Project 2001: Significant Works in Economic History
Morton J. Horwitz, The Transformation of American Law, 1780-1860. Cambridge, MA: Harvard University Press, 1977. xvii + 356 pp.
Review Essay by Winifred B. Rothenberg, Department of Economics, Tufts University.
When the Rules Changed: A Twenty-five Year Retrospective on The Transformation of American Law, 1780-1860
“In short, the transition periods can be described as periods of controlled social and economic revolution. They are revolutions because they involve rapid changes in long-standing economic, social, and often political institutions; they are controlled in that the integrity of the societies is maintained despite prolonged internal conflicts.”(Kuznets, 1968, p. 107)
In 1926, when J. Franklin Jameson published The American Revolution Considered as a Social Movement, the American Revolution was not generally considered to have been a social movement at all. So much less wrenching than its French or Russian prototype, ours seemed to be a colonial war, not a class war; a war about “Who shall rule?” — not a revolution; for — recalling Carl Becker’s famous phrase — with respect to “Who shall rule at home?” nothing much appeared to have changed. But in the seventy-five years since Jameson, historians have compiled abundant evidence that fundamental change took place after the Revolution in virtually every economic, political and social indicator, from market integration to marital fertility, from agricultural productivity to religious affiliation, from the nature of the polity to financial markets, from literacy rates to life expectancy, and most of all in that elusive thing the French call mentalit?. Those changes constituted a ‘transformation’ beyond mere ‘change.’
‘Change’ is continuous. It is the condition of being in a world where “Whirl is King.”1 But the transformation of American private law that Morton Horwitz describes here “lifted pencil off paper.”2. After the Revolution, the legal reasoning that governed judge-made law in America could cut itself free from that ‘undiscovered country’ from which the English common law traced its origins and drew its enormous authority; from its rigid pleadings; from its “blind veneration for ancient rules, maxims, and precedents” (p. 25); from its neglect of societal consequences. More to the point, it was a discontinuity that paralleled the sudden acceleration of capitalist development and the new “era of shared ideation” that legitimated it.3
Horwitz is not alone in remarking a critical period in the law in and around the 1780s. For Roscoe Pound, the early years of the Republic were “the formative era of American law,” although he seems thoroughly to have rejected the notion, so central to Horwitz, of an ideological discontinuity at that time. “Tenacity of a taught legal tradition,” he wrote, “is much more significant in our legal history than the economic conditions of time and place”(Pound, p. 82).4 But in William E. Nelson’s telling, “The War of Independence ushered in the beginning of a new legal and social order . . . the most important element [of which] was the emergence of new legal doctrines that recognized the materialism of the age” (Nelson, p. 5). And Lawrence Friedman, author of the first general history of American law, describes a “fundamental change in the concept of law” after the Revolution, one in which “the primary function of law was … to be a utilitarian tool [protecting] property in motion or at risk rather than property secure and at rest . . . [in order] to foster growth [and] to release and harness the energy latent in the commonwealth” (Friedman, p. 100).
The Transformation of American Law became an instant classic upon its publication in 1977. Readers not already familiar with it should understand that it is a flagship work of the Critical Legal Studies movement which was born and bred in American law schools in the aftermath of the civil rights struggle, the Vietnam War, and Watergate. From that anguished, profoundly anti-institutional perspective, the book mounts a brilliant attack on the transformation of the private law of property, negligence, contract, competition, and commerce that was wrought in the state courts — quite to the exclusion, incidentally, of state legislatures. Decision by decision, treatise by treatise, state court judges of the revolutionary generation began the process of making new law and new legal rules in the form and substance of which Horwitz discerns a coherence to which he gives the name ‘instrumentalism.’
