Understanding the Costs of Sovereign Default: American State Debts in the 1840's.

The defaults of U.S. states in the 1840s provide a powerful test of competing models of sovereign debt. The Eleventh Amendment to the U.S. Constitution prevented foreign creditors from obtaining payment in the federal courts. Moreover, because the defaulting states were part of a large and economically integrated nation, creditors could not enforce payment by imposing military or trade sanctions. In spite of the lack of sanctions, however, most states eventually repaid in full. It appears that the states repaid in order to maintain access to capital markets, much as in reputational models of sovereign debt. Copyright 1996 by American Economic Association.