My first posting was about Robert Morris and I noted that after the Revolution he became financially over extended and was sent to debtor prison where he remained until the Bankruptcy Law of 1800 was passed. I decided to research the subject of debtor prisons and discovered that many other American notables suffered the same fate. The lengthy list includes James Wilson (Justice of the Supreme Court), and Henry “Lighthorse Harry” Lee who was a hero of the Revolutionary War and father of General Robert E. Lee. These were giants in our fight for independence and in the establishment of our government.
Under English law debtors were dealt with very harshly. Property and goods could be confiscated to pay off a debt. Debtors could be branded, mutilated, or imprisoned until they paid. Imprisoned debtors also had to pay for their food and lodging. Imprisonment was based on the assumption that family members would eventually pay the debt to get their loved-one released from debtor prison. The English debt laws were generally adopted by the American Colonies and unfortunately continued during our early days as a nation.
Obviously, most families did not have the ability to pay the debts so many debtors languished in prison indefinitely. Debtor prisons were usually segregated by status with the elite serving in comfort while the lower classes endured squalor, filth, and disease. These prisoners were also often shackled, and lacked heat, clean water, and food. Many were literally dying of debt.
Debtors were often jailed for trivial sums. Of 1,162 debtors in 1787 New York City, 716 owed less than one pound. A third of inmates in Philadelphia in 1817 owed less than $5.00, and debtors in prison outnumbered violent criminals by 5:1. In Boston, 15% of imprisoned debtors were women. In Pennsylvania in 1785 debtors were often publicly flogged. They could also have an ear nailed to a post or cut off. Debtors could be branded.
Much has been written about unpaid debts and punishment, including works by Charles Dickens. He was inspired to write classic novels based on his father who had been imprisoned in England’s infamous Marshalsea Prison in the early 1820’s. Shakespeare made references to the immorality and misfortunes of debt in his writings, including “King Lear” and “Hamlet.”
The earliest record of a debtor prison in America is in 1678 in Salem, Massachusetts. It has been estimated that two out of three Europeans that came to America in the seventeenth and eighteenth centuries were debtors upon arrival. Many had to serve as Indentured Servants to pay for their transportation to America.
Most recognized that it was virtually impossible for people to pay their debts if they were in prison. All classes wanted out of this system of punishment of debtors, especially since the new American Republic’s economy was rapidly increasing the use of credit to fuel development. Despite what many believe, cash and barter were fairly rare in early American commerce because most wealth was in land and other physical property. Also, much of the population lived on the frontier and the frontier was rapidly moving west. Credit often was the only way to obtain a homestead stake. This rapidly expanding nation could not afford to have needed manpower and risk takers locked up in debtor prisons.
Originally, the colonies had handled debt punishment and bankruptcy individually, so the laws had varied considerably. After the Revolution states began to restrict the use of imprisonment for debt and New York abolished debtor prisons in 1831. The Federal Government followed suit in 1833 when they abolished federal imprisonment for debt. The remaining states finally followed the lead and by 1849 all had abolished debtor prisons.
The US Constitution gave the Federal Government the power to regulate bankruptcy and their first attempt was the Bankruptcy Act of 1800. This act, like the early bankruptcy laws in England, emphasized creditor relief and did not allow debtors to file for relief voluntarily. There was great public dissatisfaction with this law, and it was repealed three years later.
For the next 40 years Congress debated who bankruptcy laws should protect (i.e., debtor or creditor) and they struggled to pass uniform federal bankruptcy legislation. The passage of the Bankruptcy Act of 1841 gave debtors greater protections and for the first time allowed them the option of voluntarily seeking bankruptcy relief. However, this act only lasted eighteen months. A third bankruptcy act passed in 1867 was repealed in 1878.
Finally, the Bankruptcy Act of 1898 endured for eighty years, thanks in part to many amendments. It became the basis for today’s bankruptcy laws. The 1898 act established bankruptcy courts and provided for bankruptcy trustees. Congress replaced this act with the Bankruptcy Reform Act of 1978 which, along with major amendments in 1984, 1986, and 1994, is now known as the Bankruptcy Code.
It took Congress over 200 years to produce today’s bankruptcy code, which still is not perfect by a long shot. My first reaction was that Congress was just lazy and afraid to take a stand, but I have come to realize that is not correct in this case. I now believe the time and false starts actually reflect the complexity of the subject. Bankruptcy laws must consider practical issues, public acceptance, moral questions on debt, and effect on the economy. These are dynamic considerations so the current laws will undoubtedly be adjusted in the future to accommodate changing public beliefs and needs.
The important point is that the barbaric punishments and the squalid debtor prisons of our early days have been eliminated. The current bankruptcy code is a very important part of laws that assist individuals and businesses adjust to changing conditions without a major impact on the economy.