Chapter XIII A Closing Riff on Bankruptcy in Society

• Jurisdiction: United States

XIII. A Closing Riff on Bankruptcy in Society

One way to get a sense of the importance of bankruptcy in the world is to look at the "new market economies" — the states that have struggled to develop market institutions over the past generations. There are some things, it seems, that you just have to have if you want a functioning market: stable currency, a corporate governance regime and bankruptcy.

Bankruptcy — can that be right? On the evidence, the answer has to be "yes." Over and over, countries creating a market apparatus have found themselves creating a system of bankruptcy law. The point, it seems, is that a market economy needs, at a minimum, a system for withdrawing and redeploying capital from failing enterprises.

We have all seen (indeed, we can still see) cases where "failing" firms continue in business long after an acceptable limit, sucking wealth out of creditors for the benefit of one constituency or another. There is no good public policy reason for this sort of thing, and a functioning bankruptcy system will do away with it. A key question is how to devise a system that can sort debtors into those that have going-concern value and those that do not.

It can be surprising to see how much bankruptcy is tied with American history. The Constitution itself can be regarded as king of a solution to a debt crisis: Hamilton wanted a strong national government to assume the Revolutionary War debt to get itself taken seriously in world markets. Through the 19th century, individual bankruptcy laws helped to resolve episodic financial crises until at last (in 1898) it became a permanent feature of bankruptcy law.

Forget about the individual discharge for a moment and reconsider the role of bankruptcy in the larger context. The period after the Civil War was a great age for the building of infrastructure, particularly railroads, which came to...