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BANKRUPTCY

BANKRUPTCY. Bankruptcy is formally understood as the condition in which a debtor, upon voluntary petition or one invoked by his or her creditors, is judged legally insolvent and whose remaining property is administered by those creditors or distributed among them. The condition seems relatively straightforward: bankruptcy is legally recognized insolvency. In early modern Europe, however, it was a far more ambiguous state, freighted with the suspicion of fraud, distinguished from simple indebtedness, and, in some places, limited in its prosecution to certain trades or professions.

BANKRUPTCY AND THE INDIVIDUAL

Some of the earliest criminal codes make these associations and distinctions clear. The Discipline Ordinance, promulgated in Augsburg in 1537, ordered arrest and imprisonment of any individual unable to pay debts in excess of two hundred guldens. Should the defaulter flee—a generally recognized indication of fraudulent intent—his creditors were authorized to seize his property and person by whatever means necessary. The results were often acrimonious and violent free-for-alls, as in the infamous Höchstetter bankruptcy of 1527, in which the bankrupts languished and died in prison. While the creditors scrambled to recover what they could, a few, like the Höchstetters' partners the Fuggers, profited handsomely, but many others were ruined in the process.

Were a more mutually agreeable settlement reached, the bankrupt still faced a humiliating loss of status, a fatal derogation in an economy that functioned largely on the basis of personal relationships and reputation. The ordinance prescribed that he be stripped of his membership in the merchants' corporation, that his stall be removed from the privileged position of honest merchants at the base of Augsburg's watchtower, that he be prohibited from bearing arms in public, and that he be compelled to take his place with the women at the rear of public processions. Even his children could not escape his stigma: those born after the bankruptcy would be forbidden to wear the gold chain that was the emblem of established Augsburger merchants. Bankruptcy ordinances in 1564, 1574, and 1580 retained this emphasis on punishing economic crime.

The presumed connection between bankruptcy and fraud was echoed in other sources and other places. The Imperial Discipline Ordinance of 1548 spoke of "ruined merchants" who engaged in insecure—and, hence, fraudulent—credit transactions and suffered bankruptcy because of carelessness or waste. They were to be treated as common thieves. In England, the Tudor Act Touching Orders for Bankrupts of 1571 limited the term to indicate "traders" or "merchants" who "craftily obtaining into their hands great substance of other men's goods, do suddenly flee to parts unknown, or keep their houses, not minding to pay or restore to any their creditors, their debts and duties, but at their wills and pleasures, consume the substance obtained by credit of other men, for their own pleasure and delicate living, against all reason, equity and good conscience. . . ." Thus, bankruptcy existed in relationship to credit (which was considered a morally ambiguous entity), competence, and crime, all indicators of a crisis in the conduct and conception of business.

The passage of these laws constitutes a first response to the growing frequency of bankruptcies in early modern Europe. Beginning in the early sixteenth century, bankruptcy became a social evil that affected all levels of society and had extraordinary implications for both large and small economies. State profligacy, coupled with the unpredictable nature of economic growth, created conditions in which even the greatest commercial houses were not safe from default and failure. For the less well-connected or well-provided-for, insolvency and bankruptcy were common facts of life, the litigation of which left an unmistakable trail in most European archives. In 1560, the chronicler Paul Hektor Mair would record the names of twenty-six prominent Augsburg merchants who "became bankrupt and because of debts, sought sanctuary, fled the city, or suffered arrest until they settled and were released." Between 1529 and 1580, that number would rise to at least sixty-three and perhaps as many as seventy of the "great and famous commercial houses" of that city. Over the entire early modern period, Augsburg witnessed over 250 bankruptcies and countless insolvencies. Nor was the problem geographically limited. In England, according to one historian, "debt litigation dominated pleading in the courts of King's Bench and Common Pleas" from the mid-sixteenth to the mid-seventeenth century. From the mid-seventeenth to the mid-eighteenth century, no fewer than fifty-eight French merchants engaged in transatlantic trade suffered bankruptcy. Studies of the Parisian credit market for the same period reveal a noteworthy expansion of private borrowing coupled with periodic government defaults and interventions that would have resulted in waves of bankruptcies.

