Republic of Debtors: Bankruptcy in the Age of American Independence

Published by EH.NET (February 2004)

Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence. Cambridge, MA: Harvard University Press, 2002. viii + 344 pp. $29.95 (cloth), ISBN: 0-674-00902-9.

Reviewed for EH.NET by David T. Flynn, Department of Economics, University of North Dakota.

In Republic of Debtors, Bruce H. Mann examines the historical and economic circumstances leading to and surrounding the Bankruptcy Act of 1800. A professor of History and Law at the University of Pennsylvania, Mann constructs a detailed argument about the evolution of social thought on debt and the changing legal climate in the face of an economy increasing in complexity. Using correspondence and legislative records, Mann provides a first-hand look at the changing opinions of debtor-creditor relations, the appropriate punishments for insolvency, and the obstacles to legislative remedies.

At the beginning of the eighteenth century debt was equated with sin and the inability to pay one’s creditors was a moral failing. Over time commercial debt came to be viewed as a necessity. Economic growth and development expanded entrepreneurial prospects particularly after the French and Indian War; but increased opportunity also meant greater risks. The widening geographic circles of trade necessitated larger credit networks with expanding chains of credit. However, debt for the purpose of consumption remained an ethical lapse.

The larger distance prevented the creditor from effective monitoring of the debtor leading to societal adoption of a penalty approach to the enforcement of debt payment, the debtors’ prison. The accounts of the debtors’ prison are the most fascinating portions of this book. Confinement in the debtors’ prison acted as a guarantee of appearance in court. However, there were two ways to leave prison, by the debtor offering assets equal in value to the debt as security or finding someone to post bail and effectively act as a guarantor for the debt. Confinement to prison did not increase the chances of repayment for creditors. In many cases they were decreased due to the debtors’ inability to work.

Debtors unable to offer their own security or find another willing to do so waited in prison. Amazingly, the conditions in debtors’ prison were, in many cases, worse than those of regular prison. The state fed and clothed felons and criminals but not debtors. At times this presented perverse incentives to those with little chance of release from debtors’ prison, so they committed other crimes to move into the regular prison. Debtors did not share suffering equally in their prison. Wealthy debtors sent to prison to pay still had assets to draw upon and obtained private accommodations and even redecorated with some of the comforts of home. In some instances debtors even attempted to recapture a portion of the civility of society outside the prison walls, as well as their status within it, by creating a constitutional government. In the late 1790s, the debtors in the New York jail formed such a government complete with a legal structure, judges and other officers.

Both external groups and debtors within the prison attempted to improve conditions either through direct aid or moral suasion. Benevolent and charitable societies attempted to aid those in debtors’ prison through aid in the form of clothes and food as well as by calling the deplorable conditions in the prison to the attention of the general public. Some debtors also sponsored newspapers written and printed from the debtors’ prison in an attempt to raise the public profile of the persecution of debtors. The writing and imagery in these papers would equate the situation of the debtor with slavery, a representation that would resonate with many in the North but fail to become popular in the South. As criminal codes underwent revision in the 1790s prison terms replaced corporal forms of punishment for criminals but offered no modification of the indeterminate sentence of a debtor, strengthening the parallels drawn between debtors and slaves.

There were some private and public relief measures for debtors prior to the Bankruptcy Act of 1800. Creditors could grant letters of license allowing debtors temporary freedom from actions by creditors, hoping that the debtors would be able to recover their financial status and meet their obligations. Private compositions required the debtor to turn over all their assets, usually less a few exempted items such as bedding, for distribution among creditors. Some debtors declined to use insolvency laws to free themselves from debtors’ prison because of the requirement that they give up all but a small amount of exempt property. By forfeiting all their assets, they feared they would be unable to recover their former position and status in society.

Some debtors had the ability to leave the immediate confines of the prison to beg, possibly work, or maybe even find a way to pay off creditors. At other times legislatures enacted temporary bankruptcy laws to provide relief to debtors, such as the colonies of Massachusetts, Rhode Island and New York in the late 1750s and the states of Pennsylvania and New York in the 1780s. Tools such as the poor debtor’s oath and indentured servitude were used to remove smaller debtors from prison but were not available to the developing class of commercial debtors. These individuals amassed enormous fortunes and consequently suffered enormous losses. In some situations these speculators, such as William Duer and Robert Morris, caused financial panics. These debtors became the driving force behind a federal bankruptcy law, while also dooming that legislation to failure.

Bankruptcy relief was not traditionally available to all, only to commercial occupations such as merchants. The chief target of bankruptcy relief was the merchant because the risks they faced in business could not be avoided. However, as commerce expanded in the U.S. and the networks of credit became larger, the ability to distinguish between professional merchants and traders and others less involved in trade diminished, allowing many more to take advantage of bankruptcy laws than conceived by legislators. The intention of the act was for bankruptcy proceedings to be initiated by creditors, but many debtors found ways around this restriction. By working cooperatively with creditors that were related or sympathetic, the debtor could effectively initiate the proceedings. While the frequency of such cases cannot be determined, Mann offers persuasive evidence that many debtors availed themselves of this loophole.

Congress repealed the bankruptcy act in 1803 before its scheduled expiration. Many of the objections to the bankruptcy act were anti-Federalist in nature focusing on the expansion of the judiciary to hear bankruptcy cases, for example. Other arguments included insufficient creditor control of the bankruptcy process and that creditors did not receive sufficient compensation from their bankrupt debtors. The act also failed due to its focus on commercial debtors, primarily merchants and speculators, a favoritism that smacked of aristocratic privilege and could not survive the democratic principles of the new century and the new republic.

The regional variation in attitudes towards credit did not unify people behind bankruptcy law, before or after the act of 1800. Credit was a matter of etiquette and honor in some southern states while it was simply a necessary part of business in many port cities. Plantation owners and farmers wanted land to be exempt from forfeiture in bankruptcy resolutions but others found this inconsistent with the idea of the liquidation of the debtor’s assets in exchange for an extinguishing of outstanding claims.

Further problems included the lack of resolution on the issue of debt as a moral obligation and economic risk, despite the modified rhetoric at the end of the eighteenth century. One of Mann’s principle examples, John Pintard, expressed his commitment to repaying all his creditors in full despite receiving a bankruptcy discharge. Whether a genuine response or motivated by legal convenience, his expression still shows the dichotomy of debt as a moral and economic issue.

Republic of Debtors contains much implicit economic theory in the text that could be made explicit, particularly relating to monitoring costs and penalty costs as they relate to the method of insolvency resolution and the efficiency of the financial system in America. Despite this, Mann’s work is an impressively thorough account that furthers our understanding of the issues surrounding debt and bankruptcy in the early development of the United States.

David Flynn is assistant professor of economics at the University of North Dakota. He is author of an article under review on the duration of book credit in colonial America. Currently, he is researching the issues of default and interest for merchant account book credit.