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The History of Debt in America - 1800-1849

The period of 1800 to 1849 was one with two financial panics, pleas for bankruptcy laws and continued imprisonment for debt. It was stated that in the 1800s only 3 in 100 businessmen achieved financial independence. A handbill of 1812 declared bankrupts “politically dead,’ ‘no longer recognized as a citizen of the community…doomed to slavery, misery, and bondage for life.” The personal toll debt played on Americans was highlighted in 1829 when failed Bostonians reportedly “preferred death, by their own hands, to a life of misery and disgrace.” And again when Ralph Waldo Emerson said of the panic of 1837 “the land stinks of suicide.”

In 1800 nineteen of twenty Americans lived on farms and economic exchange operated as it had for centuries with virtually no money passing hands for weeks or months at a time. Exchange was done with commodities, tobacco, corn, and furs being among the most popular.

The Bankruptcy Act of 1800
Even though Bankruptcy was written into the U.S. Constitution a debate over the morality of it kept a comprehensive bill off the books until 1800. Even when the proponents of bankruptcy mustered enough votes to get a bill passed they couldn’t keep it on the books for long. The first national bankruptcy bill was passed in 1800 but it had significant restrictions.

The bankruptcy law of 1800 made the proceedings involuntary; it could only be initiated by a creditor. And it was could not be declared unless the debtor engaged in certain commercial occupations, amassed debts in excess of a large amount and committed statutorily defined acts of bankruptcy.

After a large number of debtors actually had their debts cleared the Republican dominated Congress repealed the bankruptcy act in 1803 eighteen months before it would have expired on its own. The bankruptcy bill of 1841 fared no better lasting barely a year.

Pawnbrokers were first legally recognized by New York City in the 1802 charter and were first regulated by city ordinance in 1812. While “usury” was considered to be any rate of interest above 6 percent a year, interest on pawn loans could reach as high as 300 percent.

During this time poverty remained a fact of life for most working-class families. Most lived on the knife-edge of poverty where any financial disturbance whether brought on by illness, unemployment, or injury sent families on a desperate search for money. For many borrowing, from any possible source, was the only way to survive. This generally involved a trip to the pawnbroker. A local journalist estimated that almost the entire population of the Bowery New York had at least one pawn ticket at all times.

The Panic of 1819
In the summer of 1818 the Second Bank of the United States called in loans and hard money, panic ensued. Banks throughout the country failed; mortgages were foreclosed, forcing people out of their homes and off their farms. Falling prices impaired agriculture and manufacturing, triggering widespread unemployment. Conditions were exacerbated by the influx of large quantities of foreign goods into the American market and the slumping cotton market in the South. A depression ebbed and swelled throughout the 1820s. The cry of the time was “Hard Times.”

The Panic of 1837
Before the Panic of 1837 people from all walks of life had been investing in schemes they knew nothing about. Workers who weren’t able to invest during the pre-panic boom times fell behind because wages didn’t keep up with rising prices and rents. Investors, as well as most state governments, preferred to hoard specie (gold and silver) and to pay off their debts with paper bank notes. President Jackson became alarmed by the growing influx of state bank notes being used to pay for public land purchases and, in 1836, ordered the Treasury to no longer accept paper notes as payment for such sales. Banks suspended specie payments and started to restrict credit and called in loans.

Soon many of the Tappan brothers' (Lewis Tappan was the founder of the first credit reporting agency) customers began defaulting on their payments. Soon the brothers were faced with more than $1,000,000 in debts. Their default helped spark the Panic of 1837 that led to thousands of business failures.

Unemployment soon touched every part of the nation and food riots occurred in a number of large cities. Construction companies were unable to meet their obligations, sparking the failure of railroad and canal projects, and bringing about the ruin of thousands of land speculators. During this time the number of commercial failures was unprecedented. Banks and some states defaulted on their debts. Prices fell by 20 percent. The impact of the depression lingered until 1843.

The Morality of Debt – The Businessman
In 1842 writer John N. Bellows advanced the idea that the creditor was not just doing the debtor a favor by selling now and allowing him to pay later because the creditor was as much interested to sell as the debtor was to buy and thus must bear his share of the risk inherent to a credit economy.

