Debt forgiveness is one of the most important innovations of modern capitalism, but it is a fairly recent one. Though the Constitution gives Congress explicit authority to enact “uniform Laws on the subject of Bankruptcies throughout the United States,” early U.S. bankruptcy laws were short-lived and provided mostly for involuntary proceedings initiated by creditors. Before the elimination of federal debtors’ prisons in 1833, jail was a common consequence of failure to pay. Not until the Nelson Act of 1898 did the country have a lasting bankruptcy code and thus a framework for debt protection.

Despite their obvious practical advantages,…