Perhaps it’s the total collapse of major corporations like Enron, WorldCom, and Global Crossing, or the over 60,000 companies like US Airways and United Airlines that have sought bankruptcy protection in the past two years, or important countries like Argentina defaulting on their debt, or the record numbers of people using bankruptcy to wipe out their mounting personal debts. But whatever the reason, there is an increased interest everywhere in the problems of debt and bankruptcy—an interest reflected in the publication of these two history books.

Each of these books deals with debt, one, Bruce H. Mann’s Republic of Debtors, with private or individual debt in eighteenth-century America; the other, James Macdonald’s A Free Nation Deep in Debt, with public or governmental debt throughout Western history. Although the two books are very different in focus and scale, they both closely connect credit, or the ability to borrow money and pay it back, with freedom.

In the case of Mann’s book, which concentrates on eighteenth-century America, individual or personal debt could mean both figuratively and literally the deprivation of freedom. Indeed, the loss of freedom, as Mann, who is professor of law and history at the University of Pennsylvania, points out, was very much part of the imagery of insolvency. Not only did the eighteenth-century Virginia planters identify their indebtedness to British merchants with slavery, but imprisoned debtors in the North eventually used the same image of slavery to describe their plight. Although debtors were, of course, never slaves (though debtors could be placed in servitude to their creditors for a number of years to work off their debts), their imprisonment did take away their freedom.

In eighteenth-century America, as earlier, debtors who could not meet their obligations were usually sent to prison. Indeed, in the pre-modern era a court judgment of insolvency, or the inability to pay one’s debts, was really the only judgment for which imprisonment was the punishment. Traditionally accused criminals were held in jail only until they went to trial; then if convicted they were fined, whipped, mutilated, or executed, but not incarcerated. But actions for debt could send the debtor to prison where he languished until he or his friends and relatives could come up with the money to pay his creditors.

Before the Revolution in America the debtors’ prison could often be the same jail that held criminals awaiting trial or punishment, or else it could be a room in the sheriff’s office or some outbuilding. Indeed, mingling debtors with criminals became a major complaint of reformers in the eighteenth century. Even after the debtors were separated from criminals in the years following the Revolution, conditions in the debtors’ prisons remained appalling. Unlike criminals, debtors were expected to pay for their own food, heat, and other supplies, and if they could not, they went hungry and cold unless some humanitarian group came to their aid.

Of course, sending their debtors to prison was usually the last resort of desperate creditors, for their debtors could rarely pay their debts while they were confined to prison. This, together with a startling rise in the number of debtors, led the eighteenth-century American colonies, and later states, to begin experimenting with a variety of insolvency or bankruptcy laws—the idea being that the creditors might release the imprisoned debtor and accept some proportionate loss of their debts in return for a share of the debtor’s property.

How these laws developed and how American ideas about debt changed in the course of the eighteenth century are the themes of Mann’s carefully and cogently written book. Although we have several studies of aspects of early American credit and debt and bankruptcy, no one before has ever laid out the eighteenth-century transformation of ideas and laws concerning debt and bankruptcy as masterfully as Mann has. And no one has ever explained the different credit instruments and their complicated workings in early America as clearly as he has. His book is thus a major contribution to the legal, social, political, and cultural history of early America.

At the beginning of the eighteenth century the American colonists generally thought about debts as moral obligations that the debtors owed to their creditors. Hence debtors who defaulted on their loans were often equated with sinners. Although some clergymen tried to draw distinctions between honest bankrupts and fraudulent ones, between those who were unable to pay their debts because of circumstances they could not control and those who were unable to pay because of their own prodigality and laziness, most usually considered all debtors, whatever their situation, morally responsible for paying their debts.

At the same time, however, other insightful ministers such as Cotton Mather realized that debts were a necessary element of commerce and that without debt there could be no trade. Although Mather and other clergymen never doubted that debtors had a moral duty to pay their creditors, they introduced a distinction between commercial debt and other kinds of debt that grew increasingly important as American society in the eighteenth century became more and more commercial.


