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The History of Debt in America - 1850-1899
1850-1899
The period of 1850-1899 was again one of turmoil and financial panics. It included panics in 1857, 1873, 1893, the farm mortgage crisis of the 1880s, not to mention the Civil War.

One economist noted that in the period before the Civil War period almost everyone was in debt but because there was no money the debts went unpaid. There was more money in large urban centers but even there the supply was not sufficient to fill all the economic needs. Outside the cities, where most people lived, the system of personalized credit, generally from merchant to local customer, and barter remained by necessity the norm well into the early twentieth century.

In 1861 half to 2/3 of San Francisco merchants failed. 240 of 256 N.Y. Dry Goods dealers went broke – almost 7,000 firms owed more than $5,000. Between 1873 and the end of the century one-third of all the railroads failed.

The Panic of 1857
The Panic of 1857 abruptly ended the boom times that followed the Mexican-American War. It was triggered by a number of factors that included the ending of the Crimean war. This caused European demand for American grain plunged. Massive embezzlement in the New York branch of The Ohio Life Insurance and Trust Company caused it to go broke. This in addition to the steamer Central America sinking with $2 million in California gold sent ripples though the financial world.

When British investors began to remove funds from American banks questions were raised about the overall soundness of the economy. Then widespread railroad failures caused manufactured goods to pile up in warehouses and massive layoffs to occur. Land speculation programs collapsed ruining thousands of investors.

Eventually the panic and depression spread to Europe, South America and the Far East. No recovery was evident in the United States for a year and a half and the full impact did not dissipate until the Civil War.

The Ethics of Debt
The Victorian attitude towards debt started with a strict adherence towards avoiding debt. But it often strayed from there. Acknowledging that in a money economy credit and debt were sometimes not only unavoidable but desirable the strict avoidance of debt flexed. But the morality of debt varied only slightly.

As far back as the 1710s Cotton Mather preached against debt but also conceded to its inevitability by advising to “Come into (debt) with the pace of a Tortoise, and to get out of it, with the flight on an Eagle.” In the late nineteenth century the emphasis was put on the borrower’s character. If money could be borrowed without effecting self-control, or even reinforcing self-control, it could be used as a positive. But going into debt just to falsely raise one’s perceived standard of living was still forcefully argued against. This was the beginning of the concept of good debt/bad debt.

There were really three categories of debt. The one good one was to use the borrowed money for a cause that would produce income or appreciating assets that would make the borrower more money then he borrowed. If one went into business and the business turned a profit then the loan, principle and interest, could be paid back while leaving the borrower in a better financial state. If a home mortgage was taken out and paid off the homes increasing value, no to mention its value as shelter, was considered a wise use of credit. Investment speculations for quick profits were, on the other hand, thought of in a different light. Akin to gambling it was considered bad debt. As was borrowing for immediate consumption.

There were two exceptions to the rule of borrowing for consumption as bad credit. One was for the very unfortunate, like the unemployed, who had very little or no choice and the other was for those of sufficient financial resources and control as to be able to pay their tabs in full on a regular basis. The later came with a warning that applies today. Beware running a tab for the everyday expense because of the tendency to spend more with credit than with cash.

The Moral Judgments on Debt Continued
Before the Civil War the word “failure” meant “breaking in business” – going broke. This meant that failure was as incident not an identity. That started to change when financial circumstances evolved into personal identity. This was in large part due to the creation of credit reporting bureaus in the 1850s. They helped bring terms like loser, into the American lexicon.

But it was not until the eve of the Civil War that Americans labeled being an insolvent as a personal failure. In fact during the Civil War the Union Army branded court-martialed soldiers with a variety of letters including W which stood for worthless.

In 1864 a physician reviewed the previous forty years: “Everyone is tugging, trying scheming to advance – to get ahead. It is a great scramble in which all are troubled and none is satisfied.”

The Credit Report
The first comprehensive credit reporting agency was the Mercantile Agency. It was founded by Lewis Tappan in 1841. Tappan was a failed businessman. In 1827 he went broke milling textiles so he took a job as the credit manger for his brother Arthur, a silk importer.

