19th Century French Bankruptcies

The paper begins by outlining the key characteristics and transformations of French insolvency law during the latter half of the 19th century and the early 20th century. A central aim is to determine if changes in bankruptcy law adequately explain the observed increase in bankrupt firms. The initial description of French insolvency law reveals inconsistencies between the aggregate-level bankruptcy trends and legal modifications. The study highlights that the available statistics, incorporating regional data, provide a more rigorous means of evaluating the impact of legal adjustments. The analysis reveals a significant influence of certain legal alterations, although not universally applicable across all aspects of bankruptcy procedures. The research also emphasizes substantial regional disparities in bankruptcy rates, suggesting these fluctuations are not solely attributable to variations in the French economic landscape, but may instead reflect a diffusion process originating from the Paris Court and spreading to the provinces. This regional divergence points to the relative insignificance of the written law compared to local judicial practices, even within a civil law system. The paper contrasts its approach with existing 'law and economics' perspectives (e.g., La Porta et al., 1998), which tend to focus on cross-national legal comparisons, often neglecting the practical implementation and long-term evolution of laws. The study emphasizes the dynamic interaction between law and practice, suggesting that court precedents can often precede and even shape legislative adjustments.

The study details the intricacies of early 19th-century French bankruptcy procedures (faillite), noting the significant role of commercial courts (reserved for merchants, excluding farmers, professionals, and civil servants) in handling these cases. Bankruptcy was officially determined when payments ceased (cessation de paiements). Initiation of proceedings could stem from the bankrupt themselves (dépôt de bilan – providing a balance sheet), their creditors (requête), or the court (d’office). Bankrupts faced imprisonment, and a trustee (syndic) oversaw the subsequent process. The process could result in a concordat (an agreement with creditors for debt restructuring allowing the firm’s continuation), complete liquidation (union), or dismissal for insufficient assets (insuffisance d’actif). The process involved creditor classification (secured vs. ordinary), with secured creditors receiving priority. Concordats required creditor majority approval. The existing system, as described, presented considerable drawbacks. It relied excessively on imprisonment, hindered concordat agreements, and involved slow, costly procedures. While effectively deterring traders, it fell short in protecting creditor interests and providing opportunities for a fresh start for unfortunate merchants. Debtors often faced post-bankruptcy asset seizures and lasting reputational damage, unless a concordat was achieved. The system frequently encouraged private settlements to avoid court processes, which often led to creditor inequalities and fraud, at times leading to delayed legal action and chaotic outcomes. This was unsatisfactory to many contemporaries, including figures like Balzac and the Saint-Simonians.

The analysis highlights the significant reforms that took place in French bankruptcy law, especially after the 1830 Revolution. These reforms aimed to create a more liberal and efficient system, shifting away from the harsh penal characteristics of previous practice. The 1838 law facilitated concordats for ‘good faith’ bankrupts, particularly those who proactively initiated proceedings with a balance sheet (dépôt de bilan). It allowed courts to excuse bankruptcies and restore commercial rights (although not necessarily political rights). The 1838 law simplified procedures, reduced costs, and empowered the syndic to manage bankrupt businesses, aiming to preserve value for creditors. Subsequent changes reinforced this liberal trend. The 1856 concordat par abandon d’actifs allowed bankrupts to start anew without fear of asset seizure, and the 1867 abolition of contrainte par corps (imprisonment for debt) reflects a wider embrace of personal liberties. Further reforms (such as the 1903 changes that eased rehabilitation) continued this direction. The 1889 introduction of the liquidation judiciaire provided a new procedure, intended for good-faith bankrupts facing unfortunate circumstances. This procedure aimed to lead to a concordat, but union or insuffisance d’actif outcomes were also possible. The evolution of bankruptcy law and practice can be viewed as a dynamic interaction between economic shifts and the influence of various social groups and their respective power structures.