When a debtor defaults on a debt, Mann writes, the principal legal question is how the creditor is to be paid. When a debtor defaults on debts to several creditors, the question is how the creditors are to be paid. The second question especially requires laws concerning insolvency and, if the society is to encourage risk-taking and entrepreneurial activity, it needs laws regulating bankruptcy, which would allow the debtor to free himself of his debts and engage in trade again. As Mann points out, “compared to bankruptcy insolvency is rather democratic.” Anyone can become insolvent, and no court has to intervene to declare a person insolvent. “Bankruptcy, on the other hand, is a legally defined status, conferrable on the select few only by formal adjudication.” There have been many insolvent debtors in American history, but these insolvent debtors, says Mann, could be bankrupt only when there were statutes that prescribed the qualifications for bankruptcy—something that through most of American history, unlike English history, was only sporadically the case.

With the growing incidence of debt and insolvency in the eighteenth century the colonial legislatures tried to work out mechanisms for apportioning losses among creditors. With the outbreak of the Seven Years’ War in the 1750s, some of the northern colonies began enacting temporary bankruptcy laws that distributed insolvent debtors’ assets among their creditors and discharged them from further liability from their debts. It became increasingly clear to many Americans that insolvency resulting from commercial activity was not a moral failure after all, and thus such insolvency required special legal treatment. Since creditors usually opposed any sort of debtor relief legislation, these experiments with bankruptcy legislation were imperfect and short-lived. But the earlier idea that the debtor’s moral obligation remained inviolable and nondischargeable was now more and more open to challenge.

The Revolution helped to clarify matters. Commercial activity exploded after the war, and especially in the 1790s, speculation of all sorts—in bank stocks, in government bonds, in western land—abounded. Everything was build on credit, and when failures resulted, as they did in increasing numbers in the 1790s, the effects were disastrous for many debtors. Indeed, some of the most prominent and wealthy men in the country—William Duer, former assistant secretary of the Treasury; Robert Morris, the financier of the Revolution; and James Wilson, associate justice of the Supreme Court—ended up in debtors’ prison.

At the same time reformers invoked the Revolutionary rhetoric of liberty and independence on behalf of imprisoned debtors with increasing effectiveness. Perhaps the most famous reformer was William Keteltas, an impecunious New York lawyer who in 1800 conducted a vigorous newspaper campaign against the practice of imprisoning debtors. He carried on his campaign by publishing his newspaper, the Forlorn Hope, within the prison in which he was held for indebtedness. Many of the states were already reforming their codes of criminal punishments and setting forth the idea that incarceration was an enlightened substitute for corporal punishment and frequent executions. If imprisonment was now designed to reform criminals and not merely punish them, then, asked Keteltas, what was the point of imprisoning debtors who were not even criminals at all, especially since the government fed and clothed imprisoned criminals while the imprisoned debtors had to feed and clothe themselves? Like other Northern reformers Keteltas identified imprisoned debtors with slaves, but, says Mann, he alone among reformers used the image of slavery to condemn African slavery as well as imprisonment for debt. Although Keteltas’s contrast between debtors and criminals became a central argument against imprisoning debtors, he was not able to change the law. Indeed, New York did not abolish imprisonment for most debtors until 1831.

Most imprisoned debtors, Mann says, continued to be genuine indigents whose debts were as insignificant as their assets; humanitarians looked after them with great compassion but without ever questioning whether imprisonment was a legitimate way of treating insolvent debtors. Only when merchants and other better-off citizens involved in commerce overextended themselves did governments become interested in promoting various methods of bankruptcy. The Constitution in fact had granted the federal government the right to establish uniform bankruptcy laws for the United States, and Congress struggled throughout the 1790s to pass a bankruptcy law in the face of strong Jeffersonian aversion to debt and speculation. Only in 1800 in the aftermath of the severe commercial collapse of 1797 did a Federalist-dominated Congress finally enact a bankruptcy law, one that was limited to five years and that applied only to large-scale commercial debtors. Although the bankruptcy law was designed to be “involuntary,” meaning that only creditors could initiate proceedings under it, it actually created, says Mann, a “voluntary” system, which allowed debtors as well to invoke its benefits.


Many of the Federalist legislators turned out to have been less interested in the economic desirability of a bankruptcy system than they were in using the national bankruptcy law to expand the authority of the federal judiciary over the states. Hence Jeffersonians eager to reduce the power of the federal government wanted the law repealed, and in 1803, shortly after coming to power, they achieved their aim. This short-lived national bankruptcy act, says Mann, looked both forward and backward at the same time. Its passage marked the end of the idea of debt as a moral and religious sin, but its rapid repeal suggested a continuation of the traditional association of debt with dependency and dissoluteness. Bankrupt debtors were still failures.

