Indiana Mammoth Internal Improvement Act - Enactment

Enactment

From the early onset it was noted that the different projects did not work together, but instead competed with each other for funds and land. By trying to construct all the project at once, there was also a labor shortage and the projects began competing with each other for workers, significantly raising the originally projected labor costs. This posed a problem for the government, because they did not provide enough funds to complete each of the projects at the rates being paid, instead expecting them to start making money on their own, and funding their own completion. There was a brief by Governor David Wallace to attempt to force the commission to only build one route at a time to conserve funds and avoid what was becoming seen as an impending financial disaster, but the different factions in the General Assembly could not agree on which line should be completed first.

The Wabash and Erie Canal was the most successful of the canal projects, and was profitable early on, but never to the extent expected. The Central Canal was a major failure, with only a few miles of canal dug near Indianapolis before the project was out of money. The Whitewater Canal was proceeding along well until its earthen walls and feeder dams were the victims of muskrats who burrowed through the walls, causing hundreds of thousands of dollars in damages for which there was no money to repair. At the height of the operation, over ten thousand workers were employed on the canal projects.

The rail line from Madison to Indianapolis was built much more cheaply than the canals; $1.3 million was appropriated. It was however, considerably over budget due to the increased costs of having to build a grade out of the low lying Ohio Valley onto the Indiana table land, so the project could not be finished. Had the project instead started in Indianapolis, it would have been able to earn income on freight and passengers along the relatively flat central Indiana portion, and been able to fund itself to construct the grade into Madison. The Vincennes Trace was paved from New Albany to Paoli at a cost of $1,150,000, with another 75 miles (121 km) still requiring pavement when the project ran out of money.

The Panic of 1837, caused primarily by western land speculation, left the state in dire straits financially. Income shrank, and in 1838 the state's taxation revenue was $45,000, but the interest on the state's growing debt was $193,350. Governor Wallace made the startling report to the General Assembly who began to wrangle over what action should be taken. Provisions were made to make debt payments with more borrowed money, in the hope that the projects could be finished before the state's credit was maxed out. The gamble proved to be a bad decision and by 1839 there was no money left for the projects and work was halted. Work only continued on the Wabash and Erie where workers were paid with stock in the canal, and not cash, and supplies were purchased using the federal funding. At that time 140 miles (230 km) of canal had been built for $8 million, and $1.5 million spent on 70 miles (110 km) of railroad and turnpike. The state was left with a $15 million debt, and only a trickle of tax revenue.

In hope to increase revenues, the state reformed property tax assessment to be based on property values, as opposed to a set amount per acre. The modest reform boosted revenues by 25% in the following year, but was still nowhere near enough to cover the gap. Governor Wallace announced to the General Assembly in his last year as governor that the state would be insolvent within a year. The 1841 budget had over $500,000 in debt payments, plus regular spending, but revenues that year were only $72,000. The state was unofficially bankrupt. The proponents of the system had promised their constituents that taxes would not need to be increased, and that once the projects were finished taxes could perhaps be abolished because tolls would pay all the state's needs. Because of this, no provisions had been made to pay interest on the massive debt.

In 1841 Governor Samuel Bigger proposed the creation of county boards to set property values. The result of the new system led to as much as a 400% tax increase in some parts of the state. Citizens decried the draconian tax hikes, and many refused to pay. The General Assembly was forced to repeal the system the following year.

James Lanier, president of the Bank of Indiana, was sent by Governor Bigger to negotiate with the state's London creditors in a hope to avoid total bankruptcy in 1841. He negotiated the transfer of all of the projects, except the Wabash and Erie, to the creditors in exchange for a 50% reduction in the debt they held, lowering the total state debt to $9 million.

Although the debt decrease lessened the strain on the state, the debt payment was still far more than the state could afford. On January 13, 1845, the General Assembly passed a resolution issuing an official apology to the state's creditors and the state and federal governments of the United States for the repudiation of large parts of their debt. The resolution stated "We regard the slightest breach of plighted faith, public or private, as an evidence of a want of that moral principle upon which all obligations depend: That when any state in this Union refuses to recognize her great seal as the sufficient evidence of her great seal as the evidence of her obligation she will have forfeit her station in the sisterhood of States. and will no longer be worthy of their respect and confidence." The governor was directed to forward copies of the apology to each of the states. The result of the repudiation ruined Indiana's credit for nearly twenty years.

The Whigs suffered from the failure of the project and Democrat James Whitcomb, an opponent of the projects from the beginning, was elected governor. A Democratic majority had already came to power in the statehouse the year before. With their support he began negotiations to end the crisis. Charles Butler arrived from New York to negotiate on behalf of the state's creditors in 1846. The proposed deal was for the state to trade majority ownership of the Wabash and Erie for another 50% reduction in the debt, leaving the state owing $4.5 million and ending the financial crisis. Although the debt was significantly reduced, payment on it was still over half of the state budget, but the growing population of the state was quickly raising tax revenues.