Horwitz’s use of the word “instrumental” is an important clue to his thesis. The dictionary definition of ‘instrumental’ is simply “helpful; serving as a means,” in which sense the word could apply equally well — could it not? — to the eighteenth-century English common law which just because it was based on precedent, was biased in favor of the status quo, was indifferent to social consequences and was resistant to change, was ‘instrumental’ insofar as it preserved order in a society that valued order above all things. It is clear, then, that Horwitz uses the word ‘instrumental’ in a heightened sense to mean reshaping private law so that it may serve as “a creative instrument for directing men’s energy toward social change” (p. 1). To effect social change within a common law tradition inherently biased against change required a transformation not only of legal rules but of the role of judge-made law in the society. Courts shed their passivity, to the point of assuming a quasi-legislative role. Early nineteenth century judges understood — Coase to the contrary notwithstanding — that legal rules do matter, that “different sets of legal rules would have differential effects on economic growth, depending both on the distribution of wealth they produced and the level of investment they encouraged” (p. xvii, note).
The property-rights emphasis in the New Institutional Economic History makes knowing what property rights _are_ a matter of importance, what they _were_ a matter of greater importance, and that they are not what they were, and why, of greater importance still. The substance of Horwitz’s argument begins with property law the transformation of which ran parallel to a transformation in the conception of property itself, from an estate to be tranquilly enjoyed (in the eighteenth century), to a resource to be productively employed (in the nineteenth). The rubric of property law included riparian and other water-power rights, tenant rights, and the law of ‘waste.’ Eminent domain, nuisance, negligence, and damages fall under this rubric as well, but rules changes in those areas figured so conspicuously as subsidies to growth sectors in the economy that Horwitz treats them as such in a separate category.
Land use in the eighteenth century was constrained within two legal maxims that seem at first glance to check each other, but in fact were mutually reinforcing. On one hand stood Blackstone’s definition of private property rights as absolute: “the sole and despotic dominion which one man claims and exercises over the external things of the world in total exclusion of the rights of any other individual in the universe.” On the other stood the ancient common law principle in which property rights appear to be conditional: sic utere tuo, ut alienum non laedas, ‘so use yours that others be not harmed’. But far from mitigating the despotism of A’s dominion, sic utere extended it, for it conferred on A the power to prevent any use by B of his own land that disturbed A’s quiet enjoyment.
Property law would have to change to accommodate the nineteenth century, and it was with respect to rights in the use of water that judges, “listening to the future,” began the transformation. Two iconic cases, Merritt v. Parker (New Jersey, 1795) and Palmer v. Mulligan (New York, 1805) defined the era. Both are riparian rights cases in which a new user constructed a mill upstream or downstream of a prior user, obstructing, diverting, diminishing the flow of water or back-flooding the land. In 1795 the plaintiff won on the common law principle of aqua currit et debet currere, ‘water runs and ought to run.’ In 1805 the defendant won on efficiency grounds: that “explicit consideration of the relative efficiencies of conflicting property uses should be the paramount test of what constitutes legally justifiable injury” (p. 38). On the cusp of the new century the rules of the game had changed.
Palmer v. Mulligan may have been the tipping point that Horwitz tells us it was, but in fact it was challenged, Horwitz tells us, by other judges and by Joseph Angell in his treatise on watercourses. As late as 1827, in Tyler v. Wilkinson, the much-esteemed Justice Story of Massachusetts attacked the Palmer decision as “unjust.” His rejection of the ‘efficiency’ and ‘balancing’ standards that had been determining in Palmer “spawned a line of decisions opposed to all diversion or obstruction of water regardless of any beneficial consequences, [and] marks the nineteenth-century high point in articulating the traditional conception of property that had already come under attack” (p. 39, emphasis mine). In another watercourse case, Cary v. Daniels (1844), Chief Justice Shaw “stated a legal doctrine strikingly different from Story’s earlier formulation [in Palmer]” (p. 41). Judge Morton came down on the other side of Story on the Charles River Bridge’s claim of prescriptive rights. The reader, then, is tempted to ask which — Palmer or Tyler? Story or Angell or Morton or Story? — correctly caught the spirit of the age? Could Horwitz be accused, here and indeed throughout, of selection bias in the judicial opinions upon which he chose to hang his argument? In the age of waterpower there must have been hundreds of riparian rights cases in state courts all over the country.5 How much and how wide was the difference of opinion among sitting state court judges on each of the pivotal issues that made new law? By what process did one opinion become regnant, diffuse, and become new law? Had Horwitz wanted to construct an operationally testable hypothesis, these are the questions, I should have thought, with which he would have dealt. It is early in this review to make this point, but it should, I think, be made.