The federal government tried again with temporary bankruptcy acts in 1848 and 1867. But not until 1898 did bankruptcy become a permanent part of America’s legal landscape, and even then, as Mann points out, the laws have been overhauled at forty-year intervals ever since. Mann suggests that the recent calls to restore the stigma of personal debt and bankruptcy are misguided. The stigma for bankrupt persons, he believes, has never really been lost.


Governments, of course, also get into debt and even go bankrupt. Governmental indebtedness is in fact the theme of James Macdonald’s remarkable book. For Macdonald, governmental debt has a far different meaning than debt had for Americans in the eighteenth century. He believes that properly managed public or governmental debt, far from leading to dependency and slavery, eventually became a source of independence and freedom for the nation-states of the Western world.

His book could scarcely be more comprehensive. It covers the history of governmental debt through several millennia, from the ancient Israelites through the city-states of Renaissance Italy, from the monarchies of early modern Europe to the governments that waged two world wars in the twentieth century. He even manages to bring in ancient China at appropriate moments.

Macdonald concentrates on the various ways governments in the past attempted to raise money, especially by borrowing and issuing bonds. Borrowing money today is just as important to governments. When James Carville, coming into office as an aide to President Clinton, expressed shock at the power of the bond market to affect governmental policy, he did not know the half of it. It is Macdonald’s bold contention that bond markets or public credit do not just affect governmental policies but were in fact crucial to the rise of democratic governments in the Western world. After reading this book it is hard not to conclude that most of the headline events that traditionally make up our histories of governments are epiphenomenal and that what really counts in all political history is money or the lack of it.

Since James Macdonald was for many years a British investment banker (this is his first book), he has a hands-on feel for his subject. But he has not allowed his technical expertise to get in the way of his lucid prose: his argument is readily accessible to a lay reader. And that argument is convincing. Governments, he says, began to need ever-increasing amounts of money, mostly in order to wage war, and this need for more and more money necessarily led them to concoct various schemes for extracting funds from their subjects or citizens—first by taxing and then by borrowing. In time those governments that were most successful in inducing their subjects or citizens to lend money to them inevitably became more democratic. That is, governments that were borrowing discovered that identifying their interest more closely with that of their subjects or citizens who were doing the lending was the easiest and cheapest way of raising money; and they could best do this by allowing their subjects or citizens to have a representative say in governing. Given this growing identification of the borrowing governments with the citizen-lenders, Macdonald’s book becomes as much a history of the origins of the state as a history of credit markets. “While, on one level, then,” he concludes, “this book deals with the hard facts of money and credit markets, its underlying motif is the relationship of the state with its citizens. Its hero is the citizen creditor.”

Ancient tribal governments, like that of the early Israelites, scarcely understood the idea of borrowing money. Instead, they relied on the spoils of conquest, distributing the wealth of the conquered among their people or storing up some of it for leaner times. One can see, from Macdonald’s account, why establishing treasuries was the first step toward statehood. Tribal chiefs turned into kings once they were able to maintain control of the plunder and began to receive from their followers more gifts than they were obliged to give away. These ancient monarchies, however, were never borrowers; they were in fact lenders, distributing to their subjects grain and livestock from their storehouses and expecting repayment with interest.

For the people of these ancient empires to be truly free meant to be free of taxation. Thus to accumulate wealth and avoid taxing themselves, their states had to conquer other states and make the defeated peoples pay for whatever costs they had. To be conquered or even to fall into debt therefore was to become a slave. To prevent their own people from falling into debt because of their inability to pay compound interest on money they had borrowed, many of these early governments, like that of the Israelites, banned interest payments altogether, thus establishing a tradition of antagonism toward usury that would continue for several millennia. The Greeks and Romans did create devices that allowed for the restricted payments of interest. But with the later Roman Empire’s adoption of Christianity the biblical proscriptions against charging interest became law. “It was to take over one thousand years,” says Macdonald, “for the economic damage to be undone.”

