Friday, February 14, 2020

Bankrupt in America

We received our copies of Bankrupt in America: A History of Debtors, Their Creditors, and the Law in the Twentieth Century 


also available at Amazon

I previously posted an overview of the book but here is a description of each of the chapters.

Chapter 1 Introduction

The introduction acquaints the reader with what is already known about bankruptcy in the twentieth century, describes the methods used in the book, and previews the central argument. The chapter begins with a broad overview of the laws and procedures governing the collection of unpaid debt at the state and describes federal bankruptcy. The text highlights the interplay between state and federal law. It introduces the interdisciplinary literature on bankruptcy, emphasizing the need for an analytic framework that integrates the story of changes in the bankruptcy law with the story of changes in the bankruptcy rate. It places the framework and methods within the contexts of New Institutional and cliometric traditions.

Chapter 2 The Intended and Unintended Consequences of the 1898 Bankruptcy Act

Chapter 2 examines the origins and consequences of the 1898 Bankruptcy Act. The authors of the law were business owners who wanted an efficient procedure to deal with the failure of other businesses. They gave little thought to personal bankruptcy, and the law that they designed for businesses erected no substantial obstacle to the discharge of consumer debt. As access to consumer credit expanded, personal bankruptcy grew both relative to business bankruptcy and in absolute terms. However, personal bankruptcy did not grow evenly across the U.S. Households sought the protection of bankruptcy law mainly in states where garnishment of wages was easy. The growth in personal bankruptcy led to a shift in beliefs about the causes of bankruptcy and the purpose of bankruptcy law. Initially, creditors, debtors, legislators, judges and other legal professionals agreed that the purpose was to satisfy the claims of creditors efficiently. By the end of the 1920s, many interested parties stressed the importance of providing relief to debtors, who were portrayed as victims of unscrupulous creditors such as loan sharks. The increase in bankruptcy also led to changes in organized interest groups. Legal professionals began to work alongside creditors to try to shape the law.

Chapter 3 An Emphasis on Workout rather than Liquidation

As bankruptcy rates increased in the 1920s, creditors and legal professionals sought to increase in the efficiency of administration. However, as the nation slipped into the Great Depression, reformers found that neither the country nor Congress was interested in their ideas for improving efficiency. Business bankruptcy increased rapidly at the start of the Depression, and President Hoover pushed Congress to add ways for businesses and farmers to develop repayment plans and avoid liquidation. As the Depression wore on, however, business bankruptcy became less of a problem because new business formation was low. Personal bankruptcy cases continued to increase in states with pro-creditor collection law. Representatives from those states, especially Walter Chandler from Tennessee, argued that workers wanted to pay their creditors if they, too, could have a procedure that granted them more time. Congressional debates around the proposals that eventually became Chapter XIII (now known as Chapter 13) pitted those who viewed the procedure as a means to enable people to pay their debts and avoid the stigma of bankruptcy against those who balked at the idea of making the courts a collection agency for creditors. This theme was reprised several times over the next 70 years.

Chapter 4 Personal Bankruptcy after World War II

The bankruptcy rate was very low during World War II, but it increased quickly after the war ended. As growth in consumer credit returned to its pre-Depression trend, so did growth in the personal bankruptcy rate. Bankruptcy grew everywhere, but it rocketed past its previous peak in states with pro-creditor garnishment. Although personal bankruptcy increased, few cases were filed under Chapter XIII. Demand by debtors for Chapter XIII probably was not as great as its Depression-era advocates imagined it to be. People rarely used the procedure for spreading payments over time except in places where bankruptcy referees pushed it.

Chapter 5 The Renegotiation of the Relationship between Consumers and Their Creditors

Pro-creditor garnishment law was a key driver of the bankruptcy rate for the first two-thirds of the twentieth century, but it did not survive the consumer rights movement of the 1960s. By 1970, Congress and the Supreme Court limited the ability of states to maintain and enforce pro-creditor collection laws. Chapter 5 shows that the federal restrictions on garnishment law, especially the Consumer Credit Protection Act, reduced the state-to-state variation in the bankruptcy rate and caused the national bankruptcy rate to level off. Although the growth of bankruptcy in the 1950s and 1960s led to calls for reform of federal bankruptcy law, the effort moved slowly. By the time recommendations for bankruptcy reform were made to Congress, bankruptcy rates were no longer regarded as a problem. Almost all of the changes to personal bankruptcy in the 1978 Bankruptcy Reform Act encouraged debtors to file.

