Should society allow some of its members to settle their financial obligations using legal proceedings rather than legal tender? Last year's impassioned debate over bankruptcy legislation failed to come up with a suitable answer, and this year's debate has only just begun. But no matter what twists and turns the legislative process may take, it's unlikely that we'll return to a solution from the early days of the republic: debtors' prison.
Among other things, we no longer have the appropriate facilities. For instance, the New Gaol, formerly located in City Hall Park in downtown Manhattan, was demolished 100 years ago. During its heyday, the prison housed prominent merchants and other stalwarts of the New York financial world who had the community standing to borrow large sums of money and the ill fortune to have lost it all.
Of course, small-time deadbeats also visited the Gaol, but debtors' prison had a disparate impact on a specific socio-economic group-the rich. Anyone having unpaid debts in excess of $1,000 had to stay put until they could figure out how to mollify their creditors. Those lucky duckies at the other end of the income ladder could get out in thirty days-provided they didn't starve first. (Back then, inmates had to provide for themselves.)
University of Pennsylvania law and history professor Bruce H. Mann describes the situation faced by eighteenth-century financial failures in Republic of Debtors: Bankruptcy in the Age of American Independence (Harvard University Press, 2002). In doing so, he offers valuable insights about credit economies, bankruptcy law, and the implications of debt in a free society that still resonate today.
In early America, creditors could sue for a "writ of attachment" for amounts owed them. Once served, the debtor had to come up with the money or else have his own person "attached" as collateral. Knowing this, some debtors took flight to the western territories. Others, hoping to engineer a quick turnaround, took temporary refuge in their own homes behind locked doors and windows, legally protected from service of process.
But a locked wooden door can't keep out an angry mob. William Duer, a.k.a. the "Prince of Speculators," instigated the Panic of 1792 by attempting to buy the Bank of New York using borrowed funds. Duer's unschooled investors were promised up to 60 percent annual returns on his promissory notes, which he justified by pointing to the rising stock prices. The ensuing collapse, spectacular even by today's standards, laid low a wide swath of Duer's acquaintances, employees and investors. With that in mind, Duer speculated that the safest place for him was inside of the New Gaol.
So how did Duer and his fellow prisoners while away their incarceration? On April 15th, 1797, this group of well-bred debtors "recreated the constitutional order they had known before their imprisonment," writes Mann. "They had, to be sure, lost their independence as well as their wealth, but their fall from financial grace did not mean that they had abandoned civility, order, or legality."
The inmates instituted their own rule of law. They formed a constitution and elected from their number judges, wardens, an attorney general and a sheriff. A deliberative body issued communal sanctions and enforced its order upon those who freely chose to live under the rule of law. Procedural safeguards protected against judicial tyranny, and strict adherence to due process remained in force.
Let us henceforth remember their example and commemorate the Republic of Debtors on the otherwise unremarkable date of April 15th. Though we may lose our liberty, our property and our livelihoods, we must never relinquish our cherished institutions of peace and justice stemming from the consent of the governed. May we always strive to uphold the rule of law amongst ourselves and share its benefits with all of the willing.
We owe it to ourselves.
Land of Promise
(Excerpt from Republic of Debtors)
"The homiletic injunction 'neither a borrower nor a lender be' expresses an ideal that has never described reality in commercial societies. More to the point, it never could. Unless commerce consists of simultaneous exchanges of goods or services and the payment for them-that is, unless buyers immediately pay sellers in cash or in kind-people must conduct business on promises."