Monday, January 30, 2006

A lesson from the past

Early Debtors Faced Jail at Own ExpenseUntil All Was Repaid
January 30, 2006
Cynthia Crossen - The Wall Street Journal Online

One piece of baggage America's first settlers carried with them from England was the belief that not repaying one's debts was a moral failure. As in England, the colonists' penalty for such wickedness was often prison.

The theory behind jailing debtors was that the threat of incarceration might persuade them to reveal hidden assets. Or their families might take pity and pay their ransom. But if the debtor was truly penniless, he could be sentenced to what amounted to life in prison. Unlike murderers, rapists and thieves, the debtors were also responsible for paying their own upkeep, thus putting them even further into debt.

As a 16th-century English judge declared, "If a debtor can't feed and clothe himself, let him die, in the name of God, if he will and impute the cause of it to his own fault, for his presumption and ill behavior brought him to that imprisonment."

Two centuries later in New Hampshire, an aged Revolutionary War veteran remained in prison for almost four years because he couldn't pay his debt and the bill for his imprisonment. During that time, his original $8 liability grew to almost $300.

And if a debtor had dependents, wrote Peter Coleman in his 1974 book "Debtors and Creditors in America," jailing him "threw the burden of caring for them on friends, charity or the public."
But the Old World attitude toward debt as a breeding ground for extravagance and sin proved difficult to sustain in the New World, where cash was in short supply and economic growth would have been stunted without credit. Furthermore, imprisoning healthy workers deprived the labor force of badly needed hands. So some colonies allowed debtors -- without their consent -- to be bound in service to their creditors for as long as seven years.

This had its own unintended consequences: Some Northern merchants kept their workers on the fishing grounds off Newfoundland by plying them with rum and then declaring them defaulting debtors when they couldn't pay their liquor bill, Mr. Coleman wrote.

The colonies gradually developed more forgiving laws on debt, recognizing that owing money could be the result of bad luck rather than evidence of fraud or indolence. "Crops fail, prices fall, ships sink, warehouses burn, owners die, partners steal, pirates pillage, wars ravage, and people simply make mistakes," wrote Bruce Mann in his 2002 book "Republic of Debtors." "Failure was the down side of entrepreneurial risk. This made failure the potential common fate of all merchants."

Colonial lawmakers began taking a more charitable view toward debtors, but they were likelier to excuse a rich defaulter than a poor one. In Connecticut a legal commentator argued that rich people who couldn't pay their debts shouldn't be forced into servitude, the way poor people were, because "where a man has lived in affluence and by some unforeseen misfortune and unexpected accident is reduced to poverty, it would be cruel to aggravate his wretchedness by subjecting him to servitude."

Indeed, when some large speculative financial schemes collapsed after the Revolutionary War, many wealthy men were suddenly bankrupt. One of them, Robert Morris, who had signed the Declaration of Independence and provided critical financing for the war, lost his fortune speculating on land. Sentenced to debtors' prison in Philadelphia in 1798, Morris rented the best room in the jail and outfitted it with a settee, writing desks, a bed, a trunk of clothes and other comforts of home.

However lavishly they could outfit their prison cells, though, rich and poor faced the same dim future. There was no way an insolvent could get a fresh start -- the "holy grail of debt relief," as Mr. Mann put it. In prison or out, debtors were expected to repay every penny they owed their creditors, even if it took them the rest of their lives.

Although the Constitution gave Congress the power to pass "uniform laws on the subject of bankruptcies," Congress first began seriously debating bankruptcy laws in 1797. Northern federalists believed a uniform bankruptcy law would encourage economic growth because honest merchants who had suffered from unforeseeable misfortunes could "begin the world anew." Jeffersonian Republicans feared the increased power of federal courts. They also worried that because people could be thrown into bankruptcy involuntarily, farmers would lose their property to impatient creditors, whose eagerness to sell would result in unfairly low prices.
Congress passed a bankruptcy law in 1800 but then repealed it three years later. Not until 1831 did New York abolish prison for most debtors; Pennsylvania kept its debtors' prisons open until 1842.

William Keteltas, a lawyer who had been sent to debtors' prison in New York in 1800, published 25 issues of a jailhouse newspaper called "Forlorn Hope." "What can the relentless creditors of many who have died under the infliction of their torture expect from the throne of grace," a letter writer to the newspaper asked, "when they pray with the words, 'Forgive us our debts as we forgive our debtors'?"


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