- The Washington Times - Sunday, February 9, 2003

By Bruce H. Mann
Harvard University Press, $29.95, 344 pages

It was not easy being bankrupt in early America. In fact it was virtually impossible. People lost their money often enough. Sudden shifts in the market, bad investments, inflation, depreciation, speculation and loss of credit rendered many early Americans insolvent.
But bankruptcy was a privilege, albeit an unwelcome one, regulated by law. Though now an accepted part of business, it took the United States over 100 years to create a permanent bankruptcy law. But the issues and concerns of bankruptcy had been with Americans since the 18th century. In this gripping account of being in debt in the land of the free, Bruce Mann illuminates the origins of Americans' ambivalent relationship to business failure.
A professor of law and history at the University of Pennsylvania, Mr. Mann employs his considerable talents to bring to life a world where much that seems normal and logical to us now like a unified currency, or the fact that you cannot pay off a debt if you are stuck in jail was not. Mr. Mann's genius is to explain in clear and human terms the legal and economic intricacies by which early American creditors and debtors lived and died.
Dozens of stories of businessmen great and small fill "Republic of Debtors: Bankruptcy in the Age of American Independence," allowing us to understand the clash of market forces and legal culture on a very personal level. For example, the mysterious ins-and-outs of 18th-century debt collection appear in amusing anecdotes of once-wealthy men hiding from their creditors.
The personal and fiscal responsibilities of early Americans were fused in ways almost unimaginable to us now. In the first decades of independence, Americans still held onto traditional English ideas about the immorality of those who fell into debt. Ministers regularly equated debt with sin. The colonies continued centuries-old English practices of throwing debtors into jail until they figured out a way to pay off their creditors.
People thought that those who fell irrevocably into debt must have succumbed to vice: to luxury, decadence, corruption, or greed. This made some sense when it was poor folk or desperate entrepreneurs trying to squeeze money out of old-fashioned economies where one's credit depended more on one's personal reputation than one's fiscal responsibility.
But what about honest merchants who had a run of bad luck, or just made some bad investment decisions? It would take a revolution in cultural mentality to accept that insolvency could be the cause of simple misfortune (like losing their ship in a storm) or flaws in the structure of the economy rather than the moral failings of the suddenly penniless person.
Americans did not start to rethink the problem of debt until the Seven Years War (1754-1763), when the experience of wartime boom and postwar bust struck deeper into colonial society than ever before. But even then, solutions tended to be worked out on a colony-by-colony basis. Debtors could escape the law in one colony only to fall victim to it in another. Creditors holding bonds or certificates of payment in distant colonies were at a distinct disadvantage from those closer to the debtor. All of America suffered from the demands of British merchants to be paid in specie (gold and silver coins) only. Fears of falling into debt servitude contributed to political fears to fuel the revolution.
The American Revolution cast the problems of the American economy in a new light. Independence was now the manly ideal. But debt, increasingly in the form of speculative nvestment was more widespread than ever before. Wartime inflation, the depreciation of unstable paper money supplies, and widespread speculation (especially in land) caused financial crashes that ruined more people than ever before. When even the richest men in America, like William Duer and Robert Morris, men whose financial abilities had funded the war for independence, began to go broke, lawmakers realized they had a serious problem on their hands.
Duer died in debtor's prison in 1799, before the passage of the bankruptcy law that might have freed him. Morris would have preferred to stay in prison than be declared a bankrupt, but the new law (passed in 1800) defied him and he went free one of Americas first great bankrupts.
By the 1790s it was clear to many that the new economic realities did not fit the old moral structure. Debtors and creditors were often the same people. A man pushing a debtor to pay today could find himself in jail for debts of his own a year later. Mr. Mann delves into the prison culture of debtors, who believed so firmly in the values of the new republic that they published newsletters and drew up constitutions to govern themselves.
Yet the first national bankruptcy law was passed only after a fierce debate over both economic policy and the American character. Even then, the law lasted barely three years and was quietly repealed during first presidency of another great American debtor, Thomas Jefferson. It would take 40 years to pass another (similarly short-lived) bankruptcy law, and almost 100 to create a permanent one.
Why was there so much resistance to a simple bankruptcy law? After all, it regulated the relationship between debtors and creditors, offered a reasonable settlement for all involved, and gave debtors a new lease on life. As things stood, creditors were only paid on a first come first serve basis, if at all, debtors died in prison, and anxiety and mistrust percolated all the way through the expanding credit relationships necessitated by America's growing economy.
Americans opposed the bankruptcy law for the same reason they opposed a national bank. They feared (rightly) that it would only serve and protect the rich. Many people felt the political independence of the new republic depended upon the economic independence of its citizens.
Southerners especially were always hostile to the idea of bankruptcy, as it threatened their whole cultural and economic system. If all of a bankrupt man's assets, including his land, could be seized to pay off his creditors, then farmers risked losing all they had to great merchants and financiers. These wealthy men, in turn, might exploit the new law to avoid paying back the many who trusted them with their money. Making bankruptcy legitimate seemed to be absolving those who did not honor (in every sense of the word) their obligations.
Financiers like Robert Morris, who tended to live in the urban, mercantile north, did not feel insolvency was immoral. For them, it was all part of the risks inherent in participating in the market. But most Americans did feel there was something wrong about it and still do.
After all, it was about failure and dependence, the antithesis of everything the United States is supposed to be. Through this well-researched examination of when things did not work, Mr. Mann has done a wonderful job of showing us why reconciling individual virtue and economic performance has been, and remains, one of the great cultural and political issues of American society.

Evan Haefeli is assistant professor of History at Tufts University.

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