This section explores the political and economic forces shaping French bankruptcy legislation. The authors argue that the evolution of bankruptcy law and practice reflects the interplay of economic transformations and the shifting power dynamics among different social groups. The expansion of commercial credit, driven by the Industrial Revolution, is highlighted as a crucial factor. The increasing complexity of commercial credit networks and the emergence of larger firms needing substantial investment led to increased reliance on commercial credit rather than banking credit in France. This is suggested as a reason for the persistence of the corporatist-style organization of commercial courts throughout the 19th century. This suggests that bankruptcy was viewed as a mechanism for self-regulation within the commercial community, rather than simply an economic process. The authors trace the beginning of the debate around appropriate bankruptcy laws to the conflict between the desire of capitalists to expand credit and the existing autocratic social structures under regimes ranging from Napoleon to the restored Bourbons. Property owners, a dominant force in the political elite before 1830, resisted the rise of new entrepreneurs who might use bankruptcy to avoid debt. This resistance prioritized reputation and experience over risk-taking and innovation. A compromise emerged, protecting mortgage and secured debts while allowing merchants to default on debts owed to other merchants, not property owners. This is presented as a key factor that shaped early bankruptcy legislation.

The 1830 Revolution, which brought liberals and bankers to power, marks a turning point in the evolution of bankruptcy legislation. This section examines how the ascendancy of these groups facilitated the passage of the more liberal 1838 bankruptcy law. The authors highlight the shift in power dynamics, with the 1838 law enhancing the influence of established merchants – who elected commercial judges from among themselves – thus reinforcing existing hierarchies within the commercial society. The section notes that this approach potentially disadvantaged newcomers. The liberal proponents of this reform, besides referencing Montesquieu on natural civil liberties, also believed that the contrainte par corps (imprisonment for debt) stifled modern commercial relationships and credit expansion by overly emphasizing personal assets instead of business acumen. The authors acknowledge the influence of property owners, noting that a later law (1872) limited guarantees for the owners of merchant businesses, and the rise of bonds as a significant component of business debt— unfavorable to property owners seeking diversified financial holdings— since these bonds were considered as commercial debts in bankruptcy procedures. The Third Republic's more decentralized political structure—due to the influence of land-owning senators and deputies—saw a return to power for lawyers, reducing the influence of the Parisian financial elite. This shift led civil courts to attempt regaining greater influence over commercial courts.

This section analyzes the ongoing tensions within the judiciary and among different business interests that influenced the development of bankruptcy legislation. The lengthy debate surrounding the 1889 bankruptcy law is explained by conflicts within the judicial system and between the interests of small and large firms, whose relative influence varied considerably across different regions. The authors point out that the relative power dynamics among these groups heavily influenced how bankruptcy laws were crafted and interpreted, highlighting the complex interplay between legal frameworks, economic realities, and political maneuvering. The study emphasizes the importance of considering the endogeneity of bankruptcy law, recognizing that various stakeholders (merchants, chambers of commerce, legal professionals) actively attempted to shape the legal environment to their advantage. The extensive archival record substantiates this. This section sets the stage for further research on the intricate processes by which bankruptcy law evolved to balance competing interests and adapt to changing economic conditions.

This section introduces a microeconomic model to analyze the decisions of debtors and creditors when facing financial distress. The core of the model centers on the choice between a private settlement with creditors and formal bankruptcy proceedings. The authors critique existing studies for treating bankruptcy as a mere event rather than a strategic choice made by economic agents. They emphasize the need for a model that incorporates the behavior of both debtors and creditors. For debtors, bankruptcy is presented as a strategy to minimize debt levels when facing payment difficulties, requiring demonstration of good faith to creditors and the courts while also considering the impact on reputation and business operations. Creditors, on the other hand, utilize bankruptcy laws to enforce payment when feasible. The model serves as the framework for understanding the rise in bankruptcies in 19th-century France. The study highlights that this theoretical model will be tested using a new database of yearly official statistics, covering both national and regional levels and sometimes extending to the court level. This rich source will allow the researchers to analyze the data across both time and space, a critical aspect for understanding bankruptcy in 19th-century France. The model aims to explain how debtors and creditors strategically interacted with the legal system to achieve their economic goals in this era.

