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A Culture of Credit: Embedding Trust and Transparency in American Business

Author(s):Olegario, Rowena
Reviewer(s):Dupont, Brandon

Published by EH.NET (July 2007)

Rowena Olegario, A Culture of Credit: Embedding Trust and Transparency in American Business. Cambridge, MA: Harvard University Press, 2006. xiv + 274 pp. $40 (hardcover), ISBN: 0-674-02340-4.

Reviewed for EH.NET by Brandon Dupont, Department of Economics, Western Washington University.

In A Culture of Credit, Rowena Olegario traces the development of credit-reporting firms in the U.S. from their origins with Lewis Tappan’s agency through the twentieth century. Her focus is primarily on how credit-reporting agencies (mostly the Mercantile Agency, which later became the R.G. Dun Company, and J.M. Bradstreet) embedded trust into American business. Olegario defines trust the way that business writers of the time understood the term: willingness to risk capital on borrowers who may not be personally known to the lenders and who may not become repeat customers.

The opening chapter presents a good discussion of mercantile credit over most of the eighteenth and nineteenth centuries in both the U.S. and England with particular emphasis on the emergence of bills of exchange. Trust, Olegario emphasizes, was important in the increasing use of bills of exchange, which was rooted in the belief that they would be paid on time when due. Even relatively safe instruments like bills of exchange depended on the issuer’s reputation, which was the key determinant in obtaining credit. The provision of credit is linked to the consumer mentality of early America: “Even places far removed from established commercial centers were well supplied with consumer goods, whose availability was made possible by credit from British and, increasingly, American suppliers” (p. 25).

The British willingness to use mercantile credit clearly crossed the Atlantic and became embedded in American trade practices; however, the emergence of credit-reporting firms, beginning with the Tappan agency in 1841, was a radical departure from the traditional closed networks that were common in England. In Chapter 2, Olegario argues that the traditional British-style trade protection societies, which performed similar functions, did not emerge in the U.S. because of the less established nature of trade in the U.S., a highly mobile population, high “churn” among businesses, and competition among sellers. Thus, the credit-reporting firm was a uniquely American invention designed to mitigate information asymmetries that are an inherent component of credit transactions. While the book would benefit from more discussion on this asymmetry problem, Olegario does an effective job of describing how Tappan effectively cracked open the old British credit reporting system of trade protection societies (closed groups whose members provided information only to other members on a non-profit basis). The American system was fundamentally different in that it was based on competition among firms for subscribers rather than cooperation within trade protection societies. This competition, particularly between the Mercantile Agency and Bradstreet, would fundamