Debtors, Creditors, and Bankruptcy

State legislators also had to balance conflicting interests in another controversial area: debtor-creditor relations. In a cash-scarce economy, credit was a necessity for economic expansion, but the boom-and-bust cycles of the years before the Civil War inevitably produced insolvent debtors. What to do with them was politically divisive. Democratic legislators pushed for rules easing the burden on debtors; their Whig counterparts usually wanted creditors protected. States gradually adopted the position that insolvency was not a sin, as had been the colonial understanding, but the inevitable outcome of an impersonal market economy in which there were winners and losers.

Consistency was hardly the humbug of state debtor-creditor laws. Senator Robert Y. Hayne of South Carolina abserved in 1826 that each state had a distinctive system, "each differing from all the rest in almost every provision intended to give security to the creditor, or relief to the debtor--differing in every thing which touches the rights and the remedies of one, or the duties and liabilities of the other." ²⁹ Because each state defined creditor rights in its own way, "anyone engaged in far-ranging ventures, whether maritime trade, back-country commerce, or buying and selling across state lines, had to conduct his affairs with these differences in mind." ³⁰ State legislatures, which acted in other areas to bring order to business dealings, added uncertainty in the national marketplace through their debtor-creditor laws. This condition was not relieved until Congress in 1898 passed meaningful national bankruptcy legislation.

Bankruptcy is a proceeding in which government through a court takes possession of the property of a debtor so that it may be distributed among creditors in some equitable manner. It prevents creditors from exercising undue influence over a debtor, makes certain that there is fairness among creditors, and discharges the debtor from all liabilities, providing a fresh start. Only a few colonies provided for the outright discharge of debts, and even those that did seldom extended it to all freeholders.

In the English law, the creditor's ultimate weapon was to imprison the defaulting debtor until the obligation had been paid. The practice was widely accepted in the colonies, and every state continued it after the Revolution. The regimen was meant to be harsh. The words of Sir Robert H. Hyde, a mid-seventeenth-century English jurist, were still applicable at the end of the eighteenth century. "If a man be taken . . . in prison for debt," Hyde wrote, "he must live on his own, or on the charity of others; and if no man will relieve him, let him die in the name of God, says the law; and so say I."³¹

Imprisonment for debt indeed rested on some meaningful economic assumptions that were best suited to low-level economic activity. First, it was based on an antidevelopmental premise that discouraged risk taking. The rule was "borrower beware"; if a person borrowed recklessly, then he would be punished severely. Second, imprisonment for debt in a predominately agrarian economy, in which land was the most important resource, made some sense. Land, it must be remembered, could remain productive even while a debtor was imprisoned. If, however, he entered into bankruptcy he then lost his land and his productive capacity. Bankruptcy was a more desirable way of dealing with insolvent debtors in a maturing market economy where maintenance of the credit system and the return of persons to nonagricultural production was considered desirable.

Progress toward abolishing the practice of imprisoning debtors was slowed by the

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requirements of a dynamic marketplace, by a lingering sense that indebtedness--if not morally wrong--was certainly suspect, and by humanitarianism. The ethical proposition that honest people did not default died hard. As late as the Panic of 1857, Rhode Island, a state with an admittedly harsh posture toward debtors, imprisoned 607 individuals for insolvency. In many states, including Rhode Island, complete abolition of imprisonment for debt did not come until the twentieth century; however, practices changed more quickly than statutes, as the dwindling list of imprisoned debtors suggests.

Imprisonment for debt lost its ethical underpinnings at the same time that impersonal market forces began to shape the economy. State legislatures responded to the bursts of insolvency brought on by the boom-and-bust cycles in the economy with bankruptcy, stay, and mortgage moratorium laws.

Responsibility for bankruptcy legislation fell to the states by federal default. During the years before the Civil War, Congress passed two major acts: one in 1800 and the other in 1841. Both survived briefly, and the first, which applied only to tradespersons rather than the citizenry as a whole, was repealed because it was "partial, immoral . . . impolitic . . . and anti-republican." ³² The 1841 act, which followed on the heels of the Panic of 1837, was more important because it reflected the new attitude of trying to be fair to both debtors and creditors, while restoring the health of the credit system without which further economic expansion was impossible. Debtors and creditors objected to the act in operation, and the quickly improving economy hastened its repeal in 1846.

The states were free to act without fear of congressional preemption. The result was confusion. Some states passed stay laws, which were particularly popular with farmers. These laws suspended debt collection until such time as business conditions permitted the resumption of ordinary rules of debtor-creditor relations. Mortgage moratorium acts worked in the same way. Several states also adopted bankruptcy acts, and some of these passed during the early national period were retrospective, applying to debts contracted before the act had gone into effect. The U.S. Supreme Court in 1819 shut the door on this practice as a violation of the contract clause of the Constitution. Even prospective state bankruptcy acts, which the Supreme Court did hold constitutional, raised a political clamor, because in the minds of many creditors they represented an attempt to redistribute the risks of previous private bargains.

The long-term trend was clear. With the growth of corporations and the rise of the banking system, the entire scheme of debtor-creditor relations became more impersonal and accountable. Loans were made not on the basis of personal assessment, but on a measure of the borrower's record and future prospects for profit. The growing geographic scope of business activity further depersonalized credit relations, and the absence of a federal bankruptcy statute added an element of uncertainty to national creditor-debtor relations. As in other areas of promotional and regulatory action, state legislation treating debtor-creditor relations generated a political reaction that resulted in constitutional restrictions that limited legislative power.

Date: 2015-01-29; view: 738