The Tappan brothers, great-grandnephews of Benjamin Franklin, were active social reformers promoting prohibition and Sabbath laws. In 1822 they co-founded the American Anti-Slavery Society. A year later they organized Oberlin College to promote interracial education. But in that same year mobs of anti-Tappan protester sacked the brothers' business and burned Lewis' home.

Another fire soon started to burn. In 1837 many of the Tappan brothers' customers began defaulting on their payments. Soon the brothers were faced with more than $1,000,000 in debts. Their default helped spark the Panic of 1837 that led to thousands of business failures. It also sparked Lewis' desire to tame the credit market by collecting reliable information about businessmen and making it available, for a fee, to potential creditors.

Tappan's goals for the agency went beyond providing information; he wanted to bring "moral regulation" to the business community. That's why the Mercantile Agency's reports were more than just a financial record. They included morals, talents, past financial performances, economic potential, and a summary judgment of character.

Their system institutionalized moral judgments – making such judgment a vital business tool. As example a credit report in 1854 stated, “The kind of credit that can get our recommendation must consist much more in a man’s virtue & general character than a few thousand in property that may be easily transferred."

The early reporting lacked numerical characterization but relied on colorful commentaries. Phrases like, "be sure & never trust him, will always be worthless," or "there is a strong possibility of his failure," related a person's business worthiness. But not stopping there the reports often challenged the character of the businessman. Reporting, "…don’t think he will succeed, he is unpopular. He is rather of an unhappy disposition," allowed the fixation of moral blame upon a potential failure.

The Bankruptcy Act of 1867
In 1864 a political movement started to call for a new bankruptcy law. It was in March that The National Bankruptcy Association began recruiting. Also in 1864 U.S. Representative Thomas A. Jenckes urged “emancipation” for all Union soldiers who wore a mantle of oppression under their blue tunics. He was not speaking of the behalf of the Union’s Negro soldiers but of the white soldier who was shackled by “the bondage of debt.” His plea became the first comprehensive bankruptcy law in American history in 1867. It included both voluntary and involuntary bankruptcy filings.

Previous to the 1867 Bankruptcy Act debtors had only been allowed to keep the most basic necessities, including clothes, bedding and tools of their trade. But now the exemptions were controlled by state law. This prompted Texas to establish a generous homestead exemption for real property in hopes of attracting new settlers. Mississippi allowed an exemption of 240 acres of land plus $4,000 in personal property and Florida granted a 160 acre exemption.

The Act was amended in 68, 72, & 74. The 1874 Amendments abandoned the 50 percent requirement applicable to involuntary cases thereby preventing creditors from blocking the discharge in these cases.

One of the major problems with the Bankruptcy bill of 1867 was the fees involved with carrying it out. There were filing fees, administrative fees, and Marshall’s fees. In many cases after the exemptions were made and the fees paid there was nothing left for the creditor.

But it did offer help for many debtors. George Lyman Cannon, founder of the National Bankrupt Association used the 1867 bankruptcy law to relieve himself of $30,000 in debts and went on to found and run the prosperous Colorado Chemical Company.

The bankruptcy law of 1867 lasted far longer than its predecessors but was finally repealed in 1878.

The Expansion of Failure
In the 1800s the meaning of failure took on a significantly different definition. Failure was initially defined as a business failure. If one was in business and it didn’t succeed you had a business failure. But with business being done in expanded territories where credit was being extended to strangers a new entity took on preeminent importance. The 1850s saw the rise of the credit bureau.

Because they were expected to not only keep a financial record but to make a moral judgment credit bureaus needed to create a system of character definition. Not yet at the place to assign a numerical judgment colorful descriptions were used.

It was during this time that the word failure took on a new definition. No longer an event failure became an identity. Now if a business failed the owner did not have a failure he became one.

