Few issues have dominated an era of Tennessee politics like the debate over the state debt which raged for six years (1877-83) as a predominant political issue. Having first been incurred in support of antebellum railroad construction, the debt dramatically increased during the Civil War as unpaid interest was allowed to accumulate. Railroad repair and expansion during Reconstruction added to the previous debt. Consequently, by 1870 the debt amounted to $43,052,625. With the state still laboring under financial difficulties created by the war, Reconstruction, and the Panic of 1873, a growing sentiment developed to repudiate the debt, either partially or wholly.
In January 1877 Democratic Governor James D. Porter asked the state legislature to create a committee to work out a permanent “honorable” settlement between the bondholders and the state. The general assembly then requested that the state’s creditors submit a plan of debt adjustment. The creditors’ solution included a reduction of state expenses, the maintenance of the current rate of taxation, utilization of any surplus to refund the state’s bonds with their accrued interest, and concurrent issuance of new bonds bearing 3 percent interest for five years. The creditors further recommended that the debt be refunded at a rate of 60 cents on the dollar in new 6 percent bonds.
Although the plan would have reduced the debt by 40 percent, the legislature rejected this proposal, suggesting instead that the state suspend all further payments of interest on the state’s bonds, excepting only those held by the state’s educational institutions. The legislature further acted to reduce the tax rate from 40 cents on each 100 dollars of property to 10 cents to be used “for current expenses only.” Overriding Governor Porter’s veto, the legislature effectively prevented any further interest payments on the bonds.
Governor Porter called the legislature into special session in December 1877, but his proposed compromise, which would have coupled debt adjustment with a tax levy designed to meet the interest on the proposed new bonds, failed. A second proposed compromise, calling for debt reduction by 50 percent and a refunding of this sum into 6 percent bonds, was rejected as well, and the debt controversy became a major issue in the gubernatorial campaign of 1878.
Badly divided on the question of the state debt, the Democrats adopted a platform that evaded pledging the party to any particular settlement. Instead, gubernatorial nominee Albert Marks denounced the anti-repudiationist Republican Party for running up the debt during Reconstruction and won the election by a popular landslide.
Taking office in 1879, Marks pushed through legislation that provided for the refunding of most of the debt at 50 cents on the dollar at 4 percent interest. As he had pledged during the campaign, however, the settlement was to become effective only if two-thirds of the bondholders approved it, followed by a majority of the state’s voters in a special election. While the state’s creditors gave their approval, voters rejected the proposed settlement by a margin of 76,333 to 49,772 in the August 1, 1879, referendum.
The 1880 gubernatorial election again focused on the debt controversy. Incumbent governor Marks declined the Democratic nomination, which divided the party into pro-repudiation (Low-Tax) and anti-repudiation (State Credit) factions. As a result of these divisions, Republican Alvin Hawkins won the election. On April 6, 1881, the legislature enacted the “100-3 Act,” which funded the debt at 100 cents on the dollar, including unpaid interest, by issuing new 3 percent “compromise bonds.” It excluded educational and local charitable institutional bonds and bonds held by Sarah Childress Polk, widow of James K. Polk, from this reduced interest rate while increasing the property tax from 10 cents to 40 cents to pay the interest on the new bonds.
The compromise did not hold. In February 1882 the Tennessee State Supreme Court declared the “100-3 Funding Act” unconstitutional and void, largely for its provision making the unpaid bond coupons receivable in payment of state taxes. Hawkins immediately called the legislature back into special session. On May 20, 1882, the general assembly passed the “60-6” Act, which funded the principal and all past due interest on the state bonds at 60 cents on the dollar.
The issue of the “60-6 Settlement” dominated the gubernatorial campaign of 1882. The Low Tax Democrats’ nominee, General William B. Bate, rejected “60-6” in favor of a pledge to pay in full only the “state debt proper,” with the remainder refunded at 50 cents on the dollar. Bate received the support of most State Credit Democrats, who found him preferable to the Republican Hawkins. Taking office in 1883, Governor Bate and his fellow Low Tax Democrats soon enacted the “Compromise of 1883.” The compromise called for the funding of the “state debt proper” ($2,118,000), with accumulated interest, at par into 5.25 percent bonds; funding of the remainder of the debt ($18,903,000), with accumulated interest, at 50 cents on the dollar into 3 percent bonds; and the consequential decrease of the state’s debt by approximately $14,000,000 to roughly $15,784,608.
The question of the payment of Tennessee’s debt was finally settled and removed, at least on the surface, from political discussion. The deep animosities that it had aroused, however, were to linger on and thus have their influence on the state’s politics for several years to come.
Robert B. Jones, Tennessee at the Crossroads: the State Debt Controversy, 1870-1883 (1977)