If ‘for example’ is not proof, neither is it irrelevant to a proof. If the “professional historians and other nonlegally-trained scholars” for whom The Transformation of American Law was written (p. x) are persuaded by it, it will be in large part because of the sheer weight of the evidence, the enormous amount of corroborating testimony with which Horwitz has illuminated a critical juncture in the history of ideas in America.
The reinterpretation of eighteenth-century Mill Acts provided another opportunity for nineteenth-century courts to shed the neutrality with which the common law had clothed them and overtly to take sides in the “sacrifice of ‘old’ property for the benefit of the ‘new'” (p. 63). “Under the Mill Acts, an owner of a mill situated on any non-navigable stream was permitted to raise a dam and permanently flood the land of all his neighbors, without seeking prior permission” (p. 48). Mill Acts had been enacted by provincial legislatures as early as 1713 to privilege colonial gristmills on the ground that they were private enterprises exercising a public function. This gave the floodings something of the character of a taking in eminent domain. A jury set the height of the dam, the time of the flooding, and the compensation. In return for the remedies provided in the Acts, the plaintiffs relinquished their common law right to sue for trespass, for punitive damages, for nuisance, or to seek an injunction. But in 1827, the Massachusetts court extended to textile, paper, and saw mills, unaffected with any public interest, the same privileges and immunities, allowing them “virtually unlimited discretion to destroy the value of lands far in excess of any benefit they might possibly receive,” while at the same time to “escape damages entirely by showing that the irrigation benefits the plaintiff received from having his lands over-flowed more than outweighed any injury he had incurred” (pp. 50-51). A sterner lesson could be drawn from this but for the fact that the Mill Acts, in response to public outrage, were repealed in 1830.
Immediately after the Revolution, the “release of energy” that Willard Hurst would teach us to associate with the buoyant business of settling Wisconsin, could already be felt in the ambitious infrastructure projects being undertaken in the East. At such a time, “the most potent legal weapon” in the quiver of an instrumental jurisprudence is the power of eminent domain. Late in his book, Horwitz says of its potential to take and redistribute wealth that it was “the one truly explosive legal ‘time bomb’ in all antebellum law” (p. 259). That a State should have such a power inheres in the principle of sovereignty itself. Under English law, all who hold land do so at the sufferance of the Sovereign. Under U.S. law, where sovereignty resides in the whole people represented by the states, those states possess “unlimited power”(p. 65) to take private property for public use — even, in the case of railroads, to take private property for private use. The argument has gone even further: even to take private property for private use without compensation, for (argued counsel for the railroads) any limitation of the power of eminent domain is a limitation of sovereignty (p. 65). And, indeed, until the ratification of the fourteenth amendment carried the Bill of Rights to the States, the clause of the Fifth Amendment that reads, “nor shall private property be taken for any public use without just compensation” bound only the Congress. Most state constitutions had no such provision even as late as 1820.
Aware, as they always were, that the ad hoc outcomes of eminent domain cases could set precedents that would impact significantly upon the cost of future development projects across the continent, the courts became involved in eminent domain takings only when disputes arose over compensation. How, for example, should the land be valued? By the current owner’s purchase price? By its current price? By its estimated future price given the trend rate of growth of population and land prices? Or by speculating as to its value after the projected construction has secured its market access? Any one of these, even the most generous, could have a perverse outcome: in one of the many cases involving abutters injured by the diversion of water during construction of the Erie Canal, compensation was denied entirely on the ground that the “general increase in land values and access to markets” that might arise as a consequence of the Canal was sufficient remedy (p. 69).
