Debt and Bankruptcy

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Debt was an inescapable fact of life in early America, whether one was an Atlantic merchant or a rural shopkeeper, a Tidewater planter or a backwoods farmer, an urban artisan or a frontier trapper, male or female, free or slave. Ubiquity, however, is not uniformity. Debt meant different things to different people. To some, it represented entrepreneurial opportunity. To others, a burdensome necessity. To still others, it signified destitution or, for slaves, being sold for their masters' debts. Common to all of these was the uncertainty that faced both debtors and creditors when indebtedness became insolvency. What should become of debtors and their property when what they owned was not enough to pay what they owed? Did creditors' claims to repayment of what they had lent extend to the bodies of the debtors to whom they had lent it? Could creditors imprison their debtors or bind them to service? Could insolvent debtors ever hope for release from their debts, short of repayment in full? These questions found one set of answers at the beginning of the eighteenth century and a quite different set at the end.

Early in the eighteenth century, ministers preached a moral economy of debt in which failure to repay was not an economic offense but a moral one for which the debtor's conscience would suffer the penalty. They addressed God as the "Great Creditor" who casts insolvent souls into the debtors' prison of hell. Debtors and creditors alike measured themselves and each other against an ideal that presupposed the dependence of debtors and the omnipotence and inherent justness of creditors. At the same time, however, a few ministers, most notably Cotton Mather, recognized that trade could not exist without credit and so conceded that some debt was necessary. In this concession lay the seed of a distinction that bedeviled debtor relief later in the century. If commercial debts—and, by implication, commercial debtors—were different from other kinds of debt and debtors, they might merit different forms of relief when their indebtedness became insolvency.

Until mid-century, the law essentially codified the moral economy. Every colony allowed creditors to imprison their debtors. Few colonies had procedures for their release, and then only occasional ones limited typically to indigent debtors who owned too little to turn over to their creditors and therefore too little to be worth keeping in jail. Several colonies bound debtors to their creditors in service to work off their debts, most involuntarily. Two fleeting experiments with bankruptcy discharges early in the century left little mark.

economic commercialization

At the middle of the eighteenth century, the law of debtors and creditors and the moral economy of debt began to diverge. Changes in the economy prepared the way. Increasingly commercial economies created new opportunities for success. They also multiplied the risk of failure. Agricultural expansion spurred the growth of market towns and ports with concentrated populations and market orientations that promoted artisans, merchants, and the specialization of business enterprise. The lure of greater local trade opportunities induced people to enter the lists as small traders, while the production of agricultural surpluses and the growing demand for manufactured goods encouraged merchants to become exporters and importers. Their ability to do so was facilitated by the introduction of paper money and the rapid spread of written credit instruments, both of which contributed to a transformation in the relations between debtors and creditors. With the kind of optimism possible in an atmosphere of prosperity and expansion, ambitious men launched their ventures with large aspirations and little capital. Credit bridged the gap, whether for traders who needed goods to trade or farmers who needed land and livestock to expand. Commercial development rode the crest of a rising tide of indebtedness, a tide that reflected the confidence of prosperity as farmers and planters, artisans and shopkeepers, traders and merchants, borrowed against anticipated profits to finance their undertakings. Many succeeded. But economic expansion also enabled more people to fail owing greater sums of money to larger numbers of creditors than had been possible in the smaller, more insular local economies of the seventeenth century.

war and its aftermath

The legal landscape of debt changed dramatically after about 1755, coincident with the Seven Years' War. Wartime economic expansion, coupled with wartime economic risk, followed by postwar economic contraction, created a fluid economy in which success and failure both flourished. The sharp rise in prices of foodstuffs and supplies brought profit to sellers and expense to buyers, while the movement of goods assured that everyone along the chain of commerce was both seller and buyer, so that even those who initially reveled in high prices were squeezed as they acquired goods for resale. War also exacerbated the normal scarcity of money, driving up the cost of borrowing, enriching those with money to lend, and building pressure on colonial legislatures to issue paper money, which promptly depreciated, causing additional dislocation. The vagaries of war magnified the normal vagaries of production, trade, and investment so that economic success was never a guarantee against future failure.

