Debt’s Dominion: A History of Bankruptcy Law in America

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),

ISBN: 0-691-08810-1.

Reviewed for EH.NET by Bradley A. Hansen, Department of Economics, Mary

Washington College.

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).