During this time the struggle to balance the early concepts of debt morality with the modern business practices was played out in state legislatures and publications throughout the country. They struggled with questions like: Were men always at fault for their failures? Did a man’s moral responsibility to pay his contracted debts persist even if the law let him off the hook?

The saying, “Nobody fails who ought not to fail,” was still held onto by many staunch advocates of a strict interpretation. This was especially applied to merchants. Moralists warned that the new title of “Business Man” (usually in two words) that came into the common usage in the 1830s, reduced men to mere creatures of ambition.

“Every man thinks himself qualified to be a merchant,” a U.S. Circuit Court judge remarked in 1839. “A man but says, ‘I will be a merchant,’ and he is a merchant. The creation of light was scarcely more instantaneous.” The ambition of the times led Alexis de Tocquerville to give a name to this emerging spirit: individualism.

The new business class had some tough learning to do. Even though they were free to succeed they were also free to fail. The fact that failure was intrinsic, not antithetical, to the culture of business was often a hard lesson to learn, but learn they did.

The Bankruptcy Act of 1841
The Bankruptcy Bill of 1841 still allowed for involuntary proceedings but unlike previous laws allowed the debtor to declare voluntary bankruptcy. It provided for an automatic discharge unless fifty percent of creditors in filed a written dissent. While allowing large numbers of debtors to gain financial relief the Act immediately became highly unpopular with creditors. It was repealed in 1843 after only thirteen months on the books.

Who was is Debt?
Thomas Dawes, a judge on the Massachusetts Supreme Judicial Court, declared bankruptcy in 1801.

Debtors Prison
Debtors in New York’s New Gaol debtors prison established a very sophisticated legal system to deal with fellow prisoners. Based on the relatively new U. S. legal system it included a constitution that required consent of the governed, a legal system that had well defined procedures, and prescribed punishments for offenders

In some state prisoners could gain release by taking the “Poor Debtor’s Oath,” swearing that no fraud had been committed. But first the debtor had to pass cross-examination.

Unlike criminals debtors had to supply their own clothing, food, and fuel. The tone of the imprisonment was set by a sixteenth century English judge who believed that if the debtor couldn’t provide food for himself he should rely on the charity of others or simple be allowed to starve to death.

Conditions in the debtor’s prisons were so harsh that relief organizations were formed to help the debtors. In New York the Humane Society distributed donated food and clothing to the prisoners.

In 1791 Pennsylvania Governor Thomas Mifflin inspected a prison and was struck by the painful differences in treatment between debtors and criminals. While debtors were without clothing and food criminals had their basic needs well cared for. He concluded that being a debtor seemed to be more offensive to society that being a vicious criminal. Although he urged legislation to provide for debtor’s basic needs none was passed into law.

Who Served Time in Debtors Prison?
The collapse of large-scale speculation schemes in the 1790s lead for the fist time to imprisonment of large numbers of “wealthy debtors.”

James Wilson associate justice of the United States Supreme Court was briefly jailed in debtors’ prison in 1796.

Thomas Rodney an officer in the Revolution, a member of the Constitutional Congress, and a judge of the Supreme Court of Delaware was in debtor’s prison for fourteen months in the early 1790s.

Revolutionary War figures William Duer and Robert Morris both went to debtors prison.

Richard Crowninshield was a successful merchant and ship owner with net assets of almost $200,000 in 1811 but a year later he was in debtors prison.

Standardized Debt Collection Laws
In 1846 Hunt’s Merchant Magazine proposed the total dissolution of creditor rights. It proposed attachment remedies be used instead so that lenders would only lend what they were sure they could recover and borrowers would only borrow what they could absolutely afford to pay back. In cases of error it suggested that the borrower write off the loss and the borrower be denied further credit. The later aspects of their proposal are to a large extent in effect today.

As the legal system for debt collection evolved and became more standardized the need for debtors’ prison lessened. More loans become secured and the system of garnishment allowed for easier collection of small debts. This led to the end of debtors prison just before 1850.

>>Next Page 1850 - 1899


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