“The Federalist Papers” can be dry reading. Calm, scholarly, sometimes needlessly erudite, this classic examination of the U.S. Constitution by three of its foremost advocates—Alexander Hamilton, James Madison and John Jay—generally strikes a detached pose, focusing more on how bills become laws than on any specific political agenda.
But there’s an exception. In the middle of the book’s most famous essay—Federalist No. 10—Madison briefly drops his tone of political neutrality in order to call three kinds of laws downright “wicked.” These three are laws creating paper money, laws that redistribute private property and laws “for an abolition of debts.” This trio, he explains, are the types of laws the proposed Constitution is designed to prevent.
Today, as a loud minority of voters is calling for President Biden to “cancel” or “forgive” billions of dollars in federal student loan debts—shifting the costs of higher education onto the backs of working taxpayers—it’s worth pausing to consider why the Father of the Constitution reserved such harsh language for laws abolishing debts.
Of course, he and his colleagues were all too familiar with the dangers of debt. America owed immense sums, not only to foreigners who had subsidized the Revolutionary War, but also to British creditors, whose pre-war claims were a source of bitter feelings given the internecine strife that accompanied the independence movement. The founders knew public debt could wreck a government’s stability—within their lifetimes, for instance, Scotland had lost its independence partly because debt drove its economy to collapse—but they were also aware of the political danger posed by individual debt.
The Lessons of Greece and Rome
By the time America declared independence, the consensus among political philosophers was that constitutional democracy was impossible because the people can never be trusted to both make laws and also obey them. If a law ever proved inconvenient, these scholars argued, the people would be unable to resist the temptation to ignore it or rewrite it rather than follow it. As proof, these cynics pointed to the history of Greece, Rome and other societies where demagogues promised to eliminate the people’s debts in exchange for the power of dictatorship. These experiences, writes historian Kelcy Sagstetter, prove that “debt cancellation and tyrants go hand in hand.”
As architects of a constitutional democracy, America’s founders studied the ways in which previous democracies had failed. They knew that the single greatest threat to rule by the people is the risk that politicians will play upon the public’s emotions and prejudices in order to lead them into foolhardy and immoral acts. Economic anxiety, religious hatred, racial strife or any of the people’s other fears and longings present opportunities for demagogues to influence the populace for their own ends while pretending to serve the common welfare. By promising to eliminate people’s debts once in power—and perhaps enrich them by seizing and redistributing the assets of their creditors—demagogues can gain public support outside of the legitimate political process, and use that to remain in power for life.
Plato observed in “The Republic” that one of the key techniques for destroying political liberty is for popular leaders to “grant freedom from debts and distribute land to the people.” And history bears him out. According to his student, Aristotle, the democracies of Cos, Heraclea, Megara, Cyme and other cities were overthrown in just this way: by demagogues who “treat[ed] the notables unjustly in order to curry favor with the people,” and, once in office, murdered or banished their enemies and seized their property to pay off supporters.
Generations later, Rome’s would-be demagogues used the same technique to gain influence. The populist leader Catiline pledged to forgive debts as part of his coup attempt in 63 B.C.—as did another Roman politician, Dolabella, 15 years later. They were defeated, but their efforts helped pave the way for Caesar’s dictatorship. And although Caesar himself did not abolish debts, many supported him in his effort to destroy the republic because they thought he would.
Examples like these persuaded the historian Polybius—a favorite of America’s Founding Fathers—that democracies inevitably go through a cycle he called “anacyclosis”: The people start by abolishing monarchy, he argued, and establishing a good new constitution. But then the next generation takes power and, lacking any firsthand memory of the oppression their forebears rebelled against, falls prey to the manipulation of politicians who make “the populace ready and greedy to receive bribes.” Eventually they become “habituated to feed at the expense of others, and to have [their] hopes of a livelihood in the property of [their] neighbors.” They are seduced by some “ambitious and daring” leader, who uses such bribes to destroy the rule of law and become “a master and a despot.”
Aristotle put the matter more succinctly. Demagogues, he wrote, strive to gain popularity “based on [the people’s] hatred of the rich.” By promising to steal from the wealthy and give to his friends, a demagogue can persuade the people that they “have authority even over the laws”—that is, that the majority are unconstrained by the principles of justice or the constitution.
A Wicked Idea
Abolishing debts isn’t just politically dangerous—it’s also unjust and foolhardy. The Roman statesman Cicero—whom the founders also revered—devoted a chapter of his book “De Officiis” to the evils of such proposals. “To exploit the state for selfish profit is not only immoral, it is criminal,” he wrote. Nullifying the rights of creditors is a kind of theft because it transfers ownership of property from one person against his will and gives it to another who hasn’t paid for it. “What is the meaning of an abolition of debts,” Cicero asked, “except that you buy a farm with my money; that you have the farm, and I have not my money?”
Proposals to abolish debt also ruin credit markets. If banks face the risk of wipeout, they won’t lend. Thus, laws that absolve borrowers of their duty to repay destroy credit, entrepreneurialism and economic growth. They also encourage unjust speculation—as with the opportunistic Athenians who were said to have bought land with borrowed money the instant they learned that the dictator Solon was planning to abolish debts. Once his edict was announced, they owned the land without having to pay for it. Politicians who propose abolishing debts, Cicero concluded, only “pose as friends of the people” while actually stealing from lenders and sowing the seeds of economic collapse.
