In this paper, we explore the role of the legal system in economic development, focusing on its relationship to the role of private mechanisms in contract enforcement. We use long-term prefecture-level panel data that cover the early stages of industrialization and urbanization in Japan. We found that industrialization increased the demand for civil lawsuits, but that this was conditional on urbanization. In other words, increased demand for civil suits occurred only where industrialization and urbanization simultaneously progressed. At the same time, the inefficiency of the legal system impeded industrial growth, but only conditional on urbanization. That is, the inefficiency of the legal system impeded industrialization only in urban areas. These findings suggest that community-based contract enforcement mechanisms worked in rural areas and that these mechanisms were replaced by the formal legal system as urbanization progressed and community ties declined.