The economic uncertainties of war were prelude to those of peace. Economies that had expanded to meet wartime needs and opportunities suddenly contracted. Everyone suffered from a worsening shortage of specie. To make matters worse, tightened enforcement of British imperial policy, such as the long-ignored Molasses Act of 1733, together with high taxes by the colonies themselves to repay war debts and new parliamentary measures to bind the colonies more closely to Britain, notably the Currency Act of 1764, combined disastrously to block sources of hard currency, drain paper money from the economy, and prevent new emissions of paper currency. As the supply of money shrank, commercial transactions required hopelessly long credits or reverted to barter, taxes could not be collected, and debts could not be paid. Insolvencies multiplied, from urban merchants to rural traders and beyond.

With the economic impact of war and its aftermath clear for all to see, it became harder to stigmatize insolvency as moral failure. War made everyone familiar with risk, economic risk included. Within a two-year period, from 1755 to 1757, New York, Rhode Island, and Massachusetts enacted bankruptcy systems that distributed insolvent debtors' assets among their creditors and discharged them from further liability on their debts. Connecticut followed suit in 1763. Each of these experiments quickly expired or was repealed, leaving behind at best mechanisms for distributing debtors' assets without relieving debtors themselves, and at worst nothing at all. Their mere existence, however, marked a change in popular attitudes toward insolvency. So, too, did the arguments against imprisonment for debt and for outright bankruptcy discharges that began to appear in print. Writers and aphorists—notably Benjamin Franklin in his famous Poor Richard's Almanack (1732–1757)—continued to warn against the dangers of debt in moral terms, but their target now was consumer debt, not commercial debt. The redefinition of debt from moral failure to economic risk applied principally to debtors who were themselves entrepreneurs in the changing economy. Critics of debt reserved their strongest opprobrium for the purchasers rather than the purveyors of consumer goods, even though both acquired the items on credit. Thus, when Americans began to question imprisonment for debt and to promote bankruptcy legislation, their animating concern was the plight of people who trafficked in credit rather than those who merely purchased on it.

The Revolution accelerated these changes. Although the war created economic opportunity, it also disrupted foreign trade, which was the linchpin of the entire economy. Peace did not undo the disruption, as the American economy contracted more or less steadily throughout the 1780s. British merchants flooded the American market with higherquality, lower-priced goods than those produced locally, and pressed commercial credit on coastal import merchants to enable them to feed the pent-up demand for consumer items. The tentacles of credit followed the goods from importers to wholesalers to retailers to consumers, from the ports to the back-country. Exports fell, imports grew, income and wealth declined. Spreading business collapses deepened the understanding of failure as the downside of entrepreneurial risk and spurred mercantile calls for bankruptcy laws.

Alongside the growing volume of private debts loomed the massive public debt. The Revolution was fought on credit in the form of direct loans and of paper currency and scrip issued by the Continental Congress and the state governments. These emissions comprised a system of "currency finance" in which Congress and the individual states issued bills of credit and loan certificates to purchase supplies and pay soldiers on the promise to pay interest or to redeem them in the future in specie or, more commonly, by accepting them in payment of tax obligations. The huge emissions of new currency required to sustain the war effort precipitated a sharp decline in the value of the currency in circulation. Depreciation was aggravated by inflation as large-scale government purchases drove prices upward, prompting Congress to print even more currency. By the end of the war, Congress had issued some $200 million in continental currency, which had fallen in value from near par with specie to considerably less than one hundredth of the value of specie. The states had emitted a similar amount. In addition, Congress had sold about $60 million to $70 million in loan certificates to investors and borrowed perhaps $12 million from European sources.

