Policy Changes and Management
Studies in Fiscal Federalism and State–local Finance series
Chapter 3: States as fiscal ‘sovereigns’: implications for ability and willingness to pay in full and on time
In this chapter we discuss how state governments have used fiscal sovereignty to devise fiscal rules and institutions that provide a strong foundation underlying the debt issued by subnational governments. It is one of the more recent areas to be investigated by municipal market researchers, and contradicts claims that the market is fundamentally weak and prone to systematic upheaval. State governments in the United States of America are not fiscal ‘creatures’ of the national government. Each state has its own power to raise revenue, spend money, borrow and take on debt, and have been doing so prior to the founding of the United States of America. Johnson and Rubin (1998) describe municipal debt prior to the founding of the United States of America, and they write that: states were issuing debt as far back as 1690 when the Commonwealth of Massachusetts issued bills of credit to pay soldiers who had participated in an unsuccessful raid on the City of Quebec – the bounty from the raid was supposed to have paid their wages. Throughout the next 100 years, Massachusetts and the other twelve colonies borrowed money for various purposes, mainly military, including the financing of the Revolutionary War. In 1790, the newly created federal government assumed the debts of all the original thirteen states in exchange for which they were forbidden to create money.
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