The Bankruptcy Clause in The Federalist Papers

Posted by Kevin on August 14, 2013 under Bankruptcy Blog | Be the First to Comment

The Federalist Papers are a key source for understanding the intentions of the drafters of the Constitution. What do these essays say about the Bankruptcy Clause?

The Bankruptcy Clause of Article 1, Section 8, Clause 4 of the U. S. Constitution gave to the Congress, and thus to the federal government, the power to make laws about bankruptcy. But this Clause gives no clue why that power is so given or how that power should be exercised.

The Federalist Papers would be a sensible place to look for such clues.

These were 85 essays published anonymously in New York newspapers during 1787-88 while the states were debating whether to ratify the proposed Constitution. These widely circulated essays unabashedly lobby for ratifying the proposed Constitution in the place of the existing Articles of Confederation. This is made clear from the first words of the first essay:

AFTER an unequivocal experience of the inefficiency of the subsisting federal government, you are called upon to deliberate on a new Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire in many respects the most interesting in the world. …Yes, my countrymen, I own to you that, after having given [the new Constitution] an attentive consideration, I am clearly of opinion it is your interest to adopt it. I am convinced that this is the safest course for your liberty, your dignity, and your happiness.

In other words: government by the Articles of Confederation has not worked, and this grand experiment in government by “reflection and choice” instead of by “accident and force” is hanging in the balance. And the new Constitution is the way forward.

The Federalist Papers can be a crucial window into what the drafters of the Constitution intended. These essays explain many provisions of the Constitution in great detail, and were written within weeks or months after The Constitutional Convention. Most of them were authored by Alexander Hamilton and James Madison who were themselves members of that Constitutional Convention.

So what do these detailed persuasive essays tell us about the framer’s intentions about bankruptcy?

Precious little.  Just one sentence.  In essay no. 42, written by James Madison and first published on January 22, 1788, after a long discussion on “a uniform rule of naturalization” (immigration)—the other power referred to in the same Clause—comes the following sentence:

The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.

This sentence makes two main points.

1. Madison, at least, focused on how a uniform national bankruptcy law would help creditors by preventing debtors from hiding themselves or their assets in other states. This simply reflects the pro-creditor attitude of bankruptcy law during this period.

2. Bankruptcy law is a natural part of the general regulation of commerce, so a federal government which has powers to regulate interstate commerce would just naturally have the power to create a uniform set of bankruptcy laws.

So, the U.S Constitution contains one brief but very important partial sentence about bankruptcy, making it the responsibility of the federal government. And The Federalist Papers contains only a single sentence on the topic saying, yes, of course we need a uniform bankruptcy law among all the states since commerce (and fraud) spills over the states’ borders.