On average, there are between one and two million bankruptcy cases every year in the United States, nearly all of them involving individuals who elect to go bust rather than meet unmanageable obligations. A strikingly large proportion of them happen in Tennessee. The remarkable thing is how relatively painless this process seems to be - compared, that is, with what went on in sixteenth-century Venice or, for that matter, some parts of present-day Glasgow. Most borrowers who run into difficulties in Memphis can escape or at least reduce their debts, stigma-free and physically unharmed. One of the great puzzles is that the world's most successful capitalist economy seems to be built on a foundation of easy economic failure.
When I visited Memphis for the first time in the early summer of 2007 I was fascinated by the ubiquity and proximity of both easy credit and easy bankruptcy. All I had to do was to take a walk down a typical street near the city centre. First there were the shopping malls and fast food joints, which is where Tennesseans do much of their spending. Right next door was a 'tax advisor' ready to help those short of cash to claim their lowearners' tax credits. I saw a shop offering loans against cars and, next door to it, a second-mortgage company, as well as a cheque-cashing shop offering advances on pay packets (at 200 per cent interest), not to mention a pawnshop the size of a department store. Conveniently located for those who had already pawned all their possessions was a Rent-A-Center offering cheap furniture and televisions for hire. And next door to that? The Plasma Center, offering $55 a go for blood donations. Modern Memphis gives a whole new meaning to the expression 'bled dry'. A pint of blood may not be quite as hard to give up as a pound of flesh, but the general idea seems disconcertingly similar.
Yet the consequences of default in Memphis are far less grave than the risk of death Antonio ran in Venice. After the Plasma Center, my next stop was the office of George Stevenson, one of the lawyers who make a living by advising bankrupts at the United States Bankruptcy Court Western District of Tennessee. At the time of my trip to Tennessee, the annual number of bankruptcy filings in the Memphis area alone was around 10,000, so I wasn't surprised to find the Bankruptcy Court crowded with people. The system certainly appears to work very smoothly. One by one, the individuals and couples who have fallen into insolvency sit down with a lawyer who negotiates on their behalf with their creditors. There is even a fast-track lane for speedy bankruptcies - though on average only three out of five bankrupts are discharged (meaning that an agreement is reached with their creditors).
The ability to walk away from unsustainable debts and start all over again is one of the distinctive quirks of American capitalism. There were no debtors' prisons in the United States in the early 1800s, at a time when English debtors could end up languishing in jail for years. Since 1898, it has been every American's right to file for Chapter VII (liquidation) or XIII (voluntary personal reorganization). Rich and poor alike, people in the United States appear to regard bankruptcy as an 'unalienable right' almost on a par with 'life, liberty and the pursuit of happiness'. The theory is that American law exists to encourage entrepreneurship - to facilitate the creation of new businesses. And that means giving people a break when their plans go wrong, even for the second time, thereby allowing the natural-born risk-takers to learn through trial and error until they finally figure out how to make that million. After all, today's bankrupt might well be tomorrow's successful entrepreneur.
At first sight, the theory certainly seems to work. Many of America's most successful businessmen failed in their early endeavours, including the ketchup king John Henry Heinz, the circus supremo Phineas Barnum and the automobile magnate Henry Ford. All of these men eventually became immensely rich, not least because they were given a chance to try, to fail and to start over. Yet on closer inspection what happens in Tennessee is rather different. The people in the Memphis Bankruptcy Court are not businessmen going bust. They are just ordinary individuals who cannot pay their bills - often the large medical bills that Americans can suddenly face if they are not covered by private health insurance. Bankruptcy may have been designed to help entrepreneurs and their businesses, but nowadays 98 per cent of filings are classified as non-business.
The principal driver of bankruptcy turns out to be not entrepreneurship but indebtedness. In 2007 US consumer debt hit a record $2.5 trillion. Back in 1959, consumer debt was equivalent to 16 per cent of disposable personal income. Now it is 24 per cent.
(NB*In the same period mortgage debt has risen from 54 per cent of disposable personal income to 140 per cent.)
One of the challenges for any financial historian today is to understand the causes of this explosion of household indebtedness and to estimate what the likely consequences will be if, as seems inevitable, there is an increase in the bankruptcy rate in states like Tennessee.
to be continued...
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