The ancient democracies of Greece arose, Macdonald writes, because of various governments’ increasing reliance on heavy infantry in military service. If men were to bear arms and serve in the army, they wanted to be free men with a say in their governments and the right not to suffer the indignity of being taxed. After 500 BC the Greek states and later the Roman Republic groped toward establishing systems of public borrowing from their own people. Indeed, Macdonald suggests that the Roman Republic’s public debt in the third century BC may have been more than 50 percent of its GNP. Further conquests, however, eased the burden of debt and eventually enabled the Romans to go for half a millennium without taxation.

The Roman Empire had a primitive fiscal system and for the most part resorted to currency debasement, that is, reducing the amount of gold or silver in the coins, in order to raise money. The later emperors’ attempts to tax met with great resistance and eventually ceased with the barbarian invasions. Indeed, the Germanic tribes reasserted the traditional identification of taxation with slavery and instead relied on plunder and feudal levies for funds. “By the end of the first millennium,” writes Macdonald, “the kings of western Europe had almost entirely lost the right to tax their subjects.”

By the late Middle Ages, northern and central Italy had come to resemble ancient Greece, with almost every town of over ten thousand inhabitants exercising de facto self-government. Since merchants essentially ran these city-states, they saw the business of their governments as the furtherance of business. In the process they revolutionized statecraft, especially in public finance. Having the traditional aversion to taxation, the merchant-citizens of these city-states instead preferred to lend the governments their money. Even when their loans were compulsory, they lived with the illusion that they were not being taxed. To raise money the merchants of Venice, Genoa, and Florence invented one ingenious scheme after another—saleable loans, repayable taxes, pension funds, dowry funds, paper notes—all designed to minimize as much as possible the need for direct taxes. In the process they transformed their relationship to their governments and became “citizen creditors.”

In time the Italian city-states lost their freedom by wasting their resources in futile wars against one another. It was left to the cities of the Dutch Republic in the sixteenth and seventeenth centuries to revive and improve upon the creative financial practices of the Italian city-states. The Dutch began working out techniques of borrowing from themselves and regularly taxing themselves in order to pay back the borrowers with interest that eventually became the marvel of the Western world. It was the close identification of the state with its citizens and the taxpayers with the lenders that made the system work. By the mid-seventeenth century Holland possessed 65,000 public creditors out of an estimated 100,000 urban households.

By contrast the monarchies of late medieval and early modern Europe learned little from the financial practices of the Italian city-states. The European kings possessed hardly any tax bases and relied instead on the incomes from their own domains, on forced loans, and especially on currency debasement. Taxing their subjects usually required the consent of representative assemblies, and medieval monarchs were reluctant to use them. The influx of silver from the discovery of America, however, inflated the money supply and freed many sixteenth-century monarchs from the need to ask representative assemblies for funds. But the increased costs of warfare continued to constrain most of the European kings financially, especially those of Spain and France, and they were more and more forced to adopt systems of what Macdonald calls “debt management by bankruptcy,” essentially defaulting on their debts at periodic intervals.

The sixteenth-century English monarchy survived by debasing the currency and confiscating Church lands. But it was not able to weather the financial crises of the seventeenth century. As always it was the need or desire to wage war that got monarchs in trouble. The cost of putting down the Scottish rebellion of 1637 eventually forced Charles I to end his decade-long experiment of ruling England without convening Parliament and requesting taxes. Once invoked, the parliamentary forces were not content until they had executed Charles. England’s experiment with a republican commonwealth was brief, but it did introduce the tax system that laid the basis for the success of Great Britain in the eighteenth century.

Following the Glorious Revolution of 1688–1689 and the accession of William of Orange and his wife Mary to the throne, the English adopted the essentials of Dutch finance. By the eighteenth century Britain had become the strongest nation in the world with a remarkable ability to extract wealth from its subjects without impoverishing them. The secret was its financial system, with its central bank, its regular taxation, and its permanent debt, along with a sinking fund (which helped to keep the government’s bonds at par value). All of these gave confidence to creditors that they would always be paid in full. Behind everything, of course, was the existence of Parliament, a regularly meeting representative assembly that convinced Britons that they were in control of their own affairs.