BANKRUPTCY AND GOVERNMENT

The relationship between public and private finance remains dimly understood, but the numbers and patterns of commercial or domestic failures in early modern Europe relate, in part, to a series of spectacular state bankruptcies. In an age when most princes struggled to live within their means, the monarchs of Spain and France, despite rising prices and ambitions, seemed to rule in virtual freedom from such limitations and developed extraordinary debts in pursuit of their policies. France declared bankruptcy in 1559 and defaulted on its short-term debts repeatedly during the reign of Louis XIV, subsisting otherwise on a fiscal system noted particularly for its corruption. Spain suffered bankruptcies in 1557, 1560, 1575, and 1596. The most spectacular, that of 1575, may be taken as emblematic of all. The decision of Philip II to suspend payments to his bankers can be seen as a watershed in his reign (and in Spanish power). The causes are not far to seek: the costs of political and military policies in the Mediterranean and the Netherlands during the 1560s and 1570s outstripped the crown's financial resources. Rather than effect economies, renegotiate terms, or redistribute the burden, Philip and his financial advisers opted to default, forcing a conversion of short-term debt to long-term debt that involved favorable interest rates and the forgiveness of certain obligations. This was a favorite tactic not only of the Spanish crown but also of the French in the early modern period. But in dealing with the bankruptcy of 1575, Spain's bankers (the Genoese above all) did not mildly concede as they did in 1560 (and, later, in 1596) but instead firmly resisted. They suspended all commercial credit to Castile, the fiscal heartland of Spain, and rejected the king's proposed terms. Although the immediate consequences were not fatal, the bankruptcy may be said to mark the beginning of Spanish decline. The suspension of commercial credit within Spain, and especially within Castile, permanently affected trade and, consequently, taxes. The loss also impinged on the effectiveness of Spanish armies in Italy and the Netherlands and led, most immediately, to the sack of Antwerp in 1576, likely rendering any suppression of the Dutch Revolt of 1568–1648 impossible. As important as this bankruptcy may be for the political history of the period, its economic consequences reach far beyond Spain's borders. In the 1577 settlement that ended the bankruptcy and restored Spanish credit, the bankers managed to avoid the worst consequences by recouping or transferring their losses (by calling in other debts). This became apparent in a wave of private failures that mark the interconnections between public and private finance and between larger and smaller commercial enterprises. In Augsburg, for example, 39 of the 63 sixteenth-century bankruptcies cluster around the Spanish defaults: 13 between 1559 and 1561, 14 between 1573 and 1576. Though it is impossible to attribute these and many other failures strictly to the fiscal chicanery of Philip II, their timing cannot be purely coincidental. Bankruptcies marked a shortage of credit—a crisis in money markets—that potentially reached from state treasuries to commercial countinghouses and from powerful bankers to humble artisans.

FINANCIAL RELATIONSHIPS

Of course, bankruptcies illuminate much more than the interconnections of early modern finance; they reveal some aspects of business practice. Early modern merchants, entrepreneurs, and financiers operated in an age of money scarcity and relied, therefore, to a very large extent on credit. Indeed, these men often traded within systems of interlocking credit, owing money to their suppliers or lenders and owed money by their customers and clients. Such systems could be quite fragile; one default could cause others, rippling across the entire network of relationships. In addition, they operated in an economy that lacked legal and fiscal institutions to ensure and enforce credit transactions. As a result, merchants, entrepreneurs, and financiers relied upon personal relationships and personal knowledge to reduce the risk of default. Being a close-knit community in most places, they often knew who was or was not a good credit source or credit risk. Where personal knowledge would not serve, intermediaries, such as notaries or goldsmiths, often arose, and used their own knowledge of persons (and their means) to mediate and facilitate credit exchange. Questions of reputation and risk, to say nothing of the issue of fraud, were a function of the transmission of information and touch the boundaries between economic and cultural history. They also touch the social history of economic life in early modern Europe. Merchants also depended on a wide range of organizations to reduce risk and reinforce reputations: they formed partnerships among themselves; they entered into collective agreements; they drew upon the resources of their families; they strengthened business agreements with confessional ties (by doing business with people of the same Christian creed). Finally, bankruptcies testify not just to the failures but also to the successes of early modern enterprise, a varying combination of fortune and misfortune, competence and incompetence, honesty and dishonesty. Bankruptcies give us a mirror image of business success; by showing us how merchants and manufacturers assessed risk and managed assets, we learn not only the circumstances of failure but also the conditions of success.

The early modern period supposedly witnessed what scholars have for more than a century generally described as the transition to modern capitalism. Insofar as this is true, bankruptcy reveals some of the continuities and discontinuities in an age of change. Credit played a central role in early modern bankruptcies, and the vitality and ubiquity of early modern money markets is one area in which modern capitalism differs less than expected from its pre-modern model. The personal nature of credit relations, given the institutional underdevelopment of early modern economies, constitutes a less well understood distinction from modern capitalistic practice. The interpretation of bankruptcy as a criminal act requiring restitution—which remained unaltered until the nineteenth century—raises fundamental questions about business reorganization and capital accumulation on the eve of the Industrial Revolution. The adversarial relationship between private and public finance, revealed strikingly in early modern state bankruptcies, may suggest that their modern symbiotic relationship had not developed. Bankruptcy teaches, finally, that "transition" may be too simple a term for what was a multifaceted, complex, and gradual process.

By the eighteenth century, the bankrupt replaces the monopolist as the quintessential image of ruthless, exploitative capitalism. Bankruptcies were common occurrences against which integrity offered no necessary protection. Yet moralizing tracts and popular periodicals elevated the bankrupt to the level of arch-villain of the local economy. It was a perfect measure of the ways economic principles had and had not caught up with economic practices. Given the importance of bankruptcy not only for the economic history of early modern Europe but also for its political, social, and cultural history, it is surprising that so little scholarship has been devoted to the topic.

See also Banking and Credit; Capitalism; Commerce and Markets; Economic Crises; Interest; Taxation.

BIBLIOGRAPHY

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THOMAS MAX SAFLEY