And how should the consequential destruction of property be compensated? In the Erie Canal cases, the court exempted consequential injuries from liability, and never did make clear the grounds on which it did so. Horwitz suggests five: ? the risk of consequential damage was already discounted in the price originally paid for the land; ? the threat of appropriation by the state was already discounted in the price originally paid for the land; ? the injury was damnum absque injuria, (defined in Black’s Law Dictionary as “a loss which does not give rise to an action for damages against the person causing it,” just something to be borne “as part of the price to be paid for the advantages of the social condition”); ? the injury resulted from a breach of contract that could not have been anticipated; ? the injury was entirely predictable, but it is not clear who should bear the cost. In the event, “Landowners whose property values were impaired without compensation in effect were compelled to underwrite a portion of economic development”(p. 70).
The question of who should bear the cost also lies at the center of the negligence doctrine. The issues in negligence law have attracted considerable attention, not only because it is “the largest item of business on the civil side of the nation’s trial courts,” but also because Richard Posner’s well-known analysis of appellate-level determinations in cases of railroad and street railway accidents launched the field of Law and Economics (Posner, p. 29). In that exhaustive study, Posner tested his hypothesis that sitting justices aimed to set damage awards in such a way as to ‘make the market work’; that is, “to bring about an efficient level of accidents and safety” (Posner, p. 34). “The only recognized basis for invoking the legal process to shift an accident loss from the victim to another party is the expectation of improving the efficiency of resource use.” If, as a result of an accident, the magnitude of the loss, L, weighted by the probability or forseeability of it happening, a, is less than the cost, C, of preventing it, then economic welfare requires that the injurer not assume the costs of prevention. The injurer — it was so often the railroad — would do better, both for itself and with respect to maximizing some social welfare function, to assume liability and pay full damages to the victim rather than incur the cost of installing guard-rails, fences, gates and bells at every cross-road, automatic coupling devices, fire extinguishers, etc. to prevent further accidents. The observed behavior of judges confirmed Posner’s proposition. But his data are for the period 1875-1905, leaving room for Horwitz’s discussion of the prior history of negligence to make an important contribution.
He traces the stages in the evolution of the negligence standard from the an eighteenth-century action for nuisance in which the defendant was held strictly liable; to nonfeasance or failure to perform a duty required by law or by contract; to carelessness, as in collisions between non-contracting strangers, where the joint-ness of the act makes causation (and therefore liability) difficult to determine; to contributory negligence where the assumption of the plaintiff’s complicity can defeat his claim against the defendant; to a standard, used in railroad and bridge collapse cases, where there is a defendant at fault but no liability on the rule that “injury brought about by risk-producing activity was itself no ground for imposing legal liability” (p. 97); and finally: to the use of the negligence standard as an instrument of social change. Judges, says Horwitz, were “encouraged to regard themselves as social engineers and legislators, whose decisions to impose liability were influenced by broader considerations of social policy” (p. 88). The rule governing the outcomes in Posner’s sample would, I should think, fit here.
In order to immunize new forms of enterprise against the huge costs of strict liability, the watering-down of negligence doctrine provided a significant subsidy to the dynamic edge of the American economy.6 As in the case of tariffs on British textiles, it is fair to ask, was this subsidy necessary? If it was, it should have been done, says Horwitz, through (progressive) taxation rather than through changing legal rules — a criticism he makes throughout. There are interests of substantive justice as well as of law at stake here, and, as should be clear by now, Horwitz has taken sides. “The increasingly ruthless application of the private law negligence principle . . . became a leading means by which the dynamic and growing forces in American society were able to challenge and eventually overwhelm the weak and relatively powerless segments of the American economy” (p. 99).
