This is installment 3.2 of my Indiana Bicentennial series. Installment 3 covers generally the period from 1832 to 1848. 3.1 discussed the national context. 3.2 focused on Gov. Noah Noble. This installment will look at Indiana’s Mammoth Internal Improvement Act of 1836.
Mammoth Internal Improvement Act of 1836
The Indiana Gazetteer of 1849 said of Noble and the Internal Improvement Act, “Gov. Noble, too, was unfortunate in being, if not the father, at least the most efficient promoter of the system of Internal Improvements, from which the State has suffered so much in both character and resources.” (That, dear reader, is foreshadowing.)
The initial idea of the bill was to continue funding the development of the Wabash & Erie Canal. But this met with resistance because legislators in other parts of the state did not see much benefit to their locality from the Wabash & Erie. Lawmakers attempted without success to pass comprehensive internal improvement legislation in 1834 and 1835. Part of what paved the way for successful passage was an overhaul of the tax system in 1835. Prior to 1835, Indiana’s two primary taxes were a per-acre property tax and a poll tax. The 1835 legislation shifted the per-acre tax to an ad valorem tax.
Rather than taxing all acres equally (or in Indiana’s case in three tiers of 80, 60, or 40 cents per acre), the ad valorem tax is figured as a percentage of the real property’s value. Shifting to this type of tax resulted in agricultural land being taxed less and urban areas (a relative term at this point – “urban” was still pretty rustic) taxed more. The nature of cities and towns is that they crop up at transportation junctions. The counties where canals and highways would be built would primarily be places with towns. The ad valorem tax would result in higher taxes for places with towns. But they were willing to bet that the value of added infrastructure would offset the added taxes. For their part, the agricultural areas which would not benefit as much from major infrastructure projects were more inclined to vote for the infrastructure if their tax burden would decrease or, at least, not significantly increase.
Legislators also had some reason for optimism about increased tax revenue. Federal legislation prohibited Indiana (and other states admitted between 1803 and 1821) from taxing land for the first five years after the sale of the public land to a private individual. The State had been selling a lot of land in the five years prior to 1836 and anticipated a lot of new land (subject to the new ad valorem tax) to be coming on-line very quickly.
With respect to the internal improvement legislation, I’m not sure whether to go with the log rolling, snowball, or Christmas tree metaphor here, but I’m sure everyone gets the idea. The scope of the project got pretty big to satisfy the various regional interests. For the Ohio River population, the Vincennes Trace would be paved. The Lafayette Pike would run from New Albany to Lafayette. The Michigan Road would be paved. There would be funding for the Central Canal and the Whitewater Canal in the East. And there would be railroads! One from Madison to Indianapolis, and another from Indianapolis to Lafayette.
The legislation created an Internal Improvement Board, authorized to borrow up to $10 million on top of the $2 million in debt the State already had. Projects would require that $12 million added to about $3 million that had been acquired through land sales. Annual tax revenues at the time were only something like $65,000 per year. This was an extremely ambitious — possibly foolhardy — project even in good times. But the Panic of 1837 hit, and helped topple the undertaking. Another piece of the problem was what seems in retrospect to have been a sketchy deal with the Morris Canal and Banking Company whereby Indiana would become indebted on the $10 million in bonds immediately but Morris would pay cash for the bonds in installments over time. Morris marketed the bonds in the U.S. and Europe. (Michigan also seems to have gotten caught up in problems with Morris Canal). Whereas Indiana received only $8.5 million from Morris (and some of that was in worthless securities) the State was, nevertheless, liable to creditors for the full $10 million plus interest and penalties. In 1839, Morris failed to make its installments and construction stopped on the internal improvements. By 1841, Indiana was unable to pay the interest on its bonds.
Most of the improvements, most of which were only partially constructed, were turned over to the creditors. The Vincennes Trace became the Paoli Pike, and was converted into a private toll road for about 30 years. It was never very profitable. The Central Canal was abandoned as a failure. A section of the Whitewater Canal was completed and remained in use for some years. The Madison and Indianapolis Railroad also had some success once completed by private ownership. The Wabash & Erie reached Lafayette in 1843 and began operation that year but, after a decade, it became clear that the canal was not economically viable. Additionally, Indiana had assigned the Wabash & Erie to a private trust for the benefit of the bondholders who, in turn, assumed half of the State’s bond debt. Technology developing how it did, and the State no longer having an interest in the canal, future State policies ended up being more favorable to railroads, undercutting the interests of the privately held canal.
However, even as ill-fated as the internal improvement legislation turned out to be, the resulting transportation infrastructure increased land values and productivity for Hoosiers, particularly in and around the terminus areas of the various projects.
Next time: Governor David Wallace and Indian removal in Indiana.