|Author(s):||Skeel, David A.|
|Reviewer(s):||Hansen, Bradley A.|
Published by EH.NET (April 2002)
David A. Skeel, Debt’s Dominion: A History of Bankruptcy Law in America.
Princeton, NJ: Princeton University Press, 2001. xi + 281 pp. $35 (hardback),
Reviewed for EH.NET by Bradley A. Hansen, Department of Economics, Mary
Since 1996, over one million people a year have voluntarily filed for
bankruptcy protection in the United States. Bankruptcies of giant corporations
and wealthy celebrities regularly appear in the news. Current bankruptcy law in
the U.S. is widely regarded as being more pro-debtor than the laws of other
developed countries. U.S. law provides individuals generous exemptions and
relatively easy discharge of debts. It also leaves the managers of bankrupt
businesses in control of their firms and gives them the first chance to form a
reorganization plan. In Debt’s Dominion, David Skeel sets out to explain
why the United States has a bankruptcy law and why that law has the particular
features that it does. He is aware that his book will inevitably be compared to
Charles Warren’s Bankruptcy in United States History (Harvard University
Press, 1935), which has been the standard reference on the history of
bankruptcy law for over sixty years. Warren’s book will remain useful for its
detailed descriptions of nineteenth century legislative debates, but those
interested in bankruptcy law will now turn first to Debt’s Dominion.
Skeel not only brings the history of bankruptcy law up to date, but also
provides an analysis of bankruptcy law in the nineteenth century that differs
substantially from Warren’s.
Because this review is directed primarily at economic historians, I should
begin by pointing out that this is probably not the history of bankruptcy that
an economic historian would write. It is, however, one that economic historians
concerned with institutional change should read. David Skeel is Professor of
Law at the University of Pennsylvania and his primary concern is explaining how
the law evolved. Skeel aims for a wide audience, and jargon and mathematics are
kept to a minimum. There are some tables showing trends in bankruptcy over
time, but there is not extensive quantitative analysis. There are no attempts
to measure the effects of changes in the bankruptcy law. Likewise, in the
political analysis there are none of the formal models or empirical analyses of
roll call votes that one typically sees in rational choice studies of politics.
Although he does not utilize formal models, Skeel’s analysis of the history of
bankruptcy law has been strongly influenced by the public choice literature
produced by economists and political scientists. Debt’s Dominion
provides an analysis of the development of bankruptcy law with important
lessons for anyone concerned with the study of institutional change.
Bankruptcy law in the United States has a peculiar history. For most of the
nineteenth century the United States did not have a bankruptcy law, but by the
end of the twentieth century bankruptcy had become a prominent feature of
American society. Four bankruptcy laws were passed in the nineteenth century —
in 1800, 1841, 1867 and 1898. The first three were each repealed within a few
years. The 1898 Bankruptcy Act was extensively amended in the 1930s and
replaced by the Bankruptcy Reform Act in 1978. Skeel argues that the general
pattern of bankruptcy law in the United States has been shaped by the conflict
between organized creditor interest groups and a countervailing pro-debtor
Populist ideology, but that within this conflict legal professionals have
played a leading role in shaping the features of U.S. bankruptcy law. The devil
is in the details. Even in the nineteenth century, debates were not just about
whether to have a bankruptcy law, but about what type of bankruptcy law to
have. Skeel clearly explains the features of bankruptcy law and how they have
changed over time. He explains such issues as means testing, venue choice,
exemptions, and absolute priority in a manner that non-lawyers can understand.
Although the conflict of debtor and creditor interests provides the basic
framework of analysis, the greatest strength of the book lies in its
descriptions of the ways in which legal professionals have acted within this
framework to shape the path of institutional change. Associations such as the
Commercial Law League and the National Bankruptcy Conference have played a
leading role in the development of bankruptcy law. The most distinctive feature
of Skeel’s analysis is that he integrates a traditional public choice attention
to interest groups with an emphasis on the role of individuals, such as, Jay
Torrey, Robert Swaine and William O. Douglas.
Skeel argues that the enactment and repeal of the first three bankruptcy acts
is an example of legislative cycling. There were three divisions regarding
bankruptcy law in the United States in the nineteenth century. The pro-debtor
group favored a purely voluntary law, and the pro-creditor group generally
supported a law with both voluntary and involuntary bankruptcy. The issue was
complicated by the existence of a group that opposed any federal bankruptcy law
on states’ rights grounds. The existence of three different groups made it
possible to form a successful coalition for bankruptcy law and then relatively
quickly thereafter to form a successful coalition against bankruptcy law.
Following a crisis, such as the Panic of 1839, pro-debtor and pro-creditor
forces would compromise to pass a bankruptcy law. When the crisis passed, those
who were dissatisfied with the law would join with states’ rights advocates to
repeal the law. This cycling ended in1898, Skeel argues, because of Republican
(pro-creditor) dominance of national politics and because the law itself
created a powerful vested interest — bankruptcy law professionals.
Beginning in the late nineteenth century, legal professionals (lawyers and
judges) came to play an increasingly important role in shaping bankruptcy law.
Although commercial creditors organized the national association that lobbied
for bankruptcy law in the late nineteenth century, its president was a
commercial lawyer, Jay Torrey. Torrey drafted what was to become the 1898
Bankruptcy Act and lobbied for its passage for nearly ten years. Unlike
previous bankruptcy laws, Torrey’s bill paid particular attention to
administration, with a mind toward reducing expenses. In the early twentieth
century, associations of lawyers such as the Commercial Law League and later
the National Bankruptcy Conference lobbied to retain bankruptcy law and to
amend it in ways that supported their interests. A government study of
bankruptcy in the late 1920s recommended a move toward a British-style
bankruptcy system that would have taken bankruptcy out of the hands of lawyers
and put it into the hands of government administrators. In 1932, a bill was
introduced to amend bankruptcy law that included a move to an administered
system. Bankruptcy lawyers successfully lobbied against the administrative
changes, and they were stricken from the bill before it was passed. William O.
Douglas, first as head of the Securities and Exchange Commission (SEC) and
later as a Supreme Court Justice almost single-handedly shaped corporate
reorganization from the late thirties until the Bankruptcy Reform Act of 1978.
Douglas saw to it that the Chandler Act of 1938 would include SEC oversight of
Chapter XI corporate reorganizations, and that managers of firms in Chapter XI
would lose control to a trustee. As a Supreme Court justice he wrote the
opinion which established that senior creditors had a right to be paid in full
before junior creditors could obtain anything. Douglas’s actions drove
corporations away from Chapter XI but ultimately led to the formation of
interest groups that would transform corporate reorganization with the
bankruptcy Reform Act of 1978. Legal professionals continue to play a leading
role in the evolution of bankruptcy law.
David Skeel has produced an excellent history of bankruptcy law. He emphasizes
the institutional entrepreneurship that often seems to get lost in formal
analysis of institutional change. While many questions about the history of
bankruptcy remain to be answered, the starting point for answering those
questions has changed.
Bradley A. Hansen is assistant professor of economics at Mary Washington
College. His publications on bankruptcy and insolvency include “The People’s
Welfare and the Origins of Corporate Reorganization: The Wabash Receivership
Reconsidered,” Business History Review (Autumn 2000); and “Commercial
Associations and the Creation of a National Economy: The Demand For A Federal
Bankruptcy Law,” Business History Review (Spring 1998).
|Subject(s):||Markets and Institutions|
|Geographic Area(s):||North America|
|Time Period(s):||20th Century: WWII and post-WWII|