Federalism, the Business Cycle, Debtor Organization and the Politics of Debt

Guest Blogger

For the Balkinization Symposium on Emily Zackin and Chloe Thurston, The Political Development of American Debt Relief (University of Chicago Press, 2024).

Teresa A. Sullivan

Conflict between debtors and creditors exists to some extent at all times and everywhere, but under some conditions important shifts in the relationship occur. This book seeks to explain what led to some of those shifts in American debtor-creditor relations. Three issues stand out in the analysis: constitutional federalism; business cycle downturns; and debtor social movements.

The privileged position of property, bolstered by contract, gave creditors the undisputed upper hand in the original English colonies. Federalism was a potential threat to this relationship, in case the newly constituted states tilted the balance more to debtors and away from the creditors, especially creditors located in other states. The constitutional reservation of bankruptcy to the federal government was intended to forestall this development. As the early chapters of this book document, throughout the eighteenth century some state legislatures did indeed respond to their constituents with forbearances, moratoria, and even outright nullification of Supreme Court decisions.

These legislators’ innovations were a response to business downturns that affected their constituents. In the agrarian Midwest, agricultural producers relied heavily on debt to finance the crop cycle and then were at the mercy of the weather to produce the crop and at the mercy of the markets to recoup their expenditures. The value of their crops could decline but the size of their debts could not. State legislators understood that the creditors were likely to be New York banks.

The Civil War was a special case in terms of economic dislocation, in that nearly the entire southern population was transformed into debtors, with white property owners indebted to keep their land productive without their former enforced labor supply and the former slaves indebted through the share-cropping system. Southern legislatures responded with sweeping relief for the white planter class but also with laws that all but criminalized debt for the sharecroppers.

Congress, meanwhile, was able to act only sporadically in response to the recurrent financial panics of the eighteenth century, and the measures were soon repealed. By the time something like the current bankruptcy regime was established, it incorporated many of the features from the states’ experimentation, such as state exemptions.

The creation of whole communities in which indebtedness was a common experience spurred on the organization of debtors, some organized to disrupt foreclosures and others organized to influence the state legislature to pass favored relief measures. These social movements resulted because, in the terms of sociologist C. Wright Mills, individual troubles became understood as social problems. The inability to pay one’s debt was reconceptualized from the creditors’ favorite narrative of character defects to a sense of a structural defect in the economy.

An example comes from a twentieth-century dislocation, the Great Depression, which left one-third of the work force unemployed. It was irrational to assume that suddenly so many workers had become lazy. The idea that such widespread unemployment had systemic causes led to varied types of social activism and demands that the government take steps to alleviate poverty and shore up the economy.

More recently, in the 2008-09 recession and in the 2020-2022 pandemic, organized pressure arose for relief from eviction, foreclosure, and student debt, and there were again short-lived responses to provide some types of relief. The authors note that “the new [debtor] organizations have worked deliberately to reframe the experience of overindebtedness from an individual experience associated with personal shame and/or moral failing, to a collective and morally neutral problem (pp. 152-153).”

I would add a few glosses to the analysis. I agree with the authors’ argument that European historical precedent shaped the way that the new nation conceptualized the balance between the interests of debtors and those of creditors. I would, however, look beyond the East Coast. There is an interesting Spanish heritage in a number of the states that joined the Union after the original thirteen. Just as the significance of property and contract was a strong inheritance from English common law, Spanish civil law incorporated from late medieval times an emphasis on compassion and concern for the poor. This emphasis, derived from the strong Catholic influence on Spain, carried over to Spanish colonies just as common law carried over to the English colonies.

The Spanish history of debtor-creditor relations was kinder to debtors, including a prohibition against leaving the debtor without means to support a family or make a living. This heritage persists in states such as Texas, where the state exemption includes the homestead and tools of the trade, provisions that would allow debtors to support their families. New Mexico is similar, although with lower dollar limits. A comparison with Mexico’s Ley de Concursos Mercantiles is instructive.

The relative weakness of twentieth-century debtor organizations also needs further consideration. The creditors employ sophisticated lobbying and deploy campaign contributions to elected officials; they also convey, through their advertising, that credit cards let the consumer pursue Caribbean vacations and designer clothes. The credit card holders may in fact barely be making ends meet by using their credit cards, but the creditors’ advertising itself allows the lobbyists to insinuate that consumer debt represents undisciplined spending and should not be rewarded. Debtor organizations are hard pressed to compete with the creditor lobby.

Eighteenth-century debtors usually secured debts by offering their land, homes, and equipment as collateral. The fact that they were property owners meant that they had a high standing in their communities and thus probably a greater sense of agency. Their organization as debtors helped stabilize their communities, and they were likely to be well integrated into local and state political networks.

In the twentieth century, although secured debt is still important for homeowners and car owners, unsecured debt has become much more important. Credit cards are the leading example. Moreover, at some point in the monthly credit card billing cycle, nearly every American is a debtor. Many Americans pay their bills in full at the end of the cycle, and these people do not think of themselves as debtors and are unlikely to organize. Moreover, during the COVID-19 pandemic so many retail outlets became cashless that credit cards became routine for all daily expenditures. Credit has become normalized -- the dangers of debt, not so much.

The Political Development of American Debt Relief integrates several disciplinary perspectives into a readable, engaging narrative. Besides finding a place on the bookshelves of law professors, this book would be an interesting addition to reading lists in economic history and in sociology courses on social movements. The tensions depicted in this book are durable and unresolved, and this volume is valuable for illuminating them in the American context. 

Teresa A. Sullivan is President Emerita and University Professor Emerita at the University of Virginia. She can be reached at tas6n@virginia.edu.