Moral Implications of Bankruptcy: Trust, Religion, and Debt

Introduction

As the number of personal bankruptcy filings in the United States has significantly increased over the last twenty years, many scholars have analyzed the motivating factors and deterrents that influence an individual's propensity to seek bankruptcy protection. Traditionally, the neoclassical economic model has been used to predict human behavior in the bankruptcy context. As a wealth maximizer, the individual is predicted to file for bankruptcy only when the monetary benefits outweigh the related costs. In conceptualizing human behavior in this manner, scholars have ignored important non-monetary factors — such as morality and stigma — that also influence individual behavior in the bankruptcy context.

This paper focuses on a much-ignored perspective on human behavior in the bankruptcy context: morality. Drawing on literature from psychology, sociology, and religion, the paper addresses two fundamental components of the moral appeal factor — trust relationships in the credit market and religious beliefs regarding debt repayment. Finally, it explains the implications of morality for understanding contemporary human behavior in the bankruptcy context.

Hamilton and the National Debt

Hamilton's economic plan for the fledgling nation implied that he had few moral reservations about debt or bankruptcy. His plan consisted of several interconnected elements.

Funding. Hamilton reissued bonds originally sold by the Constitutional Convention in an effort to organize the nation's outstanding debt and build trust with the wealthy investors who now held those bonds. The problem was that many bonds had been sold to wealthy speculators during hard times; those speculators would now make an enormous profit. This act was widely seen as another Hamilton plan to benefit the rich.

Assumption of State Debt. In an effort to solidify the national debt and present a more united front, Washington, under Hamilton's direction, assumed the debts of all the former colonies. The federal government would pay the war debts rather than the individual states, with the debt to be repaid through tax revenues. The problem was that the South had already repaid most of its debt, and Southerners viewed this as yet another way Hamilton protected his wealthy northern allies.

Building a New Capital. Hamilton believed that a new federal city would increase respect for the new nation and build investor confidence. Land was donated by Maryland and Virginia, and the marshy terrain was transformed into Washington, D.C.

Establishing a National Bank. Hamilton sought to create a national bank with the power to issue paper money and handle government tax receipts and other financial transactions. He believed this would stabilize the currency and tie the economy to wealthy investors, who would own 80 percent of the bank.

In January 1790, Alexander Hamilton, installed as the first Secretary of the Treasury, submitted his Report on the Public Credit to Congress. Hamilton called for funding nearly all the government's obligations — including state debts — into long-term federal securities payable in specie, that is, hard money. After considerable debate, his proposals were adopted in August 1790. The foreign debt was fully funded, as was most of the domestic debt, although interest payments were deferred on part of the latter and another portion carried interest rates below the market rate.

Only the depreciated Continental bills, nearly valueless, were funded at less than face value; one hundred dollars in Continentals were accepted as payment for one dollar of the new bonds. The most controversial element of Hamilton's plan was the assumption of remaining state debts by the federal government, because some states had already paid off the bulk of their debts while others had not. To gain the support of Thomas Jefferson and his followers, Hamilton and the Federalists agreed to a compromise that located the future capital of the nation on the banks of the Potomac.

Hamilton's refunding plan was generous to the government's creditors, who replaced securities selling for as little as fifteen cents on the dollar in 1789 with new federal bonds that soon rose toward par. How was such generosity justified? Hamilton argued in his report that the plan would restore faith in the government and public credit, attract foreign capital to the United States, and increase the effective stock of money, thereby stimulating the economy.

Subsequent experience proved him correct. The U.S. government was nearly bankrupt in the 1780s; yet in 1803, it had no trouble borrowing $11.25 million on short notice — mostly from foreign subscribers — to finance the Louisiana Purchase, which doubled the size of the nation. By that time, nearly 60 percent of the national debt had been purchased by foreigners, who in effect lent money to Americans in return for the government's promise to repay them in the future. Within the United States, debt holders could sell their federal securities for money or use them as collateral for bank loans. In retrospect, Hamilton's plan was a political and economic masterstroke for the new Republic. As Daniel Webster would later say, Hamilton "touched the dead corpse of the public credit, and it sprung upon its feet."

