After its worst recession, the United States abolished debtors’ prison and created a more risk-taking society.
James Wilson signed the Declaration of Independence, helped to draft the Constitution, and became one of the original jurists to serve on the Supreme Court. Scottish, he studied at Glasgow University and learned from Adam Smith, who published the Wealth of Nations to define capitalism in 1776 as Wilson was signing the Declaration of Independence that would define democracy. All that and Wilson landed in debtors’ prison.
When someone as august as Wilson could end up in debtors’ prison, it served as a brake on risk-taking.
*******
Andrew Jackson the populist hated banks. He particularly hated the Bank of the United States which offered a degree of regulation for the burgeoning frontier economy of the early 1800s. Jackson acted on his contempt for bankers by vetoing a renewal of the bank’s charter in 1832. It took years to realize what a disaster this was.
Free of the regulatory influence of the Bank of the United States that Alexander Hamilton had conceived, individual banks all pursued policies that were fabulous short-term but created more and more instability. 347 banks opened up between 1832 and 1837. They issued a flurry of bank notes that stimulated the economy. Between 1832 and 1836, paper bills in circulation rose from $59 million to $140 million. The economy first heated up and then blew up, just five weeks after Jackson left office.
The recession that began in the second month of Van Buren’s presidency (and led people to refer to him as Van Ruin) was the worst in the nation’s history. (The Great Depression of 1929 would prove worse but of course no one in 1837 knew about that.) By the fall, nine out of ten eastern factories had closed. The poor broke into shops, only to find their shelves empty. The recession lasted seven years and hordes landed in debtors’ prison. The common man was certainly not going to avoid the fate of a Supreme Court justice.
In the wake of this tragedy, Congress passed a law in 1841 that offered bankruptcy protection. Meanwhile, in Britain, France, and all of Europe people were still being thrown into debtors’ prisons.
Charles Dickens’ father was thrown into debtors’ prison when Charles was only 12. Charles had to work at a boot-blacking factory, living on his own. The contrast between the US and Europe led Tocqueville - visiting the US from France - to marvel at the strange indulgence shown to bankrupts in the US.
That indulgence encouraged the risk-taking that an emerging industrial economy needed.
In this, the tragedy unleashed by Jackson’s disdain for a banking system helped to inform the policies of the Republican Party that would form just a decade later. After ridding itself of debtors’ prison, Americans took more risks than did folks in Europe. When Republicans took control in 1861, they regulated banks and issued a national currency to replace the thousands of different banknotes in circulation. Coupled with massive increases in government investments, Americans' new willingness to take risks led to the most innovative period of economic investment, innovation and growth in world history. From Van Ruin’s fated presidency and great recession came lessons on how to better create a prosperous economy. Getting rid of debtors' prison changed the business culture of the US.
There were two important lessons gleaned from the recession Jackson triggered.
1. Treat the financial system as a system and not a set of independent banks. Don't let banks take risks that could trigger a great recession.
2. Treat risk as essential to returns in an industrial economy and not imprison people who take those risks.
These seem like obvious lessons now. Obvious now but not obvious to James Wilson’s peers who thought him both worthy to define a new nation and deserving of debtors’ prison.
No comments:
Post a Comment