This subsection delves into the detailed decision-making processes of both debtors and creditors within the context of the proposed microeconomic model. For debtors, the primary considerations are minimizing debt levels and maintaining a positive reputation. Private settlements are deemed preferable in terms of reputation and lower transaction costs, avoiding potential firm liquidation if a concordat fails. However, internal conflicts within the firm (due to information asymmetry among partners) could hinder private settlements. Private settlements may be inferior for debt reduction, as information asymmetry between debtor and creditors persists. The difficulty in reaching a private settlement lies in securing agreement from all creditors, since individual debts cannot be reduced without the consent of the involved creditor, who could initiate bankruptcy proceedings. Creditors, while also favoring firm survival (provided it's financially advantageous), must weigh the trade-offs between private settlements and bankruptcy procedures. Private settlements are considered preferable for lower procedural costs, while bankruptcy provides critical information about the debtor's situation, allowing better debt reduction adjustment. Bankruptcy procedures also ensure creditor equality and safeguard against preferential access to the firm's assets. Thus, bankruptcy is viewed as an option that allows the creditor to pursue liquidation if a settlement can't be reached.

This subsection examines the factors that influence the choice between private settlement and formal bankruptcy proceedings. The authors consider the likelihood of reaching a concordat in a given situation and how the risk of disagreement impacts the choice to pursue a legal procedure (with the probability of a legal procedure decreasing as the risk of a failed concordat increases). Debtors are predicted to favor formal bankruptcy proceedings when the risks to reputation and future liquidation are minimal, often when the firm's financial health is relatively strong, information asymmetry is low, and the likelihood of a successful concordat is high. Creditors, conversely, are more inclined to initiate bankruptcy procedures when the option value of liquidation is high, indicating greater uncertainty about the debtor's situation and a heightened risk of conflict among creditors. The analysis also addresses the role of procedural costs, suggesting that reductions in these costs could prompt both debtors and creditors to favor legal procedures over private settlements. This model, while simplifying the complexities of bankruptcy decisions, provides a rigorous framework to analyze the significant increase in bankruptcies observed in France during the nineteenth century. The paper acknowledges limitations in directly assessing private settlements due to data scarcity, instead focusing on whether the observed changes in bankruptcy data align with the model's predictions.

This section establishes the context for the study by highlighting the dramatic increase in new bankruptcy procedures in France throughout the 19th century. The growth in bankruptcies significantly outpaced the growth rates of both GDP (2.4% vs 1.6% yearly increase from 1820 to 1913) and the number of firms (0.8% from 1827 to 1913). The proportion of firms experiencing bankruptcy annually rose from 1 to 4 per thousand between the 1820s and 1880s, before stabilizing and slightly declining. The authors point out that after the 1838 bankruptcy law's implementation, and excluding periods affected by special legislation (1848-53 and 1870-71), the increase in bankruptcies was relatively stable from the 1840s to 1880s. Later, the number of bankruptcies leveled off even when including the new liquidations judiciaires in the statistics. The overall peak was in 1898, with almost 10,000 new procedures. This significant increase in bankruptcy filings sets the stage for the subsequent analysis focusing on the interplay of legal reforms and judicial practices in driving this trend. The initial observation is that the increase was not solely tied to specific periods of legal reform.

This section investigates whether the evolution of bankruptcy law significantly influenced the long-term trends in bankruptcies. The primary legal changes of 1838 and 1889 aimed to incentivize debtors to use court-based solutions rather than private settlements. The reforms reduced penalties for debtors and supported their efforts to restart businesses after failure. While it also likely encouraged creditors to pursue quicker legal action, this effect was considered secondary to the impact on debtors. A notable shift occurred in the late 1860s (1865-1869), with the proportion of debtor-initiated bankruptcies decreasing from 57% to 45%. This is attributed to the 1867 abolition of imprisonment for debt, which removed a key incentive for debtors to file for bankruptcy. The data reveals that the increase in bankruptcies during the 1840s and early 1860s largely stemmed from debtor choices, with debtors initiating approximately 60% of new bankruptcy cases. This is linked to the 1838 law's impact of encouraging judicial over private settlements. Regional analysis following the 1838 law indicates that while the law itself was influential, it was also preceded by a similar practice already in effect in Paris, suggesting that legal reform may have only codified existing practices from the most commercially important regions.