Contract law may be the area respecting which the nineteenth-century transformation of American law was at once most thoroughgoing and most relevant to the concerns of modern economic history. ‘Thoroughgoing’ in that, as Horwitz tells it (and he tells it with passion and eloquence), after the Revolution contract law was torn root and branch from its origins in equitable conceptions of substantive justice, inherent fairness and objective value, and given over, entire, “to articulate the ‘will theory’ with which American doctrinal writers expressed the ideology of a market economy in the early nineteenth century” (p. 185). ‘Relevant’ in that economic historians have in recent years appropriated from contract law the whole apparatus of modern contract theory — implicit contracts, incomplete contracts, principal-agent interactions, internal labor markets, and the implications of all these for the boundaries of the firm and the transacting that takes place within them. (See for example, Hart (1995), Holmstrom and Robert (1998), and Rosen (1985).)
Evidence of the shift from “the old learning” (that contractual obligation derives “from the inherent justice or fairness of an exchange”) to the new (that contractual obligation shall reside solely in “the convergence of the wills of the contracting parties”) (p. 160) was made manifest as early as 1790 in the first legal action to acknowledge expectation damages. With the emergence of financial markets, “the function of contracts correspondingly shifted from that of simply transferring title to a specific item to that of ensuring an expected return” (p. 161, emphasis mine). Price could no longer be thought of as a stable, objective, customary, absolute measure of value when it was in the very instability of prices that gains were to be made and losses from foregone gains sustained. Henceforth the courts would acknowledge that it is “the consent of the parties alone that fixes the just price of any thing, without reference to the nature of things themselves, or to their intrinsic value” (p. 160).
It is curious to see the extent to which, in this telling, eighteenth-century legal rules are made to rest upon the foundation of intrinsic or objective value. To borrow Calvin’s devastating comment on free will: “What end could it answer to decorate a thing so diminutive with a title so superb?” There could have been little, if any, experience of price stability in the lives of this generation of judges. They had lived through the extreme price volatility of 1720-40, the simultaneous circulation of several paper currencies denominating several sets of prices with only an arbitrary relation to one another, the steady depreciation of each colony’s silver currency on the British pound sterling, and the spectacle of the Continental vanishing daily. ‘Objective value’ must have been less a ‘foundation’ than an “instrumental conception” in the service of a static social order. In light of the dominant place Horwitz gives throughout his book to this shift from objective to subjective value, one might almost say that the emergence of a market economy had a more profound impact upon the law than it had upon the real economy.
The consequential link between subjective value and the will theory of contract is nowhere more clearly illustrated than in the emergence of caveat emptor and the triumph of express over implied contracts. Whereas the most important aspect of the eighteenth-century conception of exchange had been an equitable limitation of contractual obligation if the underlying exchange were unfair, under modern will theory contractual obligation was bounded entirely by the ‘meeting of minds’ as expressed in the contract. The existence of informational asymmetries, even if establishing the inherent inequality of the parties, would no longer invalidate a contract as unfair. No provision of the contract — having been “created by it alone” (p. 182) — could be other than that expressly agreed to, even if the terms of that agreement contravened rules of law. And thus, by 1825, “the chasm” (p. 186) between express and implied contracts had emerged. The bench’s treatment of nineteenth-century labor contracts would make that chasm a bitterly contested terrain.
Applying the will theory to labor contracts The whole corpus of contract theory today is based on the recognition that it is impossible to write a complete contract. “It is simply too difficult to anticipate all the many things that may happen … [I]t is clear that revisions and renegotiations will take place. In fact, the contract is best seen as providing a suitable backdrop or starting point for such renegotiations rather than specifying the final outcome … [Both parties] are looking for a contract that will ensure that, whatever happens, each side has some protection, both against opportunistic behaviour by the other party and against bad luck” (Hart, p. 2). To interpret and enforce a contract as ‘entire’ that even under the best of circumstances is incomplete, enlists something beyond legal rules; it enlists the sympathies of the judges. Horwitz’s thesis, of course, is that the sympathies of nineteenth-century judges were, by this time, allied to commerce and industry and quite orthogonal to labor’s interests. The judicial zeitgeist, having “destroyed most substantive grounds for evaluating the justice of exchange” (p. 201), reified in its stead “the momentary intention of the parties” (p. 196).
