Bankruptcy made the middle class?

Edward J. Balleisen
Navigating Failure: Bankruptcy and Commercial Society in Antebellum America

Balleisen focuses on the 1841 Bankruptcy Law, “partly because it coincided with and emanated from powerful transformations in the scope and character of American capitalism.” (4) He agrees with Bushman and Lamoreaux that commercial acitivity was more universal and widespread than some of the “market revolution” historians would grant, but concedes 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. (5)

“To a great extent,” Balleisen says, “the relationship between failing antebellum proprietors and their creditors resembled a game of cat and mouse.” (84) Since anyone could fail, maybe we could extend the group -- 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.” (84-5) This seems especially apparent in the case of the rural merchants I’m studying, who seem to have credit relationships both in the family/community and outside it. It might be interesting to see if they behave differently, depending on the creditor’s status in their local network. It might also be interesting to look at the way these relationships change 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 says “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.” (198) 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. It 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 doesn’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.” (198)

For some failed entrepreneurs, though, Balleisen says “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.” (201) The result, Balleisen says, 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.” (219) “Despite the substantial contrast between these responses to personal legacies of insolvency,” he says, “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.” (227) 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 170 years later, here we are...


Bushman, “Markets and Composite Farms”
Lamoreaux, “Accounting for Capitalism”
Protestant Ethic, 58-75
Capitalism, Socialism, and Democracy, 81-6
E.M. Gibson, “Going into Business,” 1855
Asa Greene, Perils of Pearl Street, 1834

Lawyers and the Elite

Morton J. Horwitz
The Transformation of American Law, 1780-1860

Horwitz argues a fairly radical case, which may not have received wide enough recognition due to the subject matter and style. He says “I seek to show that one of the crucial choices made during the antebellum period was to promote economic growth primarily through the legal, not the tax, system, a choice which had major consequences for the distribution of wealth and power in American society.” (xv) He also has some interesting ideas about the way “the internal technical life of a field generates autonomous forces that determine its history.” (xi) We make a mistake, Horwitz believes, if we fail to account for the activities and interests of lawyers, judges, the legal profession, law schools, etc., when looking at how “the law” influenced history. The same could probably be said, with equally interesting results, for religion, medicine, or the study of history itself.

Horwitz looks at common law. Constitutional law, he says, “represents episodic legal intervention buttressed by a rhetorical tradition that is often an unreliable guide to the slower (and often more unconscious) processes of legal change in America.” (xii) Constitutional law also focuses on judicial review, rather than what Horwitz characterizes as a very active, constructive, legislative role taken on by nineteenth century jurists. “By 1820,” he says, “the process of common law decision making had taken on many of the qualities of legislation. As judges began to conceive of common law adjudication as a process of making and not merely discovering legal rules, they were led to frame general doctrines based on a self-conscious consideration of social and economic policies.” (2) The ancient tradition of “an eternal set of principles expressed in custom and derived from natural law” gave way to an understanding of law as “an instrument of policy” that could be used “for governing society and promoting socially desirable conduct.” (30) Once this change had been made, the game became one of defining the terms “socially desirable.”

The major examples Horwitz uses to illustrate this change surround the competing uses for water (mill power, irrigation, navigation, fishing -- although he doesn’t really try to make the case for each of these or point out how these interests were distributed in society), which illustrated the problems inherent in “a conception of ownership [including] a commitment to absolute dominion.” (31) There was a problem, in a newly-settled land, respecting the concept that “first in time is first in right.” (32) And resources’ “natural use” came to be seen as a lowest common denominator, that would block socially desirable improvements like the operation of mills. (33) The problem was, it was a pandora’s box. While it made sense to grant initial exclusivity to a developer (how many grist mills did a new town need?), “can the claims of still greater efficiency through competition be denied?” Horwitz asks. (34) He fails to examine closely whether the “greater efficiency” ever really produced its claimed social benefits (or even existed, other than as short-term paper gains) -- but maybe the people at the time didn’t ask these questions either. The point is that “By changing the rules and disguising the changes in the complexities of technical legal doctrine, the facade of economic security can be maintained even as new property is allowed to sweep away the old.” (34) This is Horwitz’s major point. The legal system, he says, was used to not only change the rules of the game to benefit an increasingly elite class, but also to
hide the fact that these changes were being made. This is a great argument. What it needs is some people in the story to show how it happened, and how people reacted, assuming anyone on the short end of the transaction knew it was happening. (this raises an interesting question: how do we tell stories about things we now see were happening, but that people of the time were unaware of? Because the evidence was hidden, or they just didn’t see things the way we do. Especially when people know something is wrong, but can’t put their finger on it -- or blame it on the wrong thing? The story isn’t just about unintended consequences, it’s about misunderstood consequences...)

