Broker's Bill to identify who they believed most benefitted from it.

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.

In 1881 after most of the state's leading African American Republicans voted to form a coalition with them, the Readjusters won even larger majorities in both houses of the General Assembly, and the voters elected William E. Cameron governor and a Readjuster lieutenant governor and attorney general. The 1881–1882 session of the General Assembly was the brief high tide for the Readjusters. The assembly passed and Cameron signed a bill very like the Riddleberger Bill to replace the bonds issued under the Funding Act of 1871 and the McCulloch Act of 1879.

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.

While the Readjusters held majorities in both houses of the General Assembly, they elected Mahone and Riddleberger to the U.S. Senate, where Mahone caucused with the Republicans. The Readjusters also repealed the poll tax, abolished use of the brutal and humiliating whipping post, a form of punishment left over from slavery days and used almost exclusively on African Americans. They also reformed the tax code and the state's colleges and universities.

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.

Most of the laws designed to make payment of taxes with coupons expensive and difficult were passed after the Readjusters lost their majorities in the General Assembly in the election of 1883. The Funders and Conservatives reorganized themselves that year as a new state Democratic Party under the leadership of John S. Barbour, a railroad executive whose interests had opposed Mahone's in the General Assembly a decade earlier when they were both important Conservative Party leaders. The Democrats realized that they would never regain the support of the voters on the issues of the debt and the schools and sought to build a new white majority on the issue of race. In 1883 they accepted the Riddleberger Act of 1882 as the final settlement of the state debt and thereafter continued the campaign to prohibit payment of taxes with coupons.

During the remainder of the 1880s, litigation about the constitutionality of Virginia laws designed to prevent the payment of taxes with coupons delayed implementation of the Riddleberger Act. Early in the 1890s, a consortium of New York bankers under the leadership of Frederic P. Olcott acquired $23 million worth of 1871 and 1879 bonds that had tax-receivable coupons and proposed to exchange them for $19 million worth of new bonds without tax-receivable coupons. The state agreed to the proposal, which enabled Virginia to pay the portion of the debt that the Riddleberger Act had promised to pay but the legal disputes about coupons had prevented. In February 1892 the General Assembly passed the Olcott Act, which authorized the state to issue $19 million worth of new bonds that paid 2 percent interest for ten years and 3 percent for ninety years. After issuing the century bonds, as they were called, the state began buying them back, along with the outstanding Riddleberger bonds, to reduce the amount of interest to be paid in the near term and to reduce the amount of principal to be paid later.

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.

The Olcott Act was not the last step in the debt controversy. In 1906, after twelve years of failed attempts to reopen negotiations with West Virginia about the third of the antebellum debt that Virginia had not refinanced, Attorney General William A. Anderson filed suit in the U.S. Supreme Court against West Virginia on behalf of the Commonwealth of Virginia and a committee of bankers. The bankers and the state's Virginia Debt Commission had joint custody of more than 90 percent of the certificates (called Virginia Deferred Certificates) that the state had issued with each of the funding acts. The certificates declared that that the one-third of the old Virginia debt that the government of Virginia claimed the government of West Virginia owed would be paid after the two states agreed on the amount and method.

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.