bankruptcy and other legislation

The tightening coil of indebtedness in the 1780s, further aggravated by the aggressive efforts of British creditors to collect prewar debts, generated different responses. Pennsylvania enacted a bankruptcy law for commercial debtors in 1785. New York enacted a dizzying succession of short-lived insolvency and bankruptcy statutes. Massachusetts erupted in rebellion when large Boston merchants and their allies in the legislature repudiated the paper money schemes that had financed the war and pursued monetary policies that benefited the merchants in international markets. Alone among the new states, Massachusetts required that all taxes and private debts be paid in specie. The demand of coastal merchants for specie to satisfy their foreign creditors echoed across the state as debt collection suits flooded the courts and imprisoned debtors crammed the jails. Particularly hard hit were the farmers of Worcester and Hampshire Counties, who could not opt out of the credit economy. These debtors were at the end of the chain of credit that ran from British merchants to Boston wholesalers to inland retailers and other commercial intermediaries. Desperate, they petitioned the legislature in Boston for paper money, tender acts, stay laws, and tax relief. When rebuffed, they closed the courts and took up arms in the short-lived Shays's Rebellion, easily the most traumatic event of the Confederation period.

The rise of speculation as the investment of choice in the 1790s fundamentally transformed indebtedness. Whether they dealt in bank stock, government securities, or land, speculators stood at the center of a financial vortex. Their competition for capital drove up the interest rates they had to offer to investors, which in turn attracted investments from ever-widening circles, both demographically and geographically. When they failed, the effects of their failure rippled outward, often engulfing those who had loaned them money. The two financial crises of the decade were triggered by the collapse of speculation schemes—the bursting of William Duer's speculations in bank stock and government securities in 1792 and the failure of large land ventures in 1797, many of which involved Robert Morris. The resulting economic distress far surpassed any that had occurred before. For the first time, numerous prominent men found themselves imprisoned for their debts or fugitives from their creditors. Their presence in the pool of insolvent debtors confounded the normal expectations of social and economic status and altered the political dimensions of debtors' relief.

Congress eventually responded with the controversial, short-lived Bankruptcy Act of 1800: "Controversial" because it enabled debtors to escape debts they could not repay and granted that boon only to commercial debtors whose success had allowed them to amass debts that were beyond the means of less prosperous debtors. "Short-lived" because its extension of federal authority and its elevation of commerce over agriculture made it too ideologically charged to survive the Jeffersonian revolution. Congress repealed the law in 1803, eighteen months before it would have expired on its own, amid vague claims of abuse and fraud that were never verified. Nevertheless, the act demonstrated that Cotton Mather's early perception that commercial debt was different from ordinary debt had ripened into a national statement of the "principle" that release from debts was a boon reserved for capitalist entrepreneurs, while simpler debtors should, by implication, remember the sanctity of their obligations.

For nearly a century after the Act of 1800, whatever relief was available to debtors in the long lacunae between federal enactments was a matter of state law. Even that relief was uncertain. In 1814, amid widespread business failures and other economic dislocations caused by Thomas Jefferson's embargo, foreign depredations on American shipping, and the War of 1812, Justice Bushrod Washington of the Supreme Court of the United States, sitting as circuit judge, cast all state bankruptcy laws into doubt by declaring a Pennsylvania bankruptcy statute unconstitutional because it discharged debts incurred prior to its enactment and because Congress had exclusive power to legislate in the bankruptcy field. The Supreme Court itself barely clarified matters five years later in Sturges v. Crowninshield, when it declared a New York relief law unconstitutional because it discharged prior debts but left uncertain the constitutionality of state laws that applied only to subsequent debts. As a result, debtors and creditor alike faced the Panic of 1819 and the economic depression that followed with little to rely on when failure loomed.

See alsoBankruptcy Law; Currency and Coinage; Economic Development; Revolution: Impact on the Economy; Shays's Rebellion; Taxation, Public Finance, and Public Debt .


Balleisen, Edward J. Navigating Failure: Bankruptcy and Commercial Society in Antebellum America. Chapel Hill: University of North Carolina Press, 2001.

Coleman, Peter J. Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607–1900. Madison: State Historical Society of Wisconsin, 1974.

Mann, Bruce H. Republic of Debtors: Bankruptcy in the Age of American Independence. Cambridge, Mass.: Harvard University Press, 2002.

Warren, Charles. Bankruptcy in United States History. Cambridge, Mass.: Harvard University Press, 1935.

Bruce H. Mann