At this time there were no bankruptcy laws to give a second chance and credit reports were permanent lasting until you died. Once you became a failure you stayed a failure. This led to failure becoming a personal identity.

Because of the great expansion of business and the rise of individualism failure took on yet another added dimension. Now if one wasn’t actively moving ahead they were put on the “sinking list.” Failure was not just doing poorly it was not making progress.

By 1890 failure was a broad category of identity not simply the financial ruin of an entrepreneur, it meant as much dissatisfaction as disaster.

The Panic of 1873
The period of 1873-1878 was known as The Great Depression, at least until The Great Depression of the 1920s and 30s came along. Starting in Europe the economic reversal hit the United States when the country’s preeminent investment bank failed.

Jay Cooke and Company was the principal backer of the Northern Pacific Railroad and had handled most of the government’s wartime loans. Its failure sparked a series of events that touched the entire nation.

Investors rushed to sell stocks in order to protect their capital. As stocks on the New York exchanges sunk lower the New York Stock Exchange closed for 10 days. Credit dried up, causing businessmen, many of whom had borrowed money to expand their operations during boom times, to release workers. Foreclosures and banks failures were common; factories closed their doors and most major railroads failed. Thousands of workers lost their jobs.

The volume of destitute people soon overwhelmed the abilities of charities to function.

The Victorian Way to Wealth
The Victorian principle of self-mastery applied equally to money. In fact the mastery of money was seen unapologetically as a way to build wealth. The two were seen as an inside outside approach. By mastering yourself and your money you would have a better spiritual and physical life.

Three principles of Victorian money management survive today. They are frugality, thrift, and planning. Although the definitions have changed over time the idea of planning a financial path that includes spending wisely and living within your means is the bedrock of economic advice.

The Meaning of Money As more and more money started to circulate its power over the body and minds of Americans grew. It was in the late nineteenth century that money became the predominant indicator of class in society. Those who were able to attract and increase their supply of money were able to move through the ranks of society as never before.

This meant that money had definable power and the lure of its dominion over all material things placed it at the top of everyman’s desires. With the belief that money could be managed in a moral way that would led to personal growth, it quickly lent itself to traditional Victorian values. This happened even as the concept of what money really was escaped most.

The subject of money became the topic of many novels, advice books, and newspaper columns. The desire to understand the concept of money and to cultivate good management skills led to its prominent place in the media as well as general discussion.

Helping speed the role of money to the forefront was the industrialization of business that led to greater numbers of people becoming wage earners. It was also during this period that the nature and concept of money changed. Until this time money had been a metal coin that had intrinsic value but now money was becoming just paper, itself almost worthless, with its value determined by agreement.

The creation of the Federal Reserve in 1913 helped bring currency into mainstream use but it still took time for its effect to become universal.

THE HOME MORTGAGE
In the late nineteenth century the home mortgage accounted for the largest single portion of household debt. In fact a Massachusetts businessman remarked that, “About everyone that live in what he calls his own house, is in debt!” At that time in Boston it was common for a potential home owner to save up half of the $3,000 needed to buy a lot and build a house. Then a first mortgage raised $1,200 at 5-6 percent interest with a second mortgage of $300 being added as the construction neared completion. Once living in the house the new “owner” was required to make semi-annual interest payments for three to eight years with the principle being due at the end of the term.

However in other areas homes were sold with either one or two straight mortgages and on a variety on installment contracts, some offering payments for twenty years. Nationwide the most common terms were 31% down with the remaining 69% being financed at 5-6 percent for five years.

It’s a Wonderful Life
First organized in Philadelphia in 1831 one of the most popular methods of home financing was joining a building and loan association. Like the Bailey Building and Loan in the movie “It’s a Wonderful Life” borrowers would buy shares in the associations. Then by using a complicated system that most of them didn’t understand, they were able to finance their home using an amortized home mortgage. This allowed them to pay off the principle and the interest simultaneously.

