Term Paper on "What Are the Moral Implications of Bankruptcy?"

Term Paper 11 pages (3139 words) Sources: 0

[EXCERPT] . . . .

Moral Implications of Bankruptcy

As the number of personal bankruptcy filings in the United States has significantly increased in the last twenty years, many scholars have analyzed the motivating factors and the deterrents that impact an individual's propensity to commence bankruptcy protection.

Traditionally, the neoclassical economic model has been used to predict human behavior in the bankruptcy context. As a wealth maximizer, the individual is predicted to file bankruptcy only when the monetary benefits are greater than the related costs. In conceptualizing the human behavior in this manner, the scholars ignored important non-monetary factors, such as morality and stigma, that influence the individual behavior in the bankruptcy context.

This paper focuses on the much ignored perspective on human behavior in the bankruptcy context: morality. In drawing on literature from psychology, sociology and religion, the paper addresses two fundamental components of the moral appeal factor: trust relationships in the credit market and religious beliefs regarding debt-repayment. Lastly, this paper explains the implications of morality to the understanding of contemporary human behavior in the bankruptcy context.

Hamilton On the National Debt

Hamilton's economic plan for our fledgling nation implied that he had no problem with the morality involved in debt or bankruptcy.

1. Funding - Hamilton're issued bonds sold by the Constitutional Convention. This was done in an effort to organize the nations outstanding debt and build trust in the new nation with the wealthy investors that now owned the bonds. The problem was that many bonds had been sold to wealthy speculators during hard times. These speculators would now make an enormous profit. This act was seen as another Hamilton plan to help the rich.

2. Assumption of State Debt - In an effort to solidify the national debt and appear more united Washington, under Hamilton's direction took on the debt of all the colonies. The federal government would pay the debt from the war, not the original colonies. The debt would be paid with tax money. The problem was that the South had already repaid most of its debt. Southerners saw this as another way Hamilton protected his wealthy northern friends.

3. Build a New Capital - Hamilton felt that a new federal city would increase respect for the new nation and build investor support. Land was donated by Maryland and Virginia and the swamps were turned into Washington D.C.

4. Establish a National Bank - Hamilton wanted to build and create a national bank with the power to issue paper money, handle tax receipts and other government money. Hamilton felt this would stabilize currency, and tie the economy to wealthy investors who would own 80% of bank.

In January 1790, Alexander Hamilton, installed as the first secretary of the treasury, submitted his Report on the Public Credit to Congress. Hamilton called for funding nearly all the government's obligations, including the state debts, into long-term federal securities payable in specie -- that is, hard money.

After considerable debate Hamilton's proposals were adopted in August 1790. The foreign debt was fully funded, as was most of the domestic debt, although interest payments were deferred on part of the latter and another portion carried interest rates below the market rate.

Only the depreciated Continental bills, nearly valueless, were funded at less than face value; one hundred dollars of Continentals were accepted as payment for one dollar of the new bonds. The most controversial part of Hamilton's plan, because some states had paid off the bulk of their debts while others had not, was the assumption of remaining state debts by the federal government. (To gain the support of Thomas Jefferson and his followers for the plan, Hamilton and the Federalists agreed to a compromise that located the future capital of the nation on the banks of the Potomac.)

Hamilton's refunding plan was generous to the government's creditors, who replaced securities selling for as little as fifteen cents on the dollar in 1789 with new federal bonds that soon rose toward par. How was such generosity justified? Hamilton argued in his report that his plan would restore faith in the government and public credit, attract foreign capital to the United States, and increase the effective stock of money, thereby stimulating the economy.

Subsequent experience proved him correct. The U.S. government was nearly bankrupt in the 1780s; in 1803 it had no trouble borrowing $11.25 million on short notice, mostly from foreign subscribers, to finance the Louisiana Purchase, which doubled the size of the nation. By that time nearly 60% of the national debt had been purchased by foreigners, who in effect lent money to Americans in return for the government's promises to repay them in the future. Within the United States, debt owners could sell their federal securities for money or use them as collateral for bank loans. In retrospect, Hamilton's plan was a political and economic masterstroke for the new Republic. As Daniel Webster would later say, Hamilton "touched the dead corpse of the public credit, and it sprung upon its feet."

The subsequent history of the debt can be traced through the accompanying table and the figures' portrayal of the expansion and contraction of the debt/gnp ratio. A national debt of $75 million in 1791, when Hamilton's funding plan was implemented, may seem small to the modern observer. But it represented about 40% of the gnp then, and a debt/gnp ratio that high was not seen again in U.S. history until the 1930s when the Great Depression led to large federal deficits and increases in the debt at the same time the gnp was collapsing.

The national debt reached a high in 1804, when the Louisiana Purchase added $11.25 million to it in one transaction. But aside from this extravagance, the administrations of Jefferson and James Madison were noted for fiscal frugality. Although some of the old Federalist taxes were cut in those years, Treasury Secretary Albert Gallatin was nonetheless able to cut the debt nearly in half between 1804 and 1811. Another notable event in the history of the debt was its elimination in 1835 and 1836, an occurrence unprecedented in the history of modern nations. This was during the administration of Andrew Jackson who, like his Jeffersonian predecessors, was fiscally frugal. But the main reason was the rapid economic growth that swelled federal tariff and land-sale revenues.

Today's Interest of Morality in Bankruptcy

There is a bankruptcy problem in American and it is tied to the consumer-debt explosion. Between 1980 and 2004, the total consumer debt grew from $288 billion to more than $2 trillion. Revolving consumer debt such as credit cards has also increased from $58 billion to $500 billion during this time. The widespread use of credit has caused millions of men and women to file bankruptcy because they have become unable to repay their debts. This paper will discuss the morality of declaring bankruptcy and what some philosophers would say about obligation to one's debt.

Almost all buying and selling in America involves credit of one form or another. Every household in the country from the poor to the rich is entangled in the complicated web of credit and obligation. As the rate of consumption has increased through the 1980s until the present, more and more large scale transactions are added to the credit networks in America.

Houses, furniture, automobiles, clothing and food are some of the necessities of life that are purchased on credit with the consumer's responsibility to repay that debt over the time agreed upon.

The consumer spending craze of the 1990s was mostly due to commercialism and ads bombarding young people that they had to have more. Now, many Americans, especially the 20- to 35-year-olds are in debt and have no idea how to pay their bills. (http://freep.com/money/business/spend28_20011228.htm).

Back in history, the nature of obligation in credit relationships were not based on how much money one person had, but rather on the mutual exchange of goodness. Henry Wilkinson, minister of England, compared the relationship of obligation of debt to that of one's personal traits.

He wrote, "whatsoever civil debts or duties we owe to any, we must truly and duely pay them and so much as in him...if the work-man be worthy of his wages, then even the hireling must have his due; the poorest laborer his due, every good man, so much as in him, pay every man his owe."

As the complexity of credit relationships and credit networks grew with the increase of household wealth, it was necessary for the government to step in and build laws surrounding debt obligation. With more credit and debt came more failure of paying debts on time and in full and bankruptcy laws were then born.

The Bankruptcy Act of 1898 was established as an acknowledgement of the fast-growing credit economy of the Industrial Age.

The Act placed the focus of bankruptcy far more on the debtor than ever before as it provided the debtor a full-fledged discharge of debts and more and broader exemptions of assets. (www.vault.com/articles/A_Brief_History_Of_Bankruptcy_Law_17926399.html)

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