Bankruptcy in History

Navigating Failure: Bankruptcy and Commercial Society in Antebellum America

Edward J. Balleisen, 2001

Edward Balleisen is a legal and business historian at Duke University. In this (his first) book he focused on the 1841 Bankruptcy Law, “partly because it coincided with and emanated from powerful transformations in the scope and character of American capitalism.” Balleisen agreed with Naomi Lamoreaux that commercial activity was more universal and widespread than some of the Market Transition historians would grant, but conceded that “financial panics, like the ones in 1837 and 1839 that precipitated tens of thousands of commercial insolvencies” not only “unleashed an upsurge of political support for a comprehensive federal bankruptcy system,” but also helped push some members of the growing middle class away from an ethic of entrepreneurial risk-taking and self-reliance, toward a desire for financial security in salaried employment.

“To a great extent,” Balleisen said, “the relationship between failing antebellum proprietors and their creditors resembled a game of cat and mouse.” Since anyone could fail, maybe we could extend the group membership -- especially in light of the fact that only recently had a transition been made from an older system of credit between family members, neighbors, and friends, to an impersonal credit market. Naturally, “Debtors sought to hide their true circumstances from the holders of claims against them,...[and] creditors...did their best to pounce on whatever assets the debtors possessed.” This seemed especially apparent in the case of the rural merchants I was studying, who seemed to have credit relationships both within the family/community and outside it. It might be interesting to look at the way these relationships changed over time. These guys, after all, were creditors as well as debtors.

“In addition to resuscitating the entrepreneurial exertions of myriad antebellum bankrupts and fostering considerable social flux,” Balleisin said, “general releases from debt contributed to the mutability and dynamism of the nineteenth-century economy. Along with the culture of privately negotiated compromises, antebellum bankruptcy discharges increased the pool of entrepreneurs who actively sought to make their fortune by extending the reach of commercial exchange, inventing new products, or developing new marketing techniques.” In other words, the ability to get out from under a failed business encouraged people to experiment and overextend, to reach for the brass ring of personal enrichment because the price of failure had been reduced. Bankruptcy encouraged entrepreneurs who took risks, which means it penalized prudent, conservative, old-fashioned, and especially cash-based businessmen. It allowed a small group of unusually aggressive players to keep trying until they won, whether by learning from their failures or simply by finally getting lucky; while it pushed their wiser, more prudent competitors to the sidelines.  Balleisen didn’t dwell on this, but it’s the dark side of the “perpetual search for profitable innovation that constitutes a defining characteristic of modern capitalism.”

For some failed entrepreneurs, though, Balleisen said “encounters with insolvency led them away from business ownership altogether.” There was “a substantial class of bankrupts who either could not resume independent business careers [even as artisans] or chose not to accept the risks associated with doing so...Many of these individuals walked away from the scenes of ongoing financial wreckage, seeking a different and less hazardous means of securing a living...Their efforts link the experience of antebellum bankruptcy to the rise of a salaried urban middle class.” Of course, there had to be businesses for them to work in, though. So the ability of some entrepreneurs to continue until they succeeded created the employment opportunities these less hearty souls took advantage of.

The result, Balleisen said, was a “burgeoning class of clerks, bookkeepers, and agents [who] could not only take consolation in their enjoyment of relative economic stability but also lay claim to a version of republican independence--one in which the most fundamental ‘autonomy’ rested not on the responsibilities of self-employment, but on freedom from both the most severe forms of subservience and the degrading precariousness of irretrievable indebtedness.” Bankruptcy created a class of employers and a class of employees. “Despite the substantial contrast between these responses to personal legacies of insolvency,” Balleisen said, “they worked together to help usher in a new economic order structured around large, bureaucratic corporations, rather than small-scale producers and purveyors of goods and services. In part, post-bellum America’s world of trusts and tycoons rested on a foundation of pervasive individual failure.” One way of looking at this would be to say, “well, alright. They lost their nerve and handed over the reins to their economic ‘betters’ in return for security. In return, they got to live quiet lives as modern consumers in the suburbs.” Another perspective, though, might be that changes in the legal system allowed bad money (and behavior) to drive out good, specifically because the bad actors were absolved of their responsibility when they failed. The risks were socialized, the rewards privatized. And nearly two centuries later, here we are.