This section explores the regional variations in bankruptcy rates and the influence of the Paris Court. Paris's Court of Appeal handled a considerable proportion of French bankruptcy cases (roughly one-third) throughout the 19th century. Paris showed a higher proportion of debtor-initiated bankruptcies in the early 1840s, a pattern observed to a lesser extent in Bordeaux and Colmar. The explanation for Paris’s higher bankruptcy rate is considered to be either due to unique regional economic conditions or specific practices within the Parisian Tribunal de commerce. Key features of the Parisian Tribunal included low rates of bankrupt imprisonment and a comparatively strict use of the contrainte par corps (imprisonment for debt). The 1838 law is interpreted as an attempt to formalize and extend the Parisian model, characterized by higher bankruptcy rates with a greater percentage of debtor-initiated cases leading to concordats. This model spread across France, decreasing regional heterogeneity as ‘good practices’ were adopted nationwide. The 1867 law did not significantly alter this homogeneity. The introduction of the liquidation judiciaire in 1889, however, produced regional inconsistencies. Adoption rates varied widely, ranging from around 15% in Paris to 50% in other areas. This is attributed to differing interpretations of the law across various courts; the study suggests that while the 1889 law did little to influence bankruptcies in major commercial centers, it helped less developed regions catch up.

This subsection explores the impact of procedural costs and efficiency on the rise in bankruptcies. High procedural costs, including both financial costs and time delays, were widely recognized as barriers to using the court system. The authors measure improvements in efficiency by tracking the proportion of cases resolved within a given year. This indicator increased over time, from around 35% in the 1840s to 55% after 1900. This improvement is suggested as a factor in shifting both debtors and creditors towards judicial settlements. While the overall court efficiency increased, a closer look is needed to make sure this improvement wasn't skewed by an increase in the number of cases quickly dismissed due to insufficient assets (insuffisance d’actif). Financial costs related to taxation of official documents and syndic payments decreased throughout the century. The authors use archival data to confirm that syndic expenses, relative to income generated from bankruptcies, also declined. In summary, a reduction in both financial and time-related procedural costs potentially contributed to the increase in bankruptcies.

The analysis relies on a new database of yearly official statistics produced by the French judicial system, covering bankruptcy procedures from 1820 (or 1840) to 1913. This data includes information on newly opened and closed bankruptcy procedures at national and regional levels, providing a longitudinal and spatial dimension critical for understanding bankruptcy trends. The statistics offer details on case origins (debtor or creditor initiated), outcomes (concordat, union, etc.), case duration, asset and liability sizes, debt composition, and creditor dividends. While providing rich temporal and, to some extent, spatial variations, the data presents limitations. Crucially, it often lacks information connecting the characteristics of failed firms to bankruptcy procedure outcomes. The authors suggest that individual case files from court archives can supplement the statistical data, helping to understand discrepancies between legal stipulations and actual court practices. The individual case records assist in analyzing how statistics were compiled and in identifying the limitations of the aggregate-level statistics, which are a vital source in understanding 19th-century French bankruptcy.

This section analyzes how legal changes influenced the overall trends in bankruptcies. The researchers note that the number of new bankruptcy cases increased sharply during the 19th century, exceeding the growth rates of both GDP and the number of firms. The 1838 and 1889 legal reforms aimed to encourage debtors to file for bankruptcy rather than seeking private settlements. The reforms lessened penalties against debtors and made it easier to restart businesses post-bankruptcy. The composition of bankruptcies, specifically the proportion initiated by debtors or creditors, provides further insights. A significant change is observed in the late 1860s (between 1865 and 1869) where debtor-initiated bankruptcies decline drastically (from 57% to 45%). This is linked to the 1867 abolition of prison for debt, thus removing a major incentive for debtors to file for bankruptcy early. Data shows that the rapid increase in bankruptcies during the 1840s and early 1860s was mainly due to debtors' choices, suggesting the success of the 1838 law. The 1889 law, which introduced the liquidation judiciaire, led to a decrease in creditor-initiated bankruptcies while increasing the overall proportion of debtor-initiated bankruptcies. This implies that the new law encouraged earlier filings by debtors, but didn’t increase the total number of bankruptcies. The researchers test the efficiency of the law by looking at whether the number of private settlements was already negligible by the time the 1889 law came into force.