In 1903 the Ladies Home Journal reported that 3 of 4 new home buyers used a mortgage to finance their purchase. While this allowed more people to own their homes the joys of home ownership also brought on struggle, toil, and labor in order to pay off the large debt. Many homeowners found themselves getting extra wear from their clothing and learning how to cut each others hair. Some found that the financial discipline their mortgage forced on them stayed long after the debt was paid. While credit was used to bring about the dream of home ownership, the regiment of the mortgage taught that debt could be a hard task master.

The Panic of 1893
The depression following the Panic of 1893 was the second worst in the country's history. When the Reading Railroad went into receivership the failures of hundreds of banks and businesses dependent upon it soon followed. The stock market reacted with a dramatic plunge and European investors began pulling their funds out of the United States.

Thousands of businesses were ruined and more than four million were left unemployed causing the unemployment rate to reach 18.4 percent. This along with an ongoing agricultural depression in the West and South spread additional misery to those regions.

President Cleveland believing like most people of both major parties, that the business cycle was a natural occurrence and should not be tampered with by politicians, did nothing. This lead to the poor to believe they had been ignored and left at the mercy of big business.

The Bankruptcy Bill of 1898
The 1898 law was brought about by a variety of forces; business, pro-debtor, and legal interests. But the forces that gave the final momentum were the Republican lawmakers who supported pro-business debt collection groups that wanted a uniform statute to replace a myriad of state debt collection laws. In 1890 creditor groups commissioned a St. Louis attorney to write a bankruptcy law. That bill passed the House but bogged down in the Senate. In 1897 the House again passed a version of the creditor bill with the Senate passing its own debtor friendly version. Compromise arrived and President McKinley signed the Bankruptcy Act in July of 1898.

The Bankruptcy Act of 1898 was the first bankruptcy law to become permanent. It incorporated five fundamental principles. It relieved all debts not just ones arising out of contracts entered into after the law went into effect; it permitted both voluntary and involuntary bankruptcy; it applied to all business corporations, including national banks, but exempted farmers and wage earners from the involuntary provisions; it protected whatever property was exempt under state law from attachment; and it provided provisions by which insolvent debtors could have a grace period in which to reorganize their affairs or reach compromises with their creditors. Creditor approval and other conditions for discharge were fully removed.

Who was in Debt? – Begging Letters
At the turn of the century so many people were hopelessly in debt that they wrote letters to rich and famous people asking for help, begging for money. On rare occasion these letters met with success and money was lent or given, or a job was offered. But most of them just went to chronicle the desperate times and document the utter frustration that would lead private people to share their deepest secrets with a stranger.

In 1903 Andrew Carnegie received 15,000 begging letters a week.

Edward Everett sought to explain the panic of 1857 saying if was because of “a mountain load of debt” taken on by the entire country – individuals and communities, businesses and government. Everett estimated that the household debt alone was $1.5 billion, $300 per household.

The concern about how much debt Americans were in and if they had the ability to repay it led to Congress demanding that the 1890 census collect statistics on corporate and individual debt. But then, as now, the subject of personal debt was one not often discussed with strangers especially census takers who were collecting information for the government. The idea was scrapped. But not to disregard the Congressional mandate the census bureau, based upon the information available estimated that the minimum total debt of the American people to be $11 trillion. This equaled to an average of $800 a household at a time when the average non-farm income was $475.

P.T. Barnum filed for bankruptcy in 1871.

Mathew Brady, distinguished Civil War photographer, filed for bankruptcy in 1872

President Ulysses S. Grant got involved in a banking house which went bankrupt. This left him so destitute that he had to hand over all his property, including his swords and trophies.

L. Frank Baum, "Wizard of Oz" author, ran a store into bankruptcy in 1888.

Mark Twain went bankrupt in 1894.

Oscar Wilde was forced into bankruptcy in 1895.

Milton Snavely Hershey started four candy companies that failed and filed bankruptcy before starting what is now Hershey's Foods Corporation.

Failure because so common that on New Year’s Eve 1890 the Chicago Tribune asked its readers “To what do you ascribe your failure in life?”

>>Next Page 1900 - 1949

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