Bankruptcy, Panics, and Bail-Outs

bankruptcy

bankruptcy

My Country – Bankruptcy Laws

Growing up in Chicago, one voice speaks above all else on bankruptcy: Peter Francis Geraci. Not a summer day went by without his dulcet tones.

On April 4, 1800, our first Bankruptcy Act was passed. The Framers had put into Article I that Congress could “…establish…uniform Laws on the subject of Bankruptcies throughout the United States.”

Justice Douglas writes a short story regarding the purpose of this first bankrupcty law.

The panic of 1792 had been followed by the crash of 1797 as a result of land speculation. Robert Morris, who financed the Revolution owed $12 million and was in a debtors’ prison. A Justice of the Supreme Court, James Wilson, moved from Pennsylvania to Norht Carolina to avoid a like fate. The debtor interests got hte law passed. It covered traders, not farmers or manufacturers. It was used by Robert Morris to get out of jail and it relieved several hundred other speculators.

In other words, it was the first “bail-out.” The Bankruptcy Act of 1800 became known as very creditor oriented. No provisions allowed for individuals to file on their own. However, due to many complaints of corruption and favoritism, the law was repealed just three years later.

The Bankruptcy Act of 1841

Another panic, this time in 1837, set Congress up to get back to work. The Bankruptcy Act of 1841 was in force for only one year but 33,000 debtors took advantage of it. For the first time, the law permitted debtors to file their own voluntary bankruptcy without a creditor to initiate it.  In addition, any individual could be a debtor, not just a merchant as under the 1800 law. Unfortunately, however, creditors viewed the 1841 law as providing few payments to creditors and discharging too much debt for too many debtors.

The Bankruptcy Act of 1867

Although another panic (1857) initiated the need for new laws, the Civil War put that on hold. But after the war, northern creditors of southern debtors needed a new law to collect their debts. This law was the first to allow involuntary bankruptcies for any individual, not just merchants. Additionally, the first bankruptcy judges appeared due to this law. However, the law came into “considerable disrepute” as a result of poor administration and fraudulent use. And again, the law was repealed in 1878

… 1898 Act

For the first time, a bankruptcy law became permanent. Previously, as you can tell, each panic and depression led to an emergency bankruptcy law. Congress repealed the law when the economy improved. However, now the law applied to nontraders and traders. Debtors and creditors could invoke bankruptcy. The law provided for creditor participation and for discharge of debt.

Conclusion

Justice Douglas concludes with a quote from Henry Clay.

I maintain that the public right of the State in all the faculties of its members, moral and physical, is paramount to any supposed rights which appertain to a private creditor.

Ironically, we have lived through another period of panic. Although bankruptcy laws did not shift dramatically, bailouts and debtors received benefits. Whether mortgages, big banks, or insurance companies, the government stepped up to ensure that debtors had an escape. The state needs to assist debtors when it can. People fall on hard times and the only power that exists to help them currently is the state. But it does not take much to look into the face of “pulling ourselves up from the bootstrap.”

Both sides of the political aisle ran against helping out big banks. They state they will help the little guy or at least their guy. But fundamentally, when any of our institutions fail for whatever reason, we need to stand up together to support them. For every rich banker working at a big bank, there is a teller and a checking account.

 

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