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Bankrupt in America: A History of Debtors, Their Creditors and the Law in the Twentieth Century

Author(s):Hansen, Mary Eschelbach
Hansen, Bradley A.
Reviewer(s):Rodgers, Mary Tone

Published by EH.Net (June 2020)

Mary Eschelbach Hansen and Bradley A. Hansen, Bankrupt in America: A History of Debtors, Their Creditors and the Law in the Twentieth Century. Chicago: University of Chicago Press, 2020. vii + 222 pp. $55 (cloth), ISBN: 978-0-226-67956-3.

Reviewed for EH.Net by Mary Tone Rodgers, Center for Finance and Risk Management, State University of New York at Oswego

 

As this review is being written and as we progress from the initial shock of the COVID-19 pandemic to a phase in which personal bankruptcy filings have begun to soar, it is opportune that Bankrupt in America has been released. It provides a century-long perspective from which to understand present day events and it explains why bankruptcy rates rise and fall over time.

The authors succeed at justifying their argument that the primary driver of American consumer bankruptcy rate over the past century has been the increased supply of consumer credit by mustering two complementary approaches to economic research, statistical and documentary. They convincingly explain spurts and lulls in the bankruptcy rate as functions of the supply of consumer credit and other economic conditions, that have been amplified by changes in the law or in states’ collection methods through their identification of interactive regression variables with multiplicative effects, rather than relying on standard regression variables with only additive effects. With that groundbreaking result, Mary Hansen and Bradley Hansen reconcile the decades-long puzzle surrounding the findings of two opposing camps of bankruptcy researchers, one group finding explanations from credit supply and economic variables contrasted with the other group finding explanations from variables related to laws and collection methods. Without Hansen and Hansen’s work, the contradiction in findings between the two groups might not have been resolved.

Before turning to other important contributions this book makes, a review of the chapter content and of the data sources is in order. After an Introductory chapter, the next five are structured as a chronology of bankruptcy rates and laws from 1898 to 2005, bookended by the introduction of the 1898 Act to Establish a Uniform System of Bankruptcy, the first enduring federal bankruptcy law, and by the more recent 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). A seventh chapter offers Conclusions and an Epilogue. Each chapter starts with a concise, vividly written vignette about a consumer making the choice to use the bankruptcy law. Then an analysis follows of how the bankruptcy rate in the time period covered by the chapter was affected by social, economic and legal variables. Finally, each chapter ends with a detailed appendix of the statistical analysis of those three types of variables. Hansen and Hansen uncover four facts about bankruptcy rates: it was once rare, but now it is common; most early users of bankruptcy law were businesses, but now are consumers; the bankruptcy rate varies dramatically between places; and growth in bankruptcy has not been steady.

Extensive primary and secondary data sources are used to cover over one hundred years of history, but the most striking data sets are the ones created by the authors with their teams of assistants and co-authors: 1) United States District Court Boundary Shapefiles (1900-2000) and 2) United States Bankruptcy Statistics by District, 1899-2007. The data to construct the bankruptcy rate are sourced from Department of Justice and the Administrative Office of the U.S. Courts and from population count data. The data about individual bankruptcy cases are taken from a sample of personal bankruptcies in Missouri (1898-1945 from the Eastern and Western Districts of Federal Court of Missouri) and in Maryland (1940-2000 from the Maryland District Court at Baltimore). The Missouri and Maryland data are part of an effort by the authors to construct a nationally representative sample of case files for the entire twentieth century. Both the digitized data and the authors’ codebooks are archived at the Inter-university Consortium for Political and Social Research.

By framing the analysis over such a long span of history, the authors make contributions to scholarship that authors who study a shorter time span cannot make. Without such a long time span, the authors could not confidently conclude that path-dependency provides the best explanation for the development of bankruptcy in America. They note the non-economic factors that helped shape the law at critical junctures, specifically the roles played by Jay Torrey in the 1890’s, Walter Chandler in the 1930’s and Leonor Sullivan in the 1960’s. Previous law and how people were using it influenced the people who made changes to the law, meaning a path-dependent process was underway. Researchers with a shorter time frame of investigation could miss the outsized influence played by a few individuals who changed the path of bankruptcy law.

A second benefit of framing the analysis over such a long period of time is that the authors observe that the competing social narratives around bankruptcy have remained essentially the same for a century, pitting the pro-creditor story of how discharge provisions in bankruptcy law encourage opportunistic consumer default against the pro-debtor story of how predatory lenders harshly garnish defaulting consumers’ wages. The authors’ insight is that the alternating success of each narrative lies in the belief system of the audience to whom it has been pitched, not in an evolution of the narratives: when Republicans held power, the pro-creditor narrative succeeded in changing the law (the Original Act of 1898), but when Democrats held power, the pro-debtor narrative won the day (Bankruptcy Reform Act of 1978).

The economic historian will likely find the explication and application of the complementary methods of cliometric analysis and new institutional analysis refreshing in Chapter One. While the authors argue that path dependency explains the course of much institutional change in the history of bankruptcy, they go a step further and identify the precise source of path dependence by complementary cliometric analysis: bankruptcy rates are most thoroughly explained when overlays of the effects of institutional change amplify the underlying effect of increases in the supply of credit.

My favorite line of the book, “[this is] how we do history,” (p. 13), may also resonate with other economic and financial historians. When Hansen and Hansen acknowledge they have their own way of “doing history,” they imply that there is more than one way of doing it! As researchers, we each find the blend of research methods best suited to address each research question, knowing the blend can evolve over time.

As COVID-19 alters economic and financial conditions, this book prepares us to anticipate emergence of the century-old tug-of-war between the pro-creditor and pro-lender narratives. The authors alert us that it may be the predisposition of the politicians in power to believe one of the narratives that could carry the day regarding changes to the bankruptcy laws related to COVID-19, should any be made.

 

Mary Tone Rodgers, D.PS, CFA, is the Marcia Belmar Willock Professor of Finance and Director of the Gordon Lenz Center for Finance and Risk Management at the State University of New York at Oswego. She has published several articles in financial history, including “Post-financial Crisis Changes in Financial System Structure: An Examination of the JP Morgan & Co. Syndicates after the 1907 Panic” (with James E. Payne) in Review of Financial Economics (2020). She continues to research J. Pierpont Morgan’s role as lender of last resort in the pre-Federal Reserve period with Jon R. Moen.

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Subject(s):Financial Markets, Financial Institutions, and Monetary History
Government, Law and Regulation, Public Finance
Markets and Institutions
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII