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John Thompson

Elizabethton Bureau Chief
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Community Heritage Elizabethton

Getting paid in scrip

February 17th, 2014 9:52 am by John Thompson

Getting paid in scrip

Old postcard showing the North American Rayon Corporation Plant Elizabethton

ELIZABETHTON — Imagine working for a company in such bad financial shape that its employees were paid with scrip instead of cash.
That was the situation for the employees of the city of Elizabethton during the early 1930s, when the city went into default on repaying its bonds.
This is the third and final part of a series about the financial problems in Elizabethton during the Great Depression. The first two articles examined Elizabethton’s financial problems from the scholarly perspectives of John Fred Holly and Edwin C. Alexander Jr., who were graduate students at the University of Tennessee when they wrote their master’s theses about the reasons for Elizabethton’s default and the city’s recovery efforts. Both works looked at the problem in terms of economic theory.
This final article looks at Elizabethton’s problems from the viewpoint of experienced businessmen. During the Depression, a group of these men formed the Tennessee Taxpayers Association in Nashville and allied associations across the state. The group looked at economic problems from a pragmatic business approach.
The association issued its 46th publication, “A Report with Recommendations Covering a Study of the Finances and Administrative Methods of Elizabethton, Tennessee,” on July 15, 1940. The report is 162 pages and a copy can be examined in the city archives at the Elizabethton Public Library.
The group agreed with Holly and Alexander on the cause of Elizabethton’s economic problems: The city went heavily in debt after two large rayon plants located near the city. With visions of continued prosperity and even more rayon plants locating in the city in the near future, the city began rapidly building infrastructure to provide for an expected large migration of workers to the city and to provide services to the factories.
To cover the loans, the city used property assessments that were heavily inflated by a real estate boom. When the Depression hit, the city found that it would take most of its taxes just to pay the interest on its heavy debt load. Even worse, many of the improvements the city had borrowed the money to build were not needed in the economic slowdown. Some of the new sidewalks and sewers only served pastures.
The group’s report went further than the theses. It covered not only city government but also city schools and waterworks. It made voluminous recommendations on how to become more efficient and provide better services.
Some of its recommendations are in place today, such as returning to a normal city council-city manager form of government in which council members are elected for staggered terms.
The association analyzed the city’s financial problems as a businessman examines a failing business. It reported the city’s annual revenues amounted to $215,000 and its expenditures had been more than that for the past 10 years (from 1930 to 1940).
The association reported the city’s bonded debt at $1,682,000, which represents a 22 percent mortgage lien upon its $7.4 million of taxable property. Previously noting that assessed property had been inflated by the real estate boom, the association said the mortgage lien represented 38 percent of a more realistic assessment of $4.4 million.
The association reported Elizabethton had been borrowing almost from the start of its incorporation in 1905. At the time of its incorporation, it was debt-free and property taxes were 65 cents on $100 of assessed value. The tax rate increased rapidly as the new city began borrowing to create the infrastructure expected of a turn-of-the-20th-century city.
The first bonds were issued in 1908. In that year, $32,000 was borrowed to construct streets, schools and make other improvements. More bonds were issued in 1909 and 1914. In attempting to meet the interest on the outstanding bonds and retire annual principal maturities, the tax rate increased to $2.50 by 1911 and $3 by 1919. Additional bonds were issued in 1922, 1923 and 1924.
Then the rayon plants came and the city began borrowing heavily in anticipation of becoming an industrial metropolis.
Street and sewer bonds for $222,000 were issued in 1925. The group reported that in 1926, “$253,000 worth of bonds were added and the debt was $763,500, which amounted to 67 percent of the city’s assessed valuation. Interest on the bond debt amounted to 117 percent of taxes levied by the city. This, of course, made it difficult for the city to issue further bonds.”
The city got around that problem by taking the job of assessing property away from the county tax assessor.
In 1926, the last year the county assessed the city’s property, the valuation was $1,135,690. In 1927, the first year the city had its own property assessor, the city’s valuation ballooned to $4,111,000. This did not include the new rayon plant, which was built outside the city limits. In 1928, the city’s valuation went to $6,332,466. In 1929, it increased to $7,806,620. By 1937, the city’s valuation had declined to $4,400,574.
With the higher assessed values, the city was able to continue getting bonds. During 1927, 1928, and 1929, the city borrowed $1,104,000 by using bonds. The association said this continued borrowing brought the total bonds issued up at that time to $1,941,500. This amounted to 20 to 38 percent of the assessed value of all property taxable by the city.
This was “an untenable position,” the association said. “The annual interest payment alone came to require from 53 percent to 113 percent of the city’s total tax levy.”
At the same time more and more of the city’s tax revenue was needed for interest payments, the city’s operating expenses soared to provide services for the expanding city. Operating expenses increased from $34,700 in 1923 to $101,800 in 1928 and to $138,500 in 1930.
As the Depression hit, the number of delinquent taxes soared. Part of the problem was that much of the undeveloped property was owned by speculators who got caught at the boom’s end. They could not pay city taxes, and the taxes, interest and penalties kept climbing. In a short while, the market value of the property was much lower than the delinquent taxes on the property.
With tax collections falling to only 29 percent in 1932, the city became cash-starved. One solution the city used was to stop paying employees of the school system in scrip. The city had hoped the scrip would circulate through the community as cash, but confidence was so low in the city’s finances that merchants would only accept the scrip at a deep discount of 20 to 30 percent, the association said.
Despite the dismal situation, the association said the problem could be resolved. One of the ways was to remind the citizens of their history. The association said the report on Elizabethton was different from the others it had written because it devoted a great deal of space to the early settlers’ rich history. The association felt that if the current citizens’ forefathers could be victorious over the British army at King’s Mountain, there should be enough community spirit to win the financial battle.
“Fortunate indeed is your community in having citizens who recognize the gravity of the problems (that) confront Elizabethton, who are willing to face the facts and to enter upon a cooperative movement for assuring Elizabethton the character of municipal stability and economy which its splendid people deserve,” the group wrote.
“The degree of improvement (that) Elizabethton can gradually achieve will hinge upon able, unselfish businessmen with like patriotism volunteering to serve.”

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