Going Broke Is Better than Ever

Did you hear the one about the Supreme Court Justice who died broke on the run from the law?

James Wilson lived and lost the American dream.¹ An immigrant. Poor. Ambitious. Hardworking. Like Alexander Hamilton, Wilson was a destitute Scot in a rich Englishman’s world. As a young lawyer, he worked for real estate investors. He saw the rich getting richer and he wanted in.

The American Revolution put his financial ambition on hold. Wilson rattled off a checklist of prominent roles. Continental Congress? Check. Signed Declaration of Independence? Check. Member of the Constitutional Convention? Check. George Washington asked him to serve on the first Supreme Court. From that prominent perch and with a massive paycheck ( Justices made forty times a day laborer’s pay), he returned to getting rich.

At first, Wilson could do no wrong. A parcel here. A joint venture there. He mastered the art of buying land for a little money down, getting it surveyed, and selling for profit before the payments came due. His political and financial stars rose.

Wilson went bigger. He put down payments on land across the nation. He bought in Ohio, Kentucky, North Carolina, Georgia, and Alabama—anywhere he could buy with just a little down. A poor boy from Fife, Scotland, soon controlled a vast American empire.

Or did it control him? When Wall Street’s first crash came in 1792, real estate values plummeted. Wilson, the man who wrote Article II of the Constitution, couldn’t sell his lands, couldn’t make the payments, and couldn’t give it back because the land was worth less than the debt. By 1796 it was over. Bankers called his loans due, served a warrant, and Wilson became the first and only sitting Supreme Court Justice to ever spend the night in jail. Once bailed out, he skipped town. The Supreme Court met for an entire year short one member, who drank himself to death hiding from his creditors.

Anybody could fail. More than a few did. “In no country in the world are private fortunes more precarious than in the United States,” explained de Tocqueville.² “It is not uncommon for the same man, in the course of his life, to rise and sink . . . from opulence to poverty.” True. But incomplete.

There is a bounciness to American failure. We judge broke on an inverted scale. Did the repo lady tow your Kia? You’re a bum. Did the bank foreclose your $100 million portfolio? Wow. Someone loaned you $100 million! We like our bankrupts big, us Yanks. We also like a good comeback story. If you die in debt, you failed. Bounce back, and we will elect you president (William McKinley and Donald Trump),³ watch you box (Mike Tyson) and ball (Sheryl Swoops), binge your reality show (Anna Nicole Smith), and listen to your music (Willy Nelson and 50 Cent).

The reasons Americans go bust have largely stayed the same across 200 years. Failure, however, isn’t what it used to be. It’s better than ever.

* * *

Going broke was never great. People often went to prison, some for years, for not paying debts. Creditors could demand courts keep you there until you died. This sounds illogical because, inside, you can’t make money to pay them back. The hope was that suffering or shame got family to pay on your behalf. That was hard because your wife and children (now homeless) often lived in the prison, too.

Even outside of jail, you could fall very low in the early United States. When the economy collapsed in 1837, failed debtors often left in the middle of the night with only the letters GTT carved on their doors: gone to Texas.⁴ A double-dip recession afterward got so bad that others simply gave up rather than start over out west. Suicides by financial failures dominated newspaper headlines for years afterward.

Bankruptcy laws proved shockingly hard to pass. Creditors worried that letting people off the hook would create a nation of bad borrowers, constantly putting their hand out, but never paying back. Reformers argued the current system didn’t work for anybody, and besides, that’s what interest rates were for. They paid lenders for the risks of lending. Profits came with dangers.

Reformers briefly won the day with a law in 1800, but it was repealed in 1803. In 1841 another national bankruptcy act passed, only to be undone in 1843. Not until 1898 did the United States get permanent protection for bankruptcy, allowing creditors to take what borrowers had left and the unfortunate debtor to start over and try again.

Financial death became rebirth. By the twentieth century, Americans could try, fail, and try again without dying in prison or paying off debts the rest of their lives. Bouncing back became a thing you could do in the United States.

* * *

The brief cohort who declared bankruptcy in the short 1842–43 span offered historians a window into the busted lives of the early nation. Over 40,000 citizens applied for relief,⁵ equivalent to the entire population of Brooklyn, New York, at the time. The causes of their distress were varied, and many were as simple as the random rubble of the 1837 economic collapse. Still, they fit certain patterns: personal extravagance, business inexperience, and undercapitalization dominated the records more than simple bad luck. When the rain fell on the ready and the unready, the worst swimmers drowned.

Bankrupts were fragile optimists. Since their business was sure to succeed, they might as well live the good life now. In a majority of cases, personal overspending played a role.⁶ In a world bursting with credit and consumer goods, the temptations were everywhere.