Horwitz says the Massachusetts decision in
Cary v. Daniels was “premised on the desirability of maximizing economic development even at the cost of equal distribution.” (41) This opened the door for the courts to direct business toward their idea of the public good and “enabled common law judges to choose the direction of American economic development,” at least when it came into contact with older legal ideas of property and equity. (42) I’ve been wondering how people at the time responded to these changes; maybe one place to look would be at the “storm of bitter protest” caused by the “extension of the mill act to manufacturing establishments.” (51) Apparently there were people who saw through the similarity of water power, and argued that while early mills had been almost communal in nature, “manufacturing establishments were private institutions.” (51) Citizens saw through the law’s provisions for relief, arguing “Generally, the mills and mill seats are in the hands of the active and wealthy -- able to make the sufferers repent, if they resort to the law.” (52)

One of the state’s main economic development tools was eminent domain. But tied up with it is the idea of chartered monopoly and of limiting liability. A State grant is no good if “the grantee cannot exercise it without being subject to ruinous damages, so as to swell the cost of their enterprise” beyond its ability to make a profit, one commentator warned. (69) Rather than examine whether these social costs really argued against the business going forward (especially in the cases of railroads in the 1840s-60s), Horwitz says the courts socialized “consequential damages.” This enabled them to disqualify them, under the legal justification that “The law gives no
private remedy for anything but a private wrong.” (quoting Blackstone, 76) So the costs were socialized (in economic terms, externalized) at the same time the benefits were privatized in the form of corporate profits. (Horwitz doesn’t say much about the decision to do projects like Canals and Railroads in the private rather than the public sector; but it would be interesting to understand how this choice was made in America.)

Over the course of the nineteenth century, Horwitz says the basic “attitude toward legal liability” became “based on the assumption that the ‘quiet citizen must keep out of the way of the exuberantly active one.’ Indeed, the law of negligence became a leading means by which the dynamic and growing forces in American society were able to challenge and eventually overwhelm the weak...After 1840 the principal that one could not be held liable for socially useful activity exercised with due care became a commonplace in American law.” (99) The effect of this change was “to create immunities from legal liability and thereby to provide substantial subsidies” to developers. (100) “Change brought about through technical legal doctrine,” Horwitz says, “can more easily disguise underlying political choices [than] Subsidy through the tax system.” (101) Horwitz says “there is reason to suppose” that this “was not simply an abstract effort to avoid political contention but that it entailed more conscious decisions about who would bear the burdens of economic growth.” This is a really interesting claim, but it needs to be backed up, I think, with some evidence that actual people made this decision at the time.

“In every state after 1790,” Horwitz says, “a political decision to avoid promoting economic growth primarily through taxing seems to have crystallized.” (109) Shays’ and the Whiskey Rebellions would have helped that crystalization, as well as recognition that there wasn’t any money out there to
get through taxing. Horwitz continues, “By 1800 a pattern of private ownership of banks, insurance companies, and transportation facilities had become dominant in America.” (110) Again, true, but the question is why? Attributing the change in definition of corporations to an individualist spirit seems to put the cart before the horse, since early corporations “continued to argue both that their charters were grants of exclusive property interests and that economic rivalry was, in effect, a private law nuisance to property.” (114) This seems like a blatantly opportunistic attempt to have your cake and eat it to: the corporations were capitalizing on their status as something in between public and private, with the benefits of both. But the question is, how did corporations get from the 18th century definition of a public body (like a municipality) working for the public good, to the 19th century definition of a private company doing business to produce profit for its investors?

