Some Bankruptcy Law History: Debtor Benefits Are Always A Tough Sell (Part I, Ancient Days to 1803)

By: Donald L Swanson

Bankruptcy benefits for individual debtors are a tough sell—always have been.  That’s because no one likes bankruptcy—unless they need it.

But relieving people from debts in unfortunate circumstances is essential to our collective way of life in these United States.  That’s always been true.

What follows is the first of three installments on some history of bankruptcy laws through the ages, beginning with ancient times—and to the present in these United States.

Ancient Days

Three millennia ago, death and dismemberment (not necessarily in that order) can be the penalty for non-payment of debts in Athens under the Draconian Code.

A millennium later, in ancient Babylon, Hammurabi’s Code contains the following provision on non-payment of debt:

• “If anyone fails to repay a debt, and sell himself, his wife, his son, and daughter for money or give them away to forced labor: they shall work for three years in the house of the man who bought them, or the proprietor, and in the fourth year they shall be set free.”[Fn. 1]

Under Roman law, violence for non-payment of debts focuses on the debtor’s means of making a living—“banca rotta” (i.e., breaking the merchant’s bench or counter after all of debtor’s property is surrendered to creditors).

During 1100s, 1200s and into 1300s, the Mongols conquer and rule a vast stretch of land from Beijing in the east, across the silk roads, to cities like Kubal and Kiev.  Mongol law, back then, provides for declarations of bankruptcy, with such limitations as:

• no merchant can declare bankruptcy more than twice to avoid paying debts; and
• on the third time, the merchant faces punishment by execution.[Fn. 2]

This bankruptcy law’s combination, of initial leniency in matters of trade followed by harsh punishment for overuse or abuse, reflects a combination within the Mongol empire of (i) an efficient trading system that moves people and goods throughout the empire, and (ii) brutality in enforcing the empire’s will and rules. Ironically, the Mongol empire is brought down by a plague that spreads through the entire empire by the very trading system that made it great.

Early United States

During colonial times and into the early United States, bankruptcy laws are criminal laws.  We put people in prison for non-payment of debts, until prohibited in the 1830s under federal law and in the 1840s under various state laws.

When the U.S. Constitution is ratified in 1789, travel and commerce among the 13 states is limited—there are no trains, and people use rivers and trails of muck, mire and ruts for transportation.  Yet, the Constitution authorizes federal bankruptcy laws and requires a uniform application of such laws throughout the United States. 

The Constitution’s bankruptcy clause receives only one negative vote at the Constitutional Convention.  Such vote is based on a concern that bankruptcy crimes might be punishable by death, as in England.  [Note: The last person hanged in England for bankruptcy crimes happens in 1813.]

Congress did not enact a federal bankruptcy law until 1800—a temporary measure set to expire five years later (but repealed by Congress after only three years). 

Over the ensuing century, federal bankruptcy laws exist for a total of only eighteen years, as follows: 

• the Federal Bankruptcy Act of 1800 lasts three years before repeal;
• the Federal Bankruptcy Act of 1841 lasts two years before repeal;
• the Federal Bankruptcy Act of 1867 lasts eleven years before repeal;
• the Federal Bankruptcy Act of 1898 lasts two years in that century.

During the eighty two years of the 1800s when no federal bankruptcy law exists, insolvency laws of the various states fill the void.

Federal Bankruptcy Act of 1800

Congress enacts the first federal bankruptcy law in 1800, by a single vote in the House.  Congress is responding to the imprisonment of thousands of debtors during the financial crashes of 1792 and 1797. 

One of those thousands of imprisoned debtors is Robert Morris—a major financier of the American Revolution.  He ends up in debtors’ prison, where he:

• spends three and a half years for owing $12 million from failed land speculations;
• receives a visit from his good friend, George Washington (who dies during Morris’s imprisonment); and
• survives the yellow fever plague.

The Federal Bankruptcy Act of 1800 results in his release from prison, at which time he declares,  “I now find myself a free citizen of the United States without one cent that I can call my own.”[Fn. 3]

Conclusion

Ancient times through 1803 in these United States had many different bankruptcy laws, most of which can be characterized as harsh and less-than-friendly to debtors, but with a steady improvement over time.

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Footnote 1.  Hammurabi’s Code of Laws (adapted from the L.W. King translation), No. 117.

Footnote 2. Weatherford, Genghis Kahn and the Making of the Modern World (2004), published by Broadway Books.

Footnote 3.  Rappleye, Robert Morris, Financier of the American Revolution, at 510-15 (2010), published by Simon & Schuster.

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