Chapter 6 The Triumph of the Consumer Creditor

Bankruptcy rates rose after 1978. The debtor-friendliness of the 1978 changes set the stage for a new bankruptcy crisis, but the increasing importance of banks that issue credit cards was the most important force. The Supreme Court’s 1978 decision in Marquette National Bank of Minneapolis v. First Omaha Services Corp. led directly to the growth in the market for credit cards. Banks could now profit from offering cards to high-risk consumers, and this put more people on the path to bankruptcy. Card issuers used some of their profits to lobby for changes to bankruptcy law. Studies by creditor-funded organizations, such as the Credit Research Center, supported a narrative in which lax bankruptcy law and lack of stigma led households to file for bankruptcy even when they could pay, imposing a so-called bankruptcy tax on honest debtors. In 2005, Congress passed a bankruptcy reform bill supported by banks and credit card companies, over the objections of many legal professional, scholars, and even some creditors. Today personal bankrupts must use Chapter 13 repayment plans unless they can show that they do not have sufficient income to repay. Credit card issuers won the argument that retailers began in the 1930s.

Chapter 7 Conclusion and Epilogue

The conclusion reviews four themes in the evolution of bankruptcy and bankruptcy law. First, long run growth in personal bankruptcy comes from growth in the supply of credit at the extensive margin. Businesses regularly invented new ways to grow through consumer lending, and the relaxation of usury restrictions facilitated riskier loans. Second, state laws governing the collection of debt are key to interpreting geographic and temporal patterns in bankruptcy. The interaction of state collection law and bankruptcy law caused bankruptcy rates to be higher in states with pro-creditor collections. Pro-creditor collection law also magnified the effect of the growth in the credit supply and the effect of recessions on the bankruptcy rate in those states. Third, people matter. A small number of individuals had outsized influence on the history of bankruptcy. Fourth, stories matter. Beliefs about bankruptcy are typically expressed in stories about what brings people to bankruptcy. In some stories, debtors are driven to bankruptcy by unscrupulous creditors or economic crises. In other stories, unscrupulous debtors take advantage of overly generous laws, imposing the cost of their default on others. The direction bankruptcy reform took depended upon which story carried the day.

Thursday, February 6, 2020

Trumpanomics: The Art of the Con

Trump claimed that "In just three short years, we have shattered the mentality of American decline," by reversing the disastrous policies of the previous administration. Anyone who has been paying attention knows that this is probably not true, since he said it. I don't have time to address all of his lies (see this article in the Washington Post), but its not hard to show that there hasn't been any sharp break in terms of the economy

The unemployment rate is low, but it has been falling for about a decade. One could argue it was falling more rapidly before he too office. It fell 2 percentage points in the last three Obama years, but only 1.2 percentage points in the first three Trump years.

GDP is increasing, but again it has been since the last recession ended. Do you see any noticeable change in trend since he came to office?

There is no reversal of decline after he came to office because there was no decline before he came to office. You'd just as well ignore the fact that the sun rose everyday before he came to office and let him take credit for that as well.

There are some places where there appear to be some changes in trends. For instance, job openings have begun to decline.

And the size of investment relative to GDP has started to increases again (as has the federal deficit)..

Wednesday, February 5, 2020

Bankrupt in America (more shameless self promotion)

Bankrupt in America: A History of Debtors, Their Creditors and the Law in the Twentieth Century by Mary Eschelbach Hansen and Bradley A. Hansen is available from Amazon and The University of Chicago Press. It is part of the Markets and Governments in Economic History series edited by Price Fishback.

I'm going to do few posts about the book, starting today with an overview of the book.

 Bankrupt in America

Though the U.S. Constitution granted it the power to create a bankruptcy law, Congress did not pass the first permanent bankruptcy law until 1898. Bankruptcies rose from about one per 10,000 people annually in the first decades of the twentieth century to about one per 300 people at the turn of the twenty-first century. Bankrupt in America explains the how bankruptcy evolved from an option that Congress seldom used, to an indispensable tool for businesses, to a central element of the social safety net for households, all in the span of a century. The analytical narrative unites the history of how Americans have used bankruptcy with the history of the bankruptcy law itself. The central argument is that bankruptcy law and bankruptcy rates interact over time. Bankruptcy is the last in a series of choices by debtors and creditors about borrowing, lending, repaying, and collecting debt. Changes in federal bankruptcy law, in state and federal law governing debtor-creditor relations, in local legal culture, and in the supply of credit influence the choices and lead to changes in how the bankruptcy law is used.  Changes in how the bankruptcy law is used give rise to changes in beliefs and in interest groups, which in turn result in changes in the law. The interactions create an ongoing historical process of institutional change. The book traces the interactions over the twentieth century using a rich combination of statistics and documents, including recently digitized bankruptcy statistics and stories constructed from court case files.

