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Justin Fox

Bankruptcy Isn't for Everyone. Maybe It Should Be.

People and companies can start fresh. Why not states and nations?


Photographer: JB Reed/Bloomberg

Robert Morris was a signer of the Declaration of Independence, the chief financier of the American Revolution, the superintendent of finance (Treasury secretary, basically) of the early republic, one of Pennsylvania's first two U.S. senators, and, for a time, the richest man in the country. But in February 1798, after a huge bet on land on the western frontier and in the new “Federal City” on the Potomac fizzled and a financial panic ended creditors’ patience, he had little choice but to check himself into the debtors’ prison on Prune Street in Philadelphia.

The shock was felt across the country, especially two blocks away at Congress Hall. The U.S. Constitution had in 1787 explicitly called on Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” This would be good for the “regulation of commerce,” James Madison explained in Federalist Paper No. 42, “and will prevent so many frauds where the parties or their property may lie or be removed into different States.” But lawmakers hadn’t seen it as a priority, even after another famous financier, William Duer, had landed in debtors' prison after a financial panic in 1792.