Based on the doctrine that “an express contract bars an action in quantum meruit,” laborers who quit on a long-term contract were barred from recovering wages for time served. “In no case,” said the court in Stark v. Parker (Massachusetts 1824), “has a contract in the terms of the one under consideration been construed by practical men to give a right to demand the agreed compensation before the performance of the labor, … it would be a flagrant violation of the first principles of justice to hold it otherwise” (Karsten, p. 170). This precedent stood, with only one “solitary challenge” — Britton v. Turner (New Hampshire 1834) — until the 1870s.7 Horwitz strikingly underscores his point by presenting a parallel case: while laborers were denied recovery, building contractors who quit on an express contract were allowed to recover, both in quantum meruit for labor services and in quantum valebant for materials used (Hayward v. Leonard (Massachusetts 1828). “While the judges who adhered to the distinction between labor and building contracts never acknowledged an economic or social policy behind the distinction, it seems to be,” says Horwitz, “an important example of class bias” (p. 188).
Horwitz has been sharply taken to task for his analysis of labor contracts, and the critics have come at him from all sides, disputing both the benign class relations he attributes to the eighteenth century and the exploitative class relations he attributes to the nineteenth century. Peter Karsten (1997) and Robert J. Steinfeld (1991) are among those who have re-examined these issues in recent years. Karsten disputes Horwitz’s allegation of discrimination in the contrast between Stark v. Parker and Hayward v. Leonard. “I identified some sixty-eight ‘contractor’ cases in American courts,” he writes, “and found very little difference between the ways that courts treated ‘contractors’ and other workers. Contractors fared no better, no worse, than laborers in suits to recover in quantum meruit (and quantum valebant)” (Karsten, p. 186).
And as to the implication that the eighteenth-century common law was more equitable, more just, less punitive, and less coercive than judge-made law in the nineteenth, Karsten responds, “One searches in vain for an idyllic past in the history of British labor law” (Karsten, p. 159). Karsten and Steinfeld both sketch the sorry chronicle of over 550 years of oppressive English labor legislation and jurisprudence, from the Ordinance of Labourers (1349) to the Master-Servant law (which lasted, amended, from 1747 to 1875), during which quitting on a contract not only forfeited wages, but was prosecuted as criminal theft of the master’s property in his servant’s labor. The servant was brought before a magistrate and punished with “wage abatement, imprisonment, and whipping” (Karsten, p. 159), “and a fine largely exceeding the amount of his wages” (Steinfeld, p. 151). “As late as 1875 about two thousand agricultural laborers were still being convicted and imprisoned each year for leaving or threatening to leave their employers” (Karsten, p. 160). In his most recent book, I understand that Steinfeld has found 10,000 such prosecutions each year.
In defense of nineteenth-century American labor law, by contrast, “no one even imagined that [laborers] might be compelled to serve out their time. … Direct coercion would not be permitted, but legally sanctioned economic compulsion would. And this,” says Steinfeld, “made perfect sense. It comported with the emerging model of labor that left to the laborer the formal decision whether to stay or to go” (Steinfeld, pp.150-51).
Our interest as economic historians in the judicial enforcement of these contracts is in their labor-market consequences, for it is upon mobile resources and minimal transaction costs that the efficiency of a labor market depends. In his article on negligence theory, Posner had remarked “the affinity between economic market and common law adjudication as methods of allocating resources” (Posner, p. 75). What efficiency argument justifies the employer’s capture of the worker’s wages? The productivity-enhancing consequences of coercive discipline? But in Clark’s (1994) model of factory discipline it was enough that the worker ‘hired’ the coercive boss; he did not have to forfeit all his earnings to pay him. Then, did the employer need to be compensated by the worker for the savings he must now forgo on search costs, implicit contracting, labor hoarding, and lock-in that had motivated the annual contract in the first place? If so, the loss to the worker should vary inversely, rather than directly, with time worked.