Wednesday, January 1, 2020

Some Thoughts on the 1619 Project

I’m not sure how much of an impact the 1619 Project will have on the public, but it has certainly gotten a lot of academic historians wound up. Historians at the American Institute for Economic Research and the World Socialist Web Site have both criticized the Project. Talk about politics making strange bedfellows. Peter Coclanis is the latest to criticize it. And, of course, everyone with a Twitter account has an opinion. More than a few seem to be of the opinion that the entire project is tainted by bias and invalid. Others are certain that the biases of the critics are the problem.

I’m not an opponent of the project. I agree with Beckert and Rothman that “American slavery is necessarily imprinted on the DNA of American capitalism,” And there is a lot of recent and ongoing research that demonstrates the fruitfulness of this research program. For a small sample of recent work related to economics and politics see Acharya, Blackwell and Sen;  Yeonha Jung,; and Jhacova Williams. And some of the quibbling about things like whether or not the people transported against their will from Africa and sold in Virginia were "slaves" just does not make sense to me.

That said, I do think there are some significant errors in the Desmond essay and the shorter essays that were incorporated into it. These are the essays most closely related to American economic history, my own field of research and teaching. What I mean by errors are claims that are not supported by the available evidence. There are other things I could argue with. For instance, Desmond talks a lot about capitalism, but doesn’t tell us what capitalism is. This is a problem because there are a lot of different definitions of capitalism and people disagree strongly about them. Personally, I think this renders it more of a distraction than a useful category of analysis. But that is something people can argue about. What I mean by error here are specific claims that are not supported by evidence.

Quoted material is in bold.
Describing the Panic of 1837, Desmond writes that “When the price of cotton tumbled, it pulled down the value of enslaved workers and land along with it. People bought for $2,000 were now selling for $60. Today, we would say the planters’ debt was “toxic.”

The figure below shows the price of slaves during the antebellum period (Historical Statistics of the United States Millennium Edition Series (series Bb211 and Bb212).  It has both the average and the price for prime field hands. There is a large decrease in prices after the Panic of 1837, but nothing on the order of what Desmond suggests. The high figure that Desmond cites is well above the highest price for prime age field hands, and the lowest price is well below the lowest average. It may be that Desmond has evidence that would support this claim, but there is nothing indicating what the claim is based on. 

Mehrsa Baradaran writes that “At the start of the Civil War, only states could charter banks. It wasn’t until the National Currency Act of 1863 and the National Bank Act of 1864 passed at the height of the Civil War that banks operated in this country on a national scale, with federal oversight.”
The federal government could charter banks before the Civil War. It had chartered banks: the Bank of the United States and the Second Bank of the United States (and I think a couple of banks in D.C.). The two Banks of the United States operated on a national scale (they had branches in multiple states), but the national banks chartered under this new legislation did not operate on a national scale. Like most state banks, national banks did not have branches.

Desmond suggests that “When an accountant depreciates an asset to save on taxes or when a midlevel manager spends an afternoon filling in rows and columns on an Excel spreadsheet, they are repeating business procedures whose roots twist back to slave-labor camps. And yet, despite this, “slavery plays almost no role in histories of management,” notes the historian Caitlin Rosenthal in her book “Accounting for Slavery.” Since the 1977 publication of Alfred Chandler’s classic study, “The Visible Hand,” historians have tended to connect the development of modern business practices to the 19th-century railroad industry, viewing plantation slavery as precapitalistic, even primitive. It’s a more comforting origin story, one that protects the idea that America’s economic ascendancy developed not because of, but in spite of, millions of black people toiling on plantations. But management techniques used by 19th-century corporations were implemented during the previous century by plantation owners. It was rational, capitalistic, all part of the plantation’s design.

This is drawn from the work of Caitlin Rosenthal. I really like Rosenthal’s book, but she is very explicit that she is not telling an origin story. She demonstrates how slave owners developed management practices to increase their profits and how those ideas spread. But she states that she does not claim that they were the source for modern management practices.

Desmond also claims that “A majority of credit powering the American slave economy came from the London money market.
I don’t think we know this. We know that some English credit went toward financing the shipment of cotton, as well as the purchase of land and slaves, but, to the best of my knowledge, no one knows what proportion of credit originated in England. It may be true that most of the money came from London, but we do not know. If Desmond actually has evidence to support this I hope that he publishes it.

