The Political Origin of Finance: The Case of Federal Bankruptcy Law in the United States

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This paper draws on the legislative history of U.S. bankruptcy law to challenge the influential view that a country's legal origin and mechanism shape investor protection and ultimately financial development and economic growth. Even though the United States has an English legal origin, uses common law, and copied its first federal bankruptcy law from English law, the current U.S. bankruptcy regimes is diametrically opposite to that of the U.K. We show that the American experience can only be understood in the perspective of politics. During the formative 19th century legislative activity was strongly related to general economic conditions: every major reform attempts came in severe economic downturns. Legislative proposals only led to adoption of laws when there was a conservative lock on Congress and the Presidency. Moreover, an in–depth analysis of voting behavior during two critical episodes shows that congressional voting on bankruptcy was strongly influenced by general ideological positions, i.e., how legislators vote on other issues. In fact, even though we show that banking, but not commercial, interests influence outcomes, ideology is a much more important factor explaining voting behavior. We argue that political origins and ideological divides are grossly overlooked in our understanding of the determinants of financial (and legal) development. The ideologically charged congressional debate over bankruptcy reform at the turn of the twenty–first century echoes our historical analysis.



Last updated on 03/25/2015