DEBT OF THE REPUBLIC OF TEXAS
DEBT OF THE REPUBLIC OF TEXAS. The Republic of Texas inherited from the provisional and ad interim governmentsqqv a debt estimated at $1.25 million. Of this, $100,000 was in the form of loans and the remainder in the form of claims for services and supplies. At the end of the republic the debt was officially estimated at $9,949,007. Postponement of the payment of the bulk of this debt was protracted over a period of eleven years, interest accumulating on it up to July 1, 1850. An official report on the debt in November 1851 reported the sum of claims filed at $6,480,748.58, interest due $3,166,504.56, and estimated unfiled claims with interest $2,789,738.20, or an estimated total debt of $12,436,991.34. The total debt included the revenue debt, for which the import duties levied by the republic had been pledged, and the nonrevenue debt of audited drafts and audited claims including an estimate of unfiled claims.
The republic authorized a loan of $5 million in 1836, but there were no takers. In May 1838 Congress passed another $5 million loan act, and commissioners were sent to the United States and Europe to market the 10 percent bonds with which the loan was to be made. The Pennsylvania Bank of the United States bought bonds amounting to $457,380. Before the final settlement of this obligation the principal and accrued interest on it amounted to $960,498. In the state rating of the items of debt based on what would have been the specie equivalent of each at the time of its issue, this particular item was rated at $.8745 on the dollar.
A second item, the naval debt (also called the Dawson and Holford debt) was in the form of 10 percent bonds of the $5 million loan act. The republic bought two vessels, the contract for each of which provided that if the amount was not paid at its maturity date of one year, the price would be doubled. Bonds at 10 percent in double the amount of the price were put up as security, and, as the debts were not paid at their maturity, the bonds were forfeited, the principal and interest on them finally amounting to $1,622,404.70. They were rated by the state at a valuation of fifty cents on the dollar.
In June 1837, 10 percent funding bonds were authorized, and a total of $837,500 was issued in 1837, 1838, and 1839, in exchange for audited drafts, claims, and land scrip. The principal and accrued interest of this debt item finally amounted to $1,687,094.80. Of this amount the state rated $29,291.47 at par and the remainder at seventy cents on the dollar.
The funding act of 1837 expired on January 1, 1840, and was succeeded on February 5, 1840, by an act funding the treasury notes issued by the republic. Notes presented before July 1, 1840, were fundable in 10 percent bonds ($813,800) and those after that date in 8 percent bonds ($27,080). The principal and accrued interest of these issues finally amounted to $1,674,380.42 and was rated by the state at thirty cents on the dollar.
The treasury notes, amounting to $3,945,500, were also a part of the debt. The earlier notes issued bore 10 percent interest, but the later ones, those called redbacks, were not interest-bearing. These were funded in bonds amounting to $792, 880. By September 1, 1851, enough revenue had been collected to redeem and cancel $518,324 of the notes. The value of notes with accrued interest for which settlement was finally made was $2,716,645.29. Of this amount, $65,208.33 was rated at par, $451,708.32 at fifty cents on the dollar, and $2,199,728.64 (in redbacks) at twenty-five cents on the dollar.
In joining the United States, Texas retained her unappropriated lands with the idea that their first use should be to pay the debt of the republic. No action on the debt was taken by the First Legislature. In 1848 the Second Legislature instructed the state auditor and the comptroller of public accounts jointly to ascertain the amounts of the various items of the debt and to reduce their amounts to the "actual par value which may have been realized by the late Republic." This reduction, called rating or scaling, reduced the amount of liability from the face amount to what the amount would have been if there had been neither money nor credit risk on the obligation at the time it was incurred. This policy, called "the principle of equivalents," was in high favor in Texas at the time of annexation, but it was strenuously opposed by the holders of the debt. In the official state report of 1851 only $283,456.11 of the total estimated debt of $12,436,991.34 was rated at face value, and the total was scaled down to $6,827,278.64. By an act of February 11, 1850, Texas proposed to pay the scaled amount in land on the basis of fifty cents an acre. At the same time it was specified that interest on all liabilities would cease after July 1, 1850. The creditors, however, refused to accept this plan of payment.
The deadlock between the state and the creditors was solved by the settlement of the dispute over the northwestern boundary of Texas in the Compromise of 1850. The United States, in return for a cession of 67,000,000 acres of land, gave to Texas $10 million in 5 percent United States bonds, with the proviso that $5 million of the bonds should not be turned over to Texas "until the creditors of the State holding bonds of Texas for which duties on imports were specially pledged shall first file releases of all claims against the United States for or on account of said bonds." A controversy between the federal government and Texas over the interpretation of the proviso continued for more than 4½ years. It was finally settled by an act of Congress on February 28, 1855, which appropriated $7.75 million in cash to be prorated among the holders of the revenue debt. The basis of this amount was roughly the principal of the $5 million of the reserved bonds plus the accrued interest and the market premium on the bonds. In the general election of 1855 the people of Texas rejected the plan, but the congressional act had given the legislature the power of acceptance or rejection, and the legislature, by a narrow vote, accepted the plan, which was ratified on February 1, 1856. Opponents of the plan calculated the financial loss to the state at $6,082,244.
The revenue debt was interpreted by the federal government to include all the bond items and the paper money (see MONEY OF THE REPUBLIC OF TEXAS). It amounted to $10,078,703.21. Acceptance of the Texas rating of this amount would have reduced it to $4,467,756.41, or payment at the rate of 44.3 cents on the dollar. The $7.75 million prorated among the holders of the unscaled amount resulted in payment at the rate of 76.9 cents on the dollar.
Between 1852 and 1902 Texas paid out on the nonrevenue debt of the republic a net amount of $1,287,103.43, and between 1846 and 1860 the state received in the form of liabilities of the republic a net amount of $288,263.16 in payment of debts due the republic. A total, therefore, of $1,575,366.59 was what the state discharged of the debt of the republic, and this amount may be construed as a deduction from the $5 million of the United States bonds that had been turned over to the state in 1850.
The United States Treasury paid out of the $7.75 million all but $45,000, and this remainder was turned over to Texas in 1881. The total of the sums paid out by the federal government and the state was $9,280,366.59, which paid the republic's officially estimated debt of $12,436,991.34.
Holman Hamilton, Prologue to Conflict: The Crisis and Compromise of 1850 (Lexington: University of Kentucky Press, 1964). Abigail Curlee Holbrook, "Cotton Marketing in Antebellum Texas," Southwestern Historical Quarterly 73 (April 1970). Edmund Thornton Miller, A Financial History of Texas (University of Texas Bulletin 37, Austin, 1916).