The most plausible explanation is, of course, the deterrent effect. But in my own research on contract labor on Massachusetts farms, 1750-1865, where the quit rate was about ten percent of hires, the account books of the employing farmers showed that in no case were earnings withheld (Rothenberg, p. 207). America’s most ‘peculiar institution’ may not have been plantation slavery — after all, almost every agrarian society designs institutions to constrain the mobility of its labor force — but the genuinely free labor on New England farms.
But with this elegiac insertion from my own work I have broken the mood of Horwitz’s book, which at this point is utterly bleak. With the transformation of contract, having “neutralized” substantive justice, objective values, the power of juries, earlier protective or regulatory doctrines, and moral duties, “judges and jurists could no longer ascribe any purpose to legal obligations that were superior to the expressed ‘will’ of the parties. As contract ideology thus emasculated all prior conceptions of substantive justice, [the patently false assumption of] equal bargaining power inevitably became established as the inarticulate major premise of all legal and economic analysis. The circle was complete; the law had come simply to ratify those forms of inequality that the market system produced” (p. 210). The “affinity” between law and economics that Posner had remarked in 1875, Horwitz has found at least a generation earlier.
The Development of Commercial Law: Negotiability, Marine Insurance, Usury
While the responsibility for the transformation of most areas of private law fell upon (or was appropriated by) the state courts, the development of a body of commercial law — having to do with negotiability, usury, and marine insurance — was the preserve of the federal judiciary. Of these areas, negotiability, which lay at the heart of all commercial relations, presented the most difficult contradictions with the common law for it intruded upon the privity of contract.
Ideally, full negotiability requires that endorsed notes “should circulate as freely as money,” which, if one thinks about what money is, means that a subsequent innocent holder of the note “might depend on payment, regardless of any unknown defects in the obligation arising out of the original transaction between distant parties” (p. 213). To illustrate, following Horwitz: A, debtor to B, can be sued by C to whom B had transferred A’s note, even if no understanding had passed between A and C. And if C had endorsed the note over to D not knowing that A had defaulted, D could sue B, a prior endorser. Most crucial — and this is what distinguishes fully negotiable instruments from assignments — suppose A has already paid the note to B; the courts will protect D, an innocent purchaser of the instrument, from the assumption of any risk arising from B’s attempts to defend himself against D’s suit. It was with respect to this last particular that the state courts, particularly in Massachusetts, balked, until the federal court overruled them in 1809, thereby taking the first step in creating a general commercial law. For Horwitz this step was doubly important: it established full negotiability, and it deposited commercial disputes in the jurisdiction of the federal courts, thereby taking them from the “uncongenial anti-commercial environment often found (sic!) in state courts” (p. 252).
Marine insurance in the eighteenth century had been operated out of taverns, inns, and coffee-houses, by merchants and shipowners for their mutual protection; “it had never been intended for profit” (p. 227). Each voyage was a unique event; each transaction was personal; only extraordinary perils at sea were covered; and the underwriters held themselves strictly liable in all cases, unless it could be proved that the ship was unseaworthy, or an agent was negligent (called ‘barratry’).
Sometime during the remarkably fruitful period 1790-1820 came “the gradual acceptance of what we might call an actuarial conception of social risk … a social consciousness that comes to conceive of a greater and greater portion of activity as appropriately within the realm of chance” (p. 228). With the chartering in the 1790s of incorporated insurance companies with large pools of capital, marine insurance law — like bankruptcy and negligence law — devolved upon an actuarial conception of insurable risks. Losses were no longer unique events, but were predictable according to a probability distribution calculated on the experience of hundreds of voyages. Unseaworthiness and barratry were no longer bars to recovery against the insurance companies; moral responsibility became attenuated, and while the risks of moral hazard increased, insurance companies protected themselves by requiring a variety of warranties and representations any breach of which would defeat recovery. For example, “any deviation from the stipulated route of a marine voyage would void a policy even without a showing that it had increased the risk of loss” (p. 231).