This subsection focuses on regional variations in bankruptcy trends. The analysis reveals that in the years following the 1838 law, Paris exhibited a high proportion of debtor-initiated bankruptcies, which then spread to the rest of the country. This suggests that Paris served as a model for dealing with bankruptcies, with this approach being gradually adopted elsewhere. The spread of this practice is interpreted as a diffusion process emanating from Paris. The data also reveals significant variation in the usage of the liquidation judiciaire introduced in 1889, suggesting inconsistencies in the interpretation and application of national law across different regions. Paris and other major commercial centers (Lyon, Aix) showed lower usage compared to peripheral areas (Rennes, Nancy, Douai, Chambéry, Bourges). The differing adoption rates across regions suggest that the 1889 law had a smaller impact on major commercial centers, primarily simplifying procedures rather than fundamentally altering bankruptcy trends, but it helped peripheral regions catch up to the major commercial centers.

This part delves into the data on procedural efficiency and costs. Reduced procedural costs, both financial and in terms of time, are considered as potential factors contributing to the rise in bankruptcies. The authors found that while the overall efficiency of court procedures improved across the period of analysis, this might be partially affected by the increased number of bankruptcies that were closed quickly due to insufficient assets (insuffisance d’actif). The data indicates that while the total time for processing bankruptcies decreased by approximately half between 1850 and 1899, this was mostly due to the decreased processing time for liquidations (unions). The processing time for concordats did not decrease. Financial costs, primarily related to taxation and syndic payments, decreased over time, potentially contributing to the increase in bankruptcy cases. Analysis of bankruptcy outcomes reveals a decline in concordats as a proportion of total bankruptcies and an increase in bankruptcies dismissed due to insufficient assets (insuffisance d’actifs). The introduction of the liquidation judiciaire led to a slight rise in concordats but still did not offset the overall trend towards more bankruptcies resulting in insuffisance d’actifs. The findings suggest that legal changes, along with improved court practices and lower procedural costs, all contributed to the observed increase in bankruptcies in France during the 19th century. The authors acknowledge that legal reforms only explain part of the changes, and other economic factors may have played a larger role.

The conclusion summarizes the key findings regarding the significant increase in bankruptcies in 19th-century France. The research establishes that the rise in bankruptcies cannot be fully explained by the liberalization of bankruptcy law alone, even when considering the concurrent reduction in procedural costs. The study combines a microeconomic model of the choices between private settlements and formal legal procedures with a newly developed database of bankruptcy statistics from 1820 to 1913. This combination of quantitative and theoretical approaches reveals that the increase in bankruptcy filings likely reflected, to an extent yet to be precisely measured, real economic factors such as a rise in the number of small businesses and an increase in their debt leverage. The data strongly suggests a substantial role for changes in bankruptcy law and court practices. This is particularly evident in the 1838 and 1867 reforms, which impacted the frequency of concordats and the types of bankruptcy outcomes. The conclusion sets the stage for future research to further refine the understanding of the relative contributions of legal reforms and economic forces to the bankruptcy trends observed during the period.

This section underscores the complex interplay of factors contributing to the 19th-century bankruptcy surge in France. The study finds that while legal liberalization and decreased procedural costs facilitated the shift toward legal settlements, they do not fully account for the increase. The research incorporates a microeconomic model to analyze the decision-making process of debtors and creditors, and this model suggests that an increase in the number of smaller firms and higher levels of debt leverage played a significant role. The detailed analysis of historical bankruptcy data reveals a substantial influence of changes in both bankruptcy law and court practices. The 1838 and 1867 reforms stand out as particularly influential. The data suggests a complex dynamic where legal changes were not only reacting to economic pressures but also shaped by the practices of commercial courts. In short, this section emphasizes that the increase in bankruptcies resulted from a combination of factors, and further investigation is needed to determine the relative importance of each.

The conclusion concludes by outlining avenues for future research. The authors acknowledge that while the study demonstrates a strong link between legal reforms, judicial practices, and increased bankruptcies, further work is needed to quantify the precise contributions of each factor. The interaction between legal evolution and real economic changes requires further exploration, with specific attention to the complex feedback loop between economic and judicial shifts influencing legal development. The study lays the foundation for future research focusing on refining the understanding of this intricate relationship. This involves a more precise quantitative assessment of the interaction between economic forces, judicial decisions, and legislative reforms. The goal would be to more clearly define the causative mechanisms at play and to gain a more comprehensive understanding of bankruptcy dynamics during the 19th century in France.