This paper proposes that under the conditions typical of the Amazon frontier of Brazilabsence of a wage labour market and abundant supply of land-farm-family labour is a positive function of debt. This labour supply response, known as "debt peonage," provides for indirect management of farm labour by local merchants via the crop lien mechanism. A microeconomic model of the family farm shows that debt-labour leads to labour-intensive farming but land-extensive farming leads to over-deforestation. Correct colonization policy should then provide for market structures that reduce indebtedness and deforestation. This would also reduce the environmental consequences of settlement in the Amazon.