“The ultimate triumph of a market ideology” (p. 241) was the movement to abolish usury laws. It is noteworthy, however, that by the Civil War, seven states still voided usurious contracts, penalizing them with fines and/or forfeiture of principal, and every state except California maintained some regulation over the legal rate of interest (p. 243), but by 1860, “it was no longer possible to recapture an earlier and more coherent system of premarket morality” (p. 245) in the context of which this lingering survivor of the ‘just price’ any longer made sense.
As economic historians have been made increasingly aware of legal institutions, if not by Ronald Coase then by Douglass North, no one, I think, any longer doubts that they are intimately related to economic development. But can we understand that relationship without positing a direction of causation? For Horwitz, the transformation of American law after the Revolution appears to have been so thoroughgoing, so deliberate, so willed that it is possible to read him as suggesting that the causation might actually have run counter-intuitively: from legal change to economic change, from pro-entrepreneurial judges to instrumental legal rules; from instrumental legal rules to the institutions of corporate capitalism. And now, twenty-five years after The Transformation of American Law, the theoretical work currently being done by Andrei Shleifer, Robert Vishny, Edward Glaeser, Daron Acemoglu, and other New Political Economists can be read as suggesting that such a thing is not only possible, but a direction worth pursuing in the development field. (See for example, Glaeser and Shleifer, forthcoming.)
Horwitz is not a Luddite. His target is not the process of economic development per se. It is that the courts appropriated so much of the process, and by so doing effected the transformation by obiter dicta rather than by legislation; by changing legal rules rather than by accommodating conflicting interests; by debt- and equity-financing rather than by progressive taxation. It is that, as a consequence, “growth was subsidized by victims of the process” (p. xvi).
Much of Horwitz’s argument depends on his belief that something precious was lost in the passing of the eighteenth century. Objective value, just price, equitable standards, fair contracts, symmetrical information, implied contracts, substantive justice, compensated takings, strict liability: the furniture of “the heavenly city of the eighteenth century.” It can all be compressed into one of his sentences, the belief “that unequal bargaining power was an illegitimate form of duress” (p. 184).
As the book moves through the antebellum period and the lineaments of the transformation harden in place, Horwitz’s own deeply moral commitment to humane values becomes increasingly engaged. The rhetoric grows angrier, the sarcasm more difficult to conceal. It makes this wonderful book exciting to read, but more problematic. One hates – I hate — to disagree with him.
1. Becker (1932), p. 15, quoting Aristophanes. The full quote is “Whirl is king, having deposed Zeus.” 2. The phrase is from Gerschenkron (1968). 3. The phrase is from Nelson (1975). 4. Pound goes on to say, “Today national law schools, teaching law, not laws, and teaching law in the ‘spirit of the common legal heritage of English-speaking people’, are working effectively to preserve this uniformity, against many forces of disintegration” (p. 83). 5. Riparian rights are property rights to the banks of non-navigable waterways, i.e., of waterways not subject to the ebb and flow of the tides, and to the waters up to the mid-point of the stream. 6. Subsidy? Posner replies, “It is true that if you move from a regime where railroads are strictly liable for injuries inflicted in cross accidents to one where they are liable only if negligent, the costs to the railroads of crossing accidents will be lower, and the output of railroad service probably greater as a consequence. But it does not follow that any subsidy is involved — unless it is proper usage to say that an industry is being subsidized whenever a tax levied upon it is reduced or removed” (Posner, p. 30). 7. Karsten has an extended discussion of Britton v. Turner on pp. 157-82. Apparently it was not at all a “solitary” case; it was “hotly debated” in many state courts, and “before the Civil War had ended, five states had adopted the Britton v. Turner standard” (p. 175). Others had recognized it as more equitable but so radical as to require a legislative rather than judicial initiative.
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Winnie Rothenberg is Associate Professor of Economics at Tufts University. She is the author of From Market-Places to a Market Economy: The Transformation of Rural Massachusetts, 1750-1850 (Chicago: University of Chicago Press, 1992), and of a number of articles in Journal of Economic History, one of which, published in 1981, won the Arthur H. Cole Prize for best article. She has served as Vice President of the Economic History Association and as a member of its Board of Trustees.