Horwitz says “eighteenth century...contract law was essentially antagonistic to the interests of commercial classes,” because it sought to judge the underlying fairness or justice of the exchange in question. (167) But ironically, the argument for judging contracts objectively on their terms was based on a claim that value was subjective and circumstantial. Promissory notes were used in place of cash, and “in order to make notes negotiable a subsequent endorsee [must] be allowed to recover on the note regardless of the consideration between the original parties.” (177) The same-as-cash nature of the note enabled “merchants to exclude the question of the equality of a bargain by transacting their business through promissory notes,” and excluded the courts from playing a role in judging the fairness of a transaction. The contract became an authority unto itself, and was no longer seen as part of a tradition of dealings based on just prices or practices. (
This is a missing link in the market transition story -- many historians assume the change required a move to a cash-based, spot market. Horwitz shows the market could be depersonalized and objectified even before it stopped being based on long-term, credit relationships.)

Contract law changed the laborers’ world through the “doctrine of ‘assumption of risk,’ [in which] contract ideology...emasculated all prior conceptions of substantive justice.” The fiction of “equal bargaining power inevitably became established as the inarticulate major premise of all legal and economic analysis. The circle was completed: the law had come simply to ratify those forms of inequality that the market system produced.” (210)

Returning to the issue of negotiable notes, Horwitz points out that common law not only established rules allowing “subsequent innocent purchasers” to collect on the notes regardless of any defects in the original deal, but it allowed “the legal system [to] sanction private arrangements whose effect was to increase the supply of money by allowing individuals to agree to substitute their own notes for currency designated by the state.” (211) This has interesting implications for the pace and distribution of economic development. After Andrew Jackson’s specie circular, for example, currency was in short supply in already-settled areas. Growth would have been much slower, and demand for state money creation would have been more urgent, if people like my upstate NY merchants had not been able to do business using notes. But I wonder, how much was “the law”
making policy? Couldn’t it also be argued that these people were making policy, and “the law” was just trying to keep up with them? Who actually had the agency -- who was in the driver’s seat -- seems to be a major unanswered question here. Massachusetts Chief Justice Theophilus Parsons’ 1808 remarks seem the suggest the law was following: “The circulation of negotiable paper,” he said, “is extremely useful to trade, as it multiplies commercial credit, and the notes pass form man to man as cash. Any rule of law, tending unnecessarily to suppress this circulation, is therefore against public policy.” (220)

Horwitz concludes by describing the “rise of legal formalism” in the 1840s and 50s. “If a flexible, instrumental conception of law was necessary” to promote economic development, “it was no longer needed once the major beneficiaries...had obtained the bulk of their objectives.” (254) In fact, just the opposite. The law needed to become (and be seen as) “self-contained, apolitical, and inexorable;” built on scientific logic and practiced by professionals. Having used it to get to power, Horwitz says, the ruling class used legal formalism as a way of “disguising and suppressing the inevitably political and redistributive functions of law.” (266) This is a startling conclusion, if one came to this book thinking the law was actually ever apolitical or objective. From a broader context, Horwitz shows that American law in the nineteenth century was no different in this respect from that of any other time or place. He outlines some of the ways an emerging elite used and changed the law to facilitate its rise, although he leaves the names and faces out of the story. Horwitz believes recent historians have been “more concerned with finding evidence of governmental intervention than they were in asking in whose interest these regulations were forged.” (xiv) His book suggests who some of the targets of questions should be -- it remains to be seen whether it can be proved these people were acting consciously, and how they and society at large understood their actions and the changes that resulted.

Interesting references:

  1. Fogel, Railroads and American Growth, 1964

  1. Fishlow, American Railroads and the Transformation of the Ante-Bellum Economy, 1965

Handlin and Handlin, Commonwealth

Zephaniah Swift,
A Treatise on Bills of Exchange and Promissory Notes, 1810

Gulian C. Verplanck,
An Essay on the Doctrine of Contracts, 1825 (the “Austrian” argument of subjective value 75 years early)