An Early History of Bankruptcy Statutes and Economic Conditions in the U.S.: 1776 to 1978

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Early-America Courthouse — built in 1845

By: Donald L. Swanson

This article is a two-centuries history of Federal bankruptcy laws and economic conditions in the United States: from the Declaration of Independence in 1776 through the enactment of the current Bankruptcy Code in 1978.

The Late 1700s

In 1776, at the signing of the Declaration of Independence, thirteen colonies along the eastern seaboard are operating under English law, including England’s bankruptcy laws.  Thereafter, English law continues to apply, until a colony/state enacts its own legislation on a subject.

The Articles of Confederation contain no reference to bankruptcy law.  So, Federal bankruptcy law does not develop under the Articles, and states pursue their own laws on the subject.

Around this 1776 time, the economy of the colonies/states is primarily agrarian and stable, with a relatively-high standard of living.

–After independence, the economy of the new country expands rapidly, along with population growth from immigration and high birth rates.  Commercial activities (e.g., shipyards, crops and furs) explode in the north, while a plantation economy prevails in the south.

The United States Constitution is ratified by the states in 1788, which authorizes enactment of Federal bankruptcy laws (Art. I, Sec. 6).

The 1800s

Over the century that follows independence, Congress enacts Federal bankruptcy laws on three different occasions: in 1800, 1841 and 1867.  Each enactment follows and responds to a financial panic, but each bankruptcy law is repealed within a few years of enactment.

–Bankruptcy Act of 1800

The first U.S. bankruptcy law is adopted in 1800 (by a one-vote majority).  It is similar to the 1732 English bankruptcy law and has many features of the then-existing Pennsylvania statute.  This Bankruptcy Act of 1800** initiates the concept of U.S. district courts administering Federal bankruptcy proceedings.  It is the result of financial panics in 1792 and 1797 that “caused widespread ruin and the imprisonment of thousands of debtors.”

Presaging the civil war conflict to come, this Act of 1800 is supported by federalists of the north (because of interstate commerce needs) and opposed by representatives of the plantation economy of the south (because of their localized needs).

–Three years later (in 1803), Congress repeals the Bankruptcy Act of 1800, citing excessive costs, small dividends, and the discharge-then-reemergence of high-rolling speculators.

–Around this time, a rule of law develops that, (i) Federal bankruptcy laws, when in effect, will control over state debtor\creditor laws, but (ii) state laws will fill the void when a Federal bankruptcy law ceases to exist.

In 1833, the U.S. Congress abolishes imprisonment for debt, with states doing the same shortly thereafter.

–Economic Differences: North & South

Differences in effects of a commercial economy in the north and a plantation economy in the south, in 1835, are revealed by these observations of Alexis de Tocqueville, in his “Democracy in America,” from a downstream trip on the Ohio River:

–“Upon the left bank of the stream [a slave state] the population is sparse; . . . the primeval forest reappears at every turn; society seems to be asleep, man to be idle, and nature alone offers a scene of activity and life.”

–“From the right bank [a free state], on the contrary, a confused hum is heard, which proclaims, afar, the presence of industry; the fields are covered with abundant harvests; the elegance of the dwellings announces the taste and activity of the laborers; and man appears to be in the enjoyment of that wealth and contentment which is the reward of labor.”

–“Upon the left bank of the Ohio labor is confounded with slavery, while upon the right bank it is identified with that of prosperity and improvement; on the one side it is degraded, on the other it is honored.”

–Bankruptcy Act of 1841

Congress adopts the Bankruptcy Act of 1841** by a narrow margin, over strong opposition from the south.  This Act, generally modeled after a Massachusetts insolvency law, is the first to authorize voluntary bankruptcy.  The 1841 Act is repealed in 1843 due to high administration costs and creditor frustration.

No Federal bankruptcy law exists from 1843 to 1867 because, (i) northern federalists take a political beating over the Bankruptcy Act of 1841 and don’t want to repeat that political disaster, and (ii) these are times of prosperity . . . until the Civil War and its financial cataclysm intervene.

–Bankruptcy Act of 1867

After the Civil War, Congress adopts the Bankruptcy Act of 1867**, which allows debtors to choose between Federal and state exemptions and allows (for the first time) corporations to become debtors in bankruptcy.  Congress repeals this Act in 1874 due to abuses, delays and excessive fees.

All told, Federal bankruptcy laws exist, during the 110 years from ratification of the Constitution in 1788 to 1898, for a total of 16 years (3 years under the 1880 Act, 2 years under the 1841 Act, and 11 years under the 1867 Act).

The National Bankruptcy Act of 1898

Then, Congress enacts the National Bankruptcy Act of 1898***, and the U.S. Supreme Court adopts rules of bankruptcy procedure and official bankruptcy forms.

This 1898 Bankruptcy Act serves the U.S. for the greater part of the next century.  And it shepherds the U.S. through such economic difficulties as two world wars, the Great Depression and conflicts in Korea and Vietnam.

Henceforward, from 1898 and to-this-day, the U.S. is never-again without a Federal bankruptcy law.

The 1900s

From 1933 through 1937, Congress creates the Municipal Bankruptcy Act, which, (i) is upheld as constitutional by the U.S. Supreme Court, and (ii) will become our current Chapter 9 in 1978.

In 1978, the Supreme Court’s Rules of Bankruptcy Procedure are amended so that bankruptcy “referees” are now bankruptcy “judges” and can enter final orders.

Then, Congress enacts the Bankruptcy Reform Act of 1978, which remains in effect today.

Footnotes:

** = The entire text of this Act is contained in the treatise linked below

*** = The treatise linked below contains the entire text, with comments, annotations and Supreme Court Rules and Forms for this Act.

Treatise:  Bush, “The National Bankruptcy Act of 1898, with Notes, Procedure and Forms,” (1st Edition, 1899), published by Banks Law Publishing Co.

–I am indebted for information and quotations in this article to these sources: this timeline, this history article, this ABI Law Review Article, and the 1899 treatise linked above.

##  If you find this article of value, please feel free to share.  If you’d like to discuss, let me know.

 

 

 

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