It’s no wonder, then, that America’s founders considered laws abolishing debts a “wicked” idea. And the dangers these ancient thinkers warned of were headline news in their day. In the winter of 1786, a bankrupt Massachusetts farmer named Daniel Shays led an armed force of 1,500 men through the Bay State, shutting down courthouses, freeing debtors from prison and threatening government officials, before his insurrection was put down by the authorities. The Shays Rebellion triggered fears of the breakup of the union, and gave Europeans grounds to argue that the Americans would destroy themselves without a king.
Behind it all was the demagogic effort to nullify debts. “If Shays had not been a desperate debtor,” Hamilton wrote months later in Federalist No. 6, “it is much to be doubted whether Massachusetts would have been plunged into a civil war.” Fearing a replay of democracy’s worst features, he and his colleagues drafted a Constitution the following summer that aimed at curbing the dangers of mob rule while still enabling the people to govern themselves.
The Legitimate Need for Debt Relief
There was another side to the story, however. The credit laws of Greece and Rome were severe, even savage: Borrowers often pledged their own bodies as collateral, and default was considered a crime that could lead to severe punishment. This made debtors slaves if they could not repay—which increased people’s tendency to rally to any politician who promised to nullify their obligations.
“Without any distinction between fraud and misfortune,” wrote John Adams in a book published around the time of the Shays Rebellion, “[Greek and Roman laws] exposed the insolvent debtor to the mercy of his creditors, who might put him to death, dissect, or quarter him…. It is no wonder that the people, after this, often clamored for an abolition or diminution of debts.” The founders realized that excessively harsh laws enforcing debts could be just as dangerous and unfair as a system that arbitrarily eliminated borrowers’ obligations to repay.
There had to be some means of balancing the rights of borrowers and creditors, and in Federalist No. 10, Madison explained why that question could not be left simply to a majority vote. Nobody is permitted to be a judge in his own lawsuit, he wrote, because his “interest would certainly bias his judgment.” For the same reason, simply letting the majority decide whether to obey the law and respect contractual promises would transform the government into a tyranny of the majority, just like the many failed democracies of the past.
Suppose, he continued, that a law “concerning private debts” was proposed in a state legislature. Such a bill would spark a debate “to which the creditors are parties on one side and the debtors on the other.” Although “justice ought to hold the balance between them,” the reality was that “the most numerous party … must be expected to prevail.” Thus, simply leaving the question to majority vote—as the ancient democracies did—would lead the government to sacrifice “both the public good and the rights of other citizens” to the “ruling passion” of the mob. What was needed was a constitutional system of checks and balances that would force the majority to respect the minority’s rights, and vice versa—that is, to make the people obey their own laws.
One way the new Constitution would address this problem was by allowing the national Congress to adopt what the founders called “uniform laws on the subject of bankruptcies.” Bankruptcy differs from laws abolishing debts in that bankruptcy is an individualized, case-by-case process in which a judge reviews a debtor’s assets and requires him to pay what he can—whereas laws abolishing debts simply eliminate the repayment obligation of a whole class of borrowers regardless of their ability to pay. Before the Constitution was adopted, bankruptcy was governed by state laws, which differed from state to state, giving debtors and creditors an incentive to flee from one state to another—or, as in Shays’ case, to resort to violence.
“A common knowledge of human affairs,” observed Madison in Federalist No. 42, suggested that letting each state set its own rules “would nourish unceasing animosities, and not improbably terminate in serious interruptions of the public tranquility.” Allowing Congress power to create a single, nationwide system whereby debtors could plead their individual cases would take that power away from states and eliminate the dangerous pressure for debt nullification that had destroyed so many previous democracies.
Congress was slow to act, however. It didn’t pass the first federal bankruptcy law until 1800, and it repealed that only three years later. Not until the 1840s would it try again, and that law, too, was repealed soon afterwards. In the interim, states continued to govern bankruptcies—but they did so subject to federal oversight, and within the limits of a constitutional provision that barred states from “impairing the obligation of contracts.” These rules meant states could not simply wipe away debts.
As New York’s highest court observed in 1863, “the reason why the power to pass bankrupt laws was given to Congress was to secure to the people of the United States, as one people, a uniform law by which a debtor might be discharged from the obligation of his contracts…. The great object was to deprive the states of the dangerous power to abolish debts.” Finally, in 1898, Congress passed the first modern bankruptcy law, which struck a balance between protecting insolvent debtors and ensuring that creditors got as much of their money back as possible. But from the founding to the present, bankruptcy laws have focused on individual cases—while eschewing the dangerous power to simply erase an entire category of debt by government fiat.
Today’s debates over student loan debt have so far focused on relatively limited measures, such as extending payment due dates. And it’s legitimate to argue over whether, on one hand, borrowers were misled and deserve a break, or, on the other, whether it’s right to force working taxpayers to subsidize students who improvidently signed loans to obtain expensive degrees. Yet those debates haven’t satisfied some, such as Sens. Elizabeth Warren and Chuck Schumer, who have urged the president to simply issue an executive order eliminating debts without waiting for Congress to act.
Setting aside whether the president actually has the authority to issue such a decree, Warren and Schumer’s proposition is precisely what our constitutional system was designed to prevent. Such unilateral action would empower politicians at the expense of responsible citizens and pervert democracy from a system of political self-rule into the notion that voters “have authority even over the laws.”