In the financially intemperate 1840s no fewer than eight states, including North Carolina, defaulted on their bond obligations.
“The Constitution forbade the states to tear up their contracts,” Robert Wernick wrote in the December 1964 issue of American Heritage. “But to get their money back, bondholders would have to sue the states, and the Eleventh Amendment says a state may not be sued by a private citizen without its consent. None of the delinquent states has ever given its consent.
“Ingenious lawyers, glimpsing all those millions of dollars in perfectly valid obligations, have tried again and again to figure out a way of getting into that paradise. But the flaming sword of the Eleventh Amendment has always kept them out. Except once. In 1904 the state of South Dakota found itself in possession of North Carolina bonds left by a citizen for the use of the state university…. The Supreme Court held for the plaintiff, and North Carolina had to fork over $27,400. The shock was so great that North Carolina promptly made a deal with private holders in England to buy off their bonds – at a low price, but paid in hard cash.
“Other aggrieved parties have had no such luck. Private citizens tried deeding defaulted North Carolina bonds to, say, Massachusetts, since one sovereign state may sue another, but the Supreme Court held that this was only a dodge to get around the Eleventh Amendment and would hear nothing of it.”