A history of bankruptcy and bankruptcy in history
Thomas Max Safley
Insolvency and bankruptcy are persistent realities of economic life that have long provoked comment and criticism. As early as the sixteenth century, an Augsburg chronicler remarked about one of the most notorious bankrupts of his day that:
he often oppressed the common good and the poor man with his commercial activity, not only with large, reputable wares, but also with smaller, poorer goods. He bought up ash wood in good times, and brought it to market at better times, the same with wine, and lute strings, and often bought the entire supply of a good at a higher price than it was worth in order to put pressure on his competitors, who could not afford to buy it, after which he would raise the price of the good in all lands and sell as he pleased. No merchant worth 50,000 or 100,000 gulden could trade in comparison with him, because he profited wherever he wished.1
Here was profit-seeking in every saleable good, speculation in commodity futures, competition on price-point, manipulation of foreign markets and an utter disregard for every non-advantageous consideration. The account detailed how complex credit transactions combined with opportunistic business partners led to a bankruptcy that resulted in extended litigation and ended with the ruin of his family and hundreds of his creditors. That he died in chainsâthe last detail of the accountâwas little more than justice. This chronicler and others after him2 immortalize the greed, and question why the bankrupt lost sight of the early modern merchant-financier's maxim, servare modum finemque tenere, Lucan's attribution to Cato, urging moderation in pursuit of reasonable goals, which serves today as the motto of the House of Rothschild. Apart from Villani's report of the fourteenth-century collapse of the great trading companies of the Bardi and Peruzzi,3 it is one of the earliest existing accounts of an actual bankruptcy.
Some 200 years later, an anonymous moralist of the eighteenth century decried bankruptcy and bankrupts in general:
They steal under the appearance of an honorable man. They cut a figure with other people's money. They win friends with unrighteous Mammon. They are the best of men, because they give everything to their wives. When they are unable to carry on, they give up their good names as well as their businesses. They pay no one. It is said, they were unfortunate. They lose everything and live afterward from the wealth of their wives as comfortably as before.4
His text points at many of the same issues: profit and greed, credit and debt, non-payment and deception, reputation and punishment. Yet, there is no assumption of a good man gone astray. There is no just ending.
His tone suggests that something has changed. What had emerged in the sixteenth century as an economic and social problem had become a sign of economic decline and moral decay, an index of social and personal failure. Bankruptcy had moved from being something extraordinary, like the sighting of a comet or the birth of a two-headed calf, to being something systemic. Capitalistic practices no longer needed to be described; they could be assumed. Bankrupts all deserved the rope, a prescription not necessarily original in itself,5 because the damage they caused was not limited to a group of reckless high-flyers. Merchants and bankers relied on other people's capital. When they misrepresented the investment risks or mismanaged financial affairs, they robbed others of their fortunes, their homes, their jobs and their futures. They were often the least affected by the consequences of their deeds. Recent events echo these sentiments, even as the prescriptive measures against bankruptcy have lost most of their draconian bite.
This volume attempts to address the transition framed by the two commentators. Its contributors take up bankruptcy in early modern Europe from a wide variety of perspectives. At the heart of their inquiries lie questions about the identity and fate of bankrupts, the generation and redistribution of wealth, the organization and reorganization of enterprise and the emergence and transformation of institutions over time. Together they make clear that what has become generally known as âcommercial capitalism,â by no means new in the sixteenth century, was practiced in new forms, underwritten by new institutions and associated with new meanings in the eighteenth.
Bankruptcy belongs to the essence of capitalism. Though failure, conceived in its broadest terms, can occur under any kind of economic system, the particularities of bankruptcy suggest a close identification with one particular kind. While no precise definition of capitalism finds universal approval, scholars agree generally that it involves private ownership of the means of production, creation of goods and services for profit in a market and, to a varying degree, governmental support for private property in the form of appropriate legal institutions. These characteristicsâprivate property, market activity, legal institutionsâappear readily in the reports and reflections of chronicler and moralist.
They inform the very definition of the term. The root, bankrupt, appears in English in the sixteenth century, as a term borrowed from the French (banqueroute) and Italian (banca rotta) to identify âthe wreck or break-up of a trader's business in consequence of his failure to pay his creditors; or the shutting up or desertion of his place of business without paying his liabilities.â6 The Italian banca rotta referred transparently to the destruction of a merchant's trading table, or bank, usually located in the marketplace among those of other merchants, when he failed to pay his debts. Bankrupt was commonly taken to mean:
a merchant, trader or other person, whose property and effects, on his becoming insolvent, are administered and distributed for the benefit of all his creditors, under that system of statutory regulations called the Bankrupt or Bankruptcy Laws. As these laws (which began in England with Acts 34 and 35 Henry VIII, c. 4) were originally directed against fraudulent traders, who absconded with the property of their creditors, or eluded the attempts of creditors to get at them.
