The unraveling of Detroit’s finances and credit, amid the appointment of an emergency manager and associated political turmoil, prompts the observation that “never have we seen a disaster such as this.”
We have, of course. U.S. cities and counties have failed, though never on the scale of Detroit. A deal struck a week ago will restructure $3 billion of debt used for the construction of sewers, allowing Jefferson County, Ala., to emerge from an epic bankruptcy.
Credit collapses date to the dawn of time. The U.S. witnessed such occurrences in its early history – and they’re particularly instructive. The United States of America was born, in fact, during the credit crunch and depression of the mid-1780s; it’s worth recalling the saga now to learn how the country’s laws, customs and history were shaped by it.
I refer, of course, to Shays' Rebellion in western Massachusetts.
For those who snoozed that day in U.S. history class – sleep was unlikely in my case, since Mr. Hadden kept an eagle eye trained on us – Daniel Shays was a rebel leader agitating for relief from debt and taxes. Thousands of Massachusetts farmers were losing land and property because the depression had wiped out their livelihoods, rendering them unable to pay their bills. Their cause wasn’t unsympathetic. Many were veterans of the Revolutionary War against Great Britain.
The governor of Massachusetts, like Gov. Rick Snyder, filled the role of villain for many. Gov. James Bowdoin, who had been a merchant, opposed the issuing of paper currency, which would have eased the crisis by permitting the farmers to pay off debts incurred in gold and silver with cheaper – easier – money. Bowdoin arranged the raising of a militia to stop rebels from burning the courts.
The federal government couldn’t send soldiers because it was more or less broke.
Farmers, who routinely bought goods on credit when times were lean, had a great deal of popular opinion on their side. Shays, a poor farmhand, had fought at the Battle of Lexington – only to find himself being sued for nonpayment of debt after the war. Many soldiers hadn’t been paid as promised. After the war, they had trouble collecting back pay from the federal government.
Merchants, naturally, expected to be paid. They declined paper money and demanded that lands and farms be sold to satisfy obligations. I doubt there were any museums in rural Massachusetts, though if there had been the merchants surely would have insisted on the sale of paintings and sculptures.
Armed conflict between the rebels – nonpayers of taxes and debts – and the state militia broke out in 1786. By the summer of 1787 the militia had quelled resistance. Some 4,000 rebels signing confessions in return for amnesty. A couple of ringleaders were hung; Shays received a pardon.
One result of Shays Rebellion was a scrapping of the Articles of Confederation and replacement with the U.S. Constitution, solidifying the central government. And a main reason for strengthening the federal government was to enforce contracts, including debts and tax collections.
Thomas Jefferson remarked, memorably, that he wasn’t overly worried by Shays' Rebellion, that a little bloodshed by patriots and tyrants served as a healthy fertilizer for “the tree of liberty.”
Likewise, a bit of screaming, yelling, unrest and lawsuits in Detroit isn’t an unhealthy reaction to the city’s debt collapse and the painful restructuring exemplified by the appointment of an emergency manager. At least no one has been hung, and the militia hasn’t been activated.
The bottom line, then as now, is the same: Taxes must be collected and debts must be repaid.