Good Housekeeping illustrated the point with a story of an entrepreneurial husband and wife casually discussing the pending death of an aunt. “If Aunt Jane were to die, I should not be a bit surprised if she left us that old fashioned set of silver that belonged to my great grandparents.” Thus began the couple’s spiral. The silver was too nice for the sideboard, so a new one would be required. The popular sideboards today were all oak, so their current furniture would have to go. “Walnut is altogether out of style, especially in dining rooms.” But the new oak wouldn’t match the rugs. The topic turned to which new carpets to buy, which then required speculation about which new wallpaper would match the rugs. This, of course, meant new trim work, and on and on it went, until the solution was obvious. Buy a new home to house the trim that matched the walls against the rugs to seat the furniture that kept the fine silver. How to pay for it? The husband didn’t think they could. She burst into tears since he obviously did not love her enough. Everyone was quite relieved when the aunt died and left the cutlery to someone else.⁷

Beyond overspending, the next leading cause of failure was not knowing what you were doing. Overeager to be their own boss, with limited to no understanding of accounting, many failed because they made basic errors seasoned veterans wouldn’t. One New Englander sold an apple orchard and decided to write the sale contract himself, presumably to save on legal fees. The land was repayable in 200 barrels of apple cider, paid annually, with interest calculated in cider and apples. The whole thing fell into a ruinous lawsuit because no one specified who should provide the barrels.⁸

The inexperienced were also undercapitalized. There was a naive quality to those striking out on their own. Excited to do more, they extended business so thin that they were constantly at risk of ruin if a single customer couldn’t pay. Hopeless romantics in business seemed “to believe, with Mother Goose, that a tree top is a proper place for a cradle.”⁹ When the bough breaks, dreams fall back to earth. Across the long nineteenth century, only one in five businesses failed early, but about half of the underfunded ones did. The same held true for craftsmen who, though they knew their trade, hung out their shingle with no cash cushion to buy tools or reserves for lean times.¹⁰

Jonathon Amory and Henry Leeds¹¹ were eager young businessmen with a great plan to make loads of money using little of their own. With a $25,000 loan from Amory’s father-in-law, they quickly built a massive textile shipping firm. In 1838, they did a mind blowing $1.3 million in gross sales ($65 million today). All of this was performed with borrowed money and no real capital. They netted much less. Lack of reserves caught them holding the bag. To get through slack times, they took out more loans. By 1840, they were done, owing $350,000 ($12 million today) and completely ruined. They had done too much with too little.

The list went on. With a fragile network of credit, where any one failure could ripple through to everyone they owed, some people got dragged under by the drowning men they did business with. Co-signing a loan, across every U.S. century, has led to an incredible number of financial failures for the person trying to help. Future President William McKinley literally signed a blank check for someone he trusted, who promised to fill in the numbers but conveniently added a 0. While he was governor of Ohio, McKinley was functionally bankrupted simply by being gullible.

A common theme in investment and business failure, across all centuries, was chasing inflated returns that suddenly deflated. This happened so many times and in so many states that I don’t know where to begin. Assuming that last year’s hot investment will therefore be next year’s has unwound many family fortunes.

Perhaps the greatest example was out west. Dakota lands opened up just as teeming immigrants flooded eastern cities. Factory workers needed protein, and 1881’s The Beef Bonanza: How to Get Rich on the Plains¹² went nineteenth-century viral, telling you how to make money selling it to them. According to the detailed calculations of the author, a man with almost no experience could borrow the money to start cattle herding and get mind blowing 25 percent annualized returns. He reported ranchers with no experience making their entire investment back in a single year.

Would-be cowboys jumped aboard the Northern Pacific Railway and headed west. A French marquis spent millions to buy up land and flip the profits into a coup d’état for the French throne. An idealistic Scotsman came scouting for British investors. So many Harvard graduates rushed west that the Harvard Graduates Magazine¹³ felt compelled to track them all down.

One Harvard man was twenty-four-year-old Teddy Roosevelt.¹⁴ Teddy was mildly rich from inheritance, very good at spending, and recklessly bad at investing. He put $5,000 (about $150,000 today) into a poorly performing Wyoming beef business. Then Teddy wrote a check for 10 percent of his inheritance to buy a cattle ranch. This was no sure thing—the check he wrote for his previous venture had bounced—but this one cleared, and Roosevelt joined the rush to get rich out west.

From 1881 to 1886 these East Coast dudes did no wrong. Two Harvard buddies cleared 21 percent profits in their first year and immediately raised funds to expand their herds.¹⁵ Followers piled in now that success was so obvious. More cattle were shipped in from Texas so newbie ranchers could make their fortunes.

They authored their own destruction. Herds grew larger. More beef than ever came to market. Prices collapsed an astounding 50 percent. Profits disappeared.

One by one, the men who just last fall knew they were Cattle Kings discovered they were get-rich-quick tenderfoots riding a busted boom. They sold, at a loss, the cattle they had left. The Harvard investors lost 43 percent of their money. The marquis left broke and got assassinated. Roosevelt held on somewhat longer than most, refusing to admit he was beaten. Ten years later he had spent his entire inheritance and was now in debt. Roosevelt gave the ranch away for free and took a government job. He wanted to run for mayor of New York in 1894 but his wife, who had taken over the finances, wouldn’t let him because they needed his salary.

The inevitable recalibration of capitalism got them all. If there is a lot of money to be made doing something, many will rush in to do it (often with borrowed funds). This creates more product (great for consumers) and destroys excess profits (hard for investors). Returns erode as popularity increases. This story is in Iowa cornfields, Texas shale oil, Oregon microbreweries, and pandemic-era exercise bikes.

Bankruptcy is brutal. It is, however, less horrible than not-bankruptcy, which is what the United States had for nearly half the nation’s life. Suffering is neither remotely new nor peculiarly American. Getting back on the seesaw, and going up again, was.