The earlier senses were: in law, âa trader who secretes himself, or does certain other acts tending to defraud his creditorsâ (Blackstone); popularly, âone who has brought himself into debt by reckless expenditure or riotous living; a fugitive from his creditors, a broken man in sanctuary or outlawry.â7
Bankruptcy carried an enduring implication of dishonesty and profligacy, because the malversation of private property made it offensive. In legal parlance and in common usage today, bankruptcy has been largely stripped of moral censure and has come to refer strictly to the legal process that begins with a declarationâeither by bankrupt or creditorsâof a person's inability to pay his or her debts. It is âThe state of a person who has been adjudged by a court to be insolvent. The court orders the compulsory administration of the bankrupt's affairs so that his assets can be fairly distributed among his creditors.â8 It distinguishes itself thus from insolvency, that is, the unofficial financial situation from which bankruptcy results, and default on any single debt or obligation. The involvement of a court of law provides a forum andâsignificantly, for the historianâproduces a record, in which the related questions of the financial state of the bankrupt, his actions and intentions and the causes and consequences of his bankruptcy are examined, disputed and, occasionally, resolved. These definitions confirm again and again the systematic existence of private property invested for productive purposes in the market and protected by an array of legal institutions. Their change over time indicates that the social and legal responses to bankruptcy became more sophisticated.
That the term came into much more frequent, colorful and varied usage in the sixteenth century is not mere happenstance. It seems likely that bankruptcy became more frequent from the late fifteenth century. Whether this was indeed the case and why it might have been so remain matters of conjecture. It is hard to ignore the numbers of bankruptcies that begin to mount in the sixteenth century.
Take as a single example the German imperial city of Augsburg. As early as 1560, the local chronicler Paul Hektor Mair counted no fewer than 26 merchants who âbecame bankrupt and, because of debts, sought sanctuary, fled the city, or suffered arrest until they settled and were released.â9 Had he been able to extend his count to 1580, as Jakob Strieder did in 1938, the total would have risen to 70 âgreat and famous commercial houses.â10 More recent surveys have set at 63 the number of bankruptcies in Augsburg between 1529 and 1580.11 If one extends the period of study to 1800, the number may rise as high as 250, and this reflects only those cases that came to the attention of the authorities. Similar numbers may be developed for other, early modern, commercial centers.
The causes were manifold. The inconsistencies of state finance certainly played a part in many bankruptcies. The ambitions of princes and the costs of their policies rose rapidly from the fifteenth century, and merchants with disposable capital were willing to provide credit, accepting the real risk of non-payment for a high rate of interest. The results were both spectacular returns and equally spectacular ruptures.12 The Spanish suspension of payments, followed by the Dutch, French and Portuguese, all of which occurred in the sixteenth century, swept away those merchant bankers not so far-sighted as to have diversified their engagements.13 Commercial developments finished the rest. European silver mining, the great source of capital for overseas exploration and Renaissance culture, suffered a steady decline in productivity and profitability after the mid-sixteenth century. A rising tide of minerals, particularly silver, and other commodities from the Americas and Asia speeded the fall. The consequences of a so-called ârise of the Atlantic economiesâ14 have been debated among scholars,15 but they generally agree that the European economy as a whole experienced inflationary expansion, with different localities or regions profiting at different points in time. A growing, global economy, based ever more intensely on imported and exported commodities, created competitive challenges and disadvantages to which many merchants were not equal.
The resulting bankruptcies have created the impression of a turning-point in economic history. Until very recently, those of the sixteenth century marked the end of âThe Age of the Fugger,â âThe Catastrophe of the Early Capitalist Age,â or âThe Collapse of Southern- and Middle-European Early Capitalism.â16 Though close studies of the economies of Europe at that time reveal few unequivocal indicators of crisis,17 they continue to associate this wave of failures with capitalistic practices in a society and economy that seem deserving of the term. Joseph Schumpeter, whose work in many ways defines the modern discussion of failure and capitalism argued that there was no separating the two, that the one was intrinsic to the other. He wrote:
A society is called capitalist if it entrusts its economic process to the guidance of the private businessman. This may be said to imply, first, private ownership of nonpersonal means of production ⌠second, production for private account, i.e., production by private initiative for private profit.18
He thus calls attention to the individual entrepreneur as the agent, to private enterprise as the modality and to personal profit as the motive of change under capitalism. As he explains in Business Cycles, entrepreneurs are âNew Men,â whose enterprises are âNew Firmsâ that pursue âinnovationâ by creating new commodities, forming new organizations or opening new markets.19 Even as it drives capitalism forward, innovation provokes resistance, because it threatens the status quo.20 This is the essence of âcreative destruction,â as he defines it in Capitalism, Socialism and Democracy, which âincessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.â21 For Schumpeter, well aware that capitalism wreaks havoc on social relations and undermines moral values, the benefits of increased prosperity outweigh the costs in human suffering.
A close study of failure suggests a more ambivalent view. The chapters that follow take up bankruptcy, insolvency and default to explore various aspects of economic life in the early modern period. They examine the identities of and relationships among debtors and creditors. They reconstruct the organizations and workings of their businesses. They t...