The Politics of Local Finance: The Watertown Railway Bond Issue

The Watertown, Wisconsin, ordeal over debt and debt payment illustrates in a microcosm several aspects of nineteenth-century urban finance. A small city struggling to capture the potential economic benefits of its proximity to Madison, Watertown epitomized mid-nineteenth-century tensions and hopes. Although it was an extreme case, lasting nearly four decades and unresolved even by a Supreme Court decision, the dynamics of the local struggle illustrate features of town finance, debt, and default that figured in small and large cities across the United States. Its heavy debt load, its persistent creditors, and its complex social, economic, and political structure evoked a complete range of local responses to an urban fiscal crisis. Moreover, the town's default on debt repayment highlighted the sense in which default was and still is a political action.

In 1856 the Wisconsin legislature authorized the issuance of $400,000 of railroad aid bonds by the city of Watertown.^[32] These bonds were divided between two fledgling railroad companies; apparently the railroads were to pay both principal and interest payments. Such an arrangement was in effect a collateralization, the city's credit underwriting the railroads' capitalization. The panic of 1857 caused one of the railroads to virtually collapse, and the lessees of the company sold the city's bonds in Boston for 32.5 percent of their face value. The other railroad traded its stock to the city for the bonds. But the $200,000 owed to the Milwaukee & St. Paul Railroad brought the city neither railroad nor capital improvements, and one historian of this debt claims "its crushing weight stayed its growth, paralyzed its industries."^[33] By 1870 the city debt plus interest equated one-half of the city's assessed property value.

Although one might doubt that Watertown's destined greatness had been foiled by this debt, the debt became a major public

and political issue. In 1867 townspeople met and discussed various schemes to deal with it, from buying up the discounted debt to "foolish speeches" in favor of repudiation.^[34] By 1868 the city had discovered a clever solution to its problem. It began over two decades of governing without government, without those persons in its government upon whom a lawsuit could be served. The city business was always accomplished prior to the first council meeting, which formally consisted of a handing in of all signed business and resignations to the city clerk. A Board of Street Commissioners made all council-like decisions. For instance, in 1874, the Board's regular order of business included such jobs as paying various city employees and spending money from the fifth ward "poor fund" for medical assistance to a poor woman. Two years later, at its regular meeting the Board planned the upcoming Fourth of July celebration, arranging prizes, processions, and stipulating that school children would sing national songs.^[35]

Thus, as courts awarded first one judgment and then another against the city, creditors found no one upon whom to serve papers. In 1872 the state legislature passed a bill making it impossible to seize private property to satisfy municipal creditors, effectively protecting the city's property owners from the seizure and sale of their property. The Watertown Republican (March 6, 1872) alleged that the city's debt had been issued irresponsibly by the propertyless, "by a rabble of railroad laborers thrown out of employment on a road that had stopped." These unpropertied workers encumbered the honest property owners, including, of course, "every widow and orphan" who would gladly pay a real debt, but would refuse "to satisfy the avarice of the men . . . who have combined to use the wealth they wrung from the sweat and blood of the farmers of Wisconsin [referring to the great mortgage scandals of the 1850s], to buy these Railroad bonds against cities, towns, counties, and villages, at a small fraction of their par value, in order to build their fortunes upon the ruin of so many." Having blamed the debt on irresponsible and transient workers, the essay shifted to threaten a revolution of decent townspeople if the greedy speculators persisted in attempting to collect the debt.

