The development of the American economy was accompanied by significant spatial income inequalities between the northern and southern regions. While many factors contributed to northern industrialization and southern stagnation, an important factor was differences in their institutions. In the North, a democratic institution fostered growth whereas in the South, an oligarchic institution favored status quo. To gain some insights on the nature and causes of the divergence of these institutions, this paper examines the development of political and legal institutions in Massachusetts and Virginia, the two leading states in the North and the South.