Regarding the Industrial Revolution Desmond claims that The large-scale cultivation of cotton hastened the invention of the factory, an institution that propelled the Industrial Revolution and changed the course of history.”

This statement reverses the chronology. Cotton mills mechanized and powered by water or steam preceded the large scale cultivation of cotton in the United States by decades. It would be more accurate to say that the factory hastened the large scale cultivation of cotton by enslaved people in the United States.

Writing about New York City, Tiya Miles states that “As the historian David Quigley has demonstrated, New York City’s phenomenal economic consolidation came as a result of its dominance in the Southern cotton trade, facilitated by the construction of the Erie Canal. It was in this moment — the early decades of the 1800s — that New York City gained its status as a financial behemoth through shipping raw cotton to Europe and bankrolling the boom industry that slavery made.”

First, it is not clear how the Erie Canal facilitated New York’s dominance of the cotton trade. Second, does Quigley provide evidence to demonstrate that New York’s economic consolidation came as a result of its dominance of the cotton trade. 

Quigley argued for the importance of the South to New York’s economic development in “Southern Slavery in a Free City: Economy, Politics and Culture,” in Slavery in New York, edited by Ira Berlin and Leslie Harris, The New Press, 2005 (companion volume to major exhibition at the New-York Historical Society, 2005-2007). In this essay, he does make strong claims about the role of slave produced cotton in the economic evolution of New York City. For instance, he writes:
“Slavery and slave produced goods helped propel the city’s prosperity throughout the early nineteenth century. The records of the city’s cotton exchange and individual trading houses illuminate the centrality of the Southern trade to New York’s booming antebellum economy. Alongside the opening of the Erie Canal in the 1820s, local merchants’ success in establishing and maintaining long term business ties to the Southern planter class fueled New York’s financial ascendancy. The city’s merchants came to dominate the export market for cotton and served as critical middlemen for the domestic cotton trade, and metropolitan tradesmen disproportionately benefited from Southern consumerism by mid-century” (page 266).

Quigley’s interpretation differs from Miles. In Quigley, the Erie Canal is not presented as a means of garnering the Southern trade. The Southern trade is presented as adding to the effects of the opening of the canal. Consequently, the Southern trade is not “the” cause of New York’s rise to economic prominence. But does Quigley’s evidence support even these milder claims? 
Guigley relies mostly upon other secondary sources, particularly the work of Richard Albion and an essay by Lampard (Lampard, Eric E. "The New York metropolis in transformation: history and prospect. A study in historical particularity." The Future of the Metropolis. Berlin: Walter de Gruyter, Inc (1986): 27-110). But these citations do not provide evidence that would support the conclusion that New York’s dominance of the cotton trade propelled its economic ascendancy. In fact, it is difficult to make a case that New York dominated the cotton trade.

Consider the following graphs. The first shows the number of bales exported from leading ports (Donnell, Ezekiel J. Chronological and statistical history of cotton. 1872.). The second shows the exports and imports of New York and New Orleans in millions of dollars (Albion Rise of New York Port Appendices II and III). Most cotton was exported from New Orleans. And its share was growing over the antebellum period. The trade that New York dominated was imports (and immigration). Imports, not exports, were what made New York the largest port in the United States.

Some people will argue that the South needed to use New York, ships, banks, and insurance companies? But the size of these connections have been asserted rather than established with evidence. Again, this is one of the areas in which we know there were connections, but to the best of my knowledge no one has estimated the extent of these connections or their relative importance to the New York economy. It should, however, be noted that the South was not entirely dependent on the North, let alone New York. Much recent research has noted the role of significance of financial development in the South. As Desmond noted in his essay, New Orleans was one of the most banked cities in the country. Richard Kilbourne concluded that much of the finance for slave purchases in Louisiana came from local sources. Sharon Anne Murphy and Karen Ryder found that insurance companies in the South took a leading role in the sale of policies to insure enslaved people. People and corporations in New York were involved in the cotton trade (and tobacco, rice and sugar) but we don’t have good estimates of the size of this involvement. Given margin of imports over exports and the fact that most cotton left through New Orleans it is hard to support a claim that New York’s economic rise was du to its dominance of the cotton trade.

Finally, I do have to say that I think that presenting Edward Baptist as reliable authority on the history of slavery in America is also  an error because it is not supported by the available evidence. See here for details.