Five of the town's "prominent and influential citizens" (including two former mayors) awoke one summer morning in 1872 to find miniature wooden coffins on their doorsteps, in an incident reminiscent of the Captain Swing riots forty years earlier in En-

gland. A letter within each coffin urged: "In this bury all your Railway Bonds and your villainy with it." One month later the prorepudiation forces formed an organization of working-class homeowners, the Union League, which was to play an influential role in city politics for the next two decades.^[36]

In July 1872, this "class of discontented, ignorant people," led by Patrick Devy, formed a bilingual, German-Irish and Democratic organization which continued to be active in the city until 1897. The league's secret Committee of Safety agitated against all bond payments, and threatened to burn the city down if creditors tried to collect the debt or seize private property to pay it. The Union League saw the debt as a plot of the wealthy against the workers. As G. Baumann told the league on September 14, in an address in both German and English, "a certain clique of cunning men . . . men who from the first setting of this place had subsisted on the sweat of the laboring class of Watertown" had foisted the debt on the town. Their plot was foiled and resisted by the "workingmen only who fight for Right and Home." The antirepudiation Democrat called their meetings a "hodge-podge mess of drivelling, drooling gibberish and contemptible bosh."^[37]

The league's vigorously militant stance culminated by September in a unanimous resolution that gave a sense of the depth and passion of its members. "Resolved that the Union League of the City of Watertown will use all justifiable means to protect their property from legal robbers as they would from thieves and highway robbers."^[38] The only opposition to the league, an ineffective Citizen's Association, worked to compromise the debt in some way. The league's power grew, as first Devy and then Hezekiah Flinn, both Leaguers, gained seats in the state legislature in the late 1870s, where they worked to keep the debt unpaid.

The Supreme Court, in Almy v. City of Watertown (130 U.S. 301, 1889), decided that the debt claims must be served on the mayor and that the state legislation prescribing this mode of service was proper. That the city had no mayor could not be brought into the argument, and the case effectively sealed Watertown's victory over the bondholders. The Milwaukee attorney who had represented the bondholders for twenty-five years, and perhaps held most of the bonds himself, later settled with the city, exchanging over $600,000 in bonds for a $15,000 settlement. In 1894 the city

government began normal operations again, thus ending thirty-five years of turmoil.

There were five positions on the debt taken by different groups of townspeople. The handful of well-off local capitalists who also held city bonds wanted complete payment of the debt. The out-of-work railroad laborers first supported payment of the original debt, but whether they later joined the repudiation groups is not clear. The Union League—German, Irish, and Democratic, though not in tune with the town's democratic newspaper—advocated strict repudiation but also seemed to represent numerous small property holders as well as the propertyless. The Citizen's Association, apparently Republican, wanted to compromise the debt, a position comfortable to the smaller entrepreneurs and probably to all three town newspapers. And finally nonleague Democrats maintained an uneasy fifth position that skirted around favoring complete repudiation.

That property owners could have supported so militantly the antiestablishment Union League is no surprise, for as in most newly founded western cities, the acquisition of small real property holdings was possible for all but the totally destitute.^[39] Economic class differences grew at the margins between three groups: these very small property owners, who could literally tear down their houses and move them to another town; the local entrepreneurs, who possessed a bit of capital and the spirit typified by the Duluthian who happily worked hard but "worked the other fellow at the same time"; and the handful of local capitalists, who invested heavily in city bonds and local economic activities in addition to their regional activities.^[40] Ethnic splits, articulated through political parties, fractured these three economic classes, leaving a world of local politics which hotly contested the economic issues. These issues, which can often be subsumed under the concept of boosterism, directly but differently affected the fortunes and jobs of town dwellers.

Class differences usually accounted for various positions on debt. Small property holders willingly issued debt and willingly repudiated it, standing to gain from city debt that boosted economic and population growth but having little to lose. The petty capitalist also favored the issuance of debt that promised to make the city grow, having tied his or her economic future to the city.

For this reason, then, the petty capitalist stood for good credit, for debt payment when feasible and for readjustment when not. For them, local government's fiscal catastrophe spelled personal economic doom. The few wealthy resident bond holders and backers of larger local corporate enterprises favored debt for economic growth and payment at all costs. These basic positions became complex when overlaid by party and ethnic positions. The Democrats and the Irish tended to favor repudiation as in the post-Reconstruction South. And Republicans, "Americans of the New England Puritan type, men of refinement and culture,"^[41] and the native-born and Germans, would in general work for the soundness of city credit and "reputation."