The contrast with ancien régime France is glaring. The French economy in the eighteenth century, says Macdonald, was very strong and for the most part was a match for that of Britain. But France’s absolute monarchy, which had not convened its representative assembly, the Estates General, since 1614, had little of Britain’s capacity to extract wealth from its subjects. Instead it was forced to rely on the sale of offices, tax-farming, and clumsy and expensive methods of borrowing. France possessed sufficient wealth; its government simply could not effectively draw upon it. In 1788 its GNP was £280 million compared to Britain’s £135 million, and the percentage of its debt to its GNP was only 65 percent compared to Britain’s 182 percent. Yet because France’s debt was not perpetual and was not traded in markets, as Britain’s bonds were, the French debt not only cost more to service but it put pressure on France’s public finances that its political system was not equipped to handle.

Macdonald makes it clear that the confidence of the creditors and subjects in their respective governments was the crucial point of difference. Eighteenth-century Britain was the most heavily taxed and most heavily indebted state in all of Europe, but it was the French who felt most oppressed by their taxes and were most fearful of the government’s defaulting on its debt. In France the aristocracy clung to the ancient belief that truly free men paid no taxes. In England, by contrast, the land tax was paid by everyone with no exemptions.

Although this comparison between eighteenth-century Britain and France lies at the heart of his book, Macdonald spends some time describing the techniques the American colonists and later the American revolutionaries used to finance their governmental actions. Hamilton’s 1790s program of public finance was a direct copy of the British system, but because of Jefferson’s agrarian opposition it was never adopted to the extent it was in Britain. Because many of the individual American states defaulted on their loans in the nineteenth century, the credit of the United States was never as strong as the GNP of the country should have warranted.

By the nineteenth century all of Europe had learned some lessons, and the English system of public finance became the model that some governments at least tried to follow. The most stable democratic governments tended to enjoy the lowest interest rates on their debt. Those like Spain, which defaulted half a dozen times between 1820 and 1882, could scarcely earn the confidence of their creditors. By the end of the century the ancient rules of taxation had been reversed: the poor were free of taxation and only the rich were taxed. Governments were able to weather the extraordinary expansion of the suffrage because more and more people, through savings banks and other devices, became investors in the state. In the democracies, the identity between creditors and citizens was stronger than ever.

World War I revealed the power of democratic credit-based finance. The participating European states, by selling bonds and other securities, borrowed huge unprecedented sums of money from their citizens, in some cases in excess of 150 percent of the pre-war GNPs. Total war meant total participation in lending money to the government. Thus, suggests Macdonald, the mass democracies of the early twentieth century had returned to the practices of the ancient Greek and Roman republics—financing war by the voluntary contributions of their citizens.

Following an illuminating and succinct account of the frustrating attempts by the European allies to extract reparations from Germany and pay off their debts to America, Macdonald concludes his book with a discussion of the financing of World War II, which he shows was remarkably different from that of World War I. By relying on rationing, enforced savings, the closing of credit markets to private borrowers, and the automatic pay-roll deductions of greatly increased amounts of taxes, all the wartime governments exploited new and sophisticated techniques other than direct borrowing in extracting the resources of their societies. There were no reparations except for those that the Soviet Union took from East Germany, and the war debts were greatly reduced by postwar inflation.

By the beginning of the twenty-first century, Macdonald says, the development of global markets and the international ownership of public debts, largely by institutions and not individuals, have radically transformed public finance. The consequence “has been the progressive disappearance of the hero of our tale, the citizen creditor.” But perhaps in a world marked by mass migrations and growing bodies of unassimilated minorities in all Western countries increasingly made up of noncitizens, this development, he says, may be inevitable. The idea of citizenship is losing its meaning in Europe. Noncitizens are taxed and receive social benefits just as if they were citizens. In some European countries foreign residents can vote in local elections, and the obligation of citizens to fight wars has been undercut by volunteer armies.

No wonder then that the identity between citizens and creditors has been shattered. The percentage of US government bonds owned by individual American citizens is now under 10 percent. Indeed, because of government debt financing through banks, pension funds, and other institutions, most citizens of modern states are scarcely aware that they have any economic interest in their national debts. And as James Carville discovered, the international bond market now has a life of its own, with no special attachment to any single nation. “For all practical purposes…,” Macdonald concludes, “the venerable marriage between public credit and democratic government, so vital a factor in the history of the world, has been dissolved.” We are living in a new era.

This Issue

June 12, 2003