A national debt of $75 million in 1791, when Hamilton's funding plan was implemented, may seem small to the modern observer, but it represented approximately 40 percent of the GNP at the time — a debt-to-GNP ratio not seen again in U.S. history until the 1930s, when the Great Depression produced large federal deficits while the GNP was simultaneously collapsing.

The Modern Consumer-Debt Crisis and Morality

The national debt reached its early high point in 1804, when the Louisiana Purchase added $11.25 million in a single transaction. But aside from that expenditure, the administrations of Jefferson and James Madison were notable for fiscal frugality. Although some of the old Federalist taxes were cut during those years, Treasury Secretary Albert Gallatin nonetheless managed to reduce the debt nearly in half between 1804 and 1811. Another landmark in the history of the national debt was its complete elimination in 1835 and 1836 — an occurrence unprecedented in the history of modern nations. This achievement came during the administration of Andrew Jackson, who, like his Jeffersonian predecessors, was fiscally conservative, though the primary driver was rapid economic growth that swelled federal tariff and land-sale revenues.

There is a bankruptcy problem in America, and it is closely tied to the consumer-debt explosion. Between 1980 and 2004, total consumer debt grew from $288 billion to more than $2 trillion. Revolving consumer debt — such as credit card balances — increased from $58 billion to $500 billion during the same period. The widespread use of credit has caused millions of Americans to file for bankruptcy because they have become unable to repay their debts. This paper examines the morality of declaring bankruptcy and what philosophers have to say about one's obligation to one's creditors.

Almost all buying and selling in America involves credit of one form or another. Every household in the country, from the poorest to the wealthiest, is entangled in the complicated web of credit and obligation. As the rate of consumption increased from the 1980s to the present, more and more large-scale transactions were added to the credit networks of the American economy. Houses, furniture, automobiles, clothing, and food — many of the necessities of life — are purchased on credit, with the consumer bearing responsibility to repay that debt over the agreed-upon period.

The consumer-spending craze of the 1990s was driven largely by commercialism and advertising that bombarded young people with the message that they needed to have more. Today, many Americans — especially those between the ages of 20 and 35 — are deeply in debt and have little idea how to pay their bills.

Historically, the nature of obligation in credit relationships was not determined by how much money one person had, but by the mutual exchange of goodwill. Henry Wilkinson, a minister of England, compared the obligation of debt to personal character, writing: "Whatsoever civil debts or duties we owe to any, we must truly and duly pay them and so much as in him... if the workman be worthy of his wages, then even the hireling must have his due; the poorest laborer his due, every good man, so much as in him, pay every man his own."

As the complexity of credit relationships grew alongside increasing household wealth, government intervention became necessary. The Bankruptcy Act of 1898 was established in acknowledgment of the fast-growing credit economy of the Industrial Age. The Act placed the focus of bankruptcy far more squarely on the debtor than ever before, providing a full discharge of debts and broader exemptions of assets. But the fundamental question remained: what are the moral implications of filing for bankruptcy protection? Bankruptcy, defined by Webster's dictionary as the condition of "a person who becomes insolvent" or "unable to pay debts as they fall due in the usual course of business," puts a person's trust, conscience, moral responsibility, and accountability at risk.

Conclusion

Bankruptcy must be considered not only from the legal but also from the moral point of view, for sound morality prescribes that debts must be paid. A person who becomes bankrupt proclaims an inability to pay debts in full as they fall due. Such an acknowledgment no longer entails the penalties of slavery or imprisonment that once applied; instead, the law takes possession of property and divides it among creditors. If that property suffices to pay creditors in full, justice and conscience are satisfied. If, however — as is usually the case — creditors receive only a portion of what is owed them, they have suffered a loss, and if the debtor is the voluntary cause of that loss, he or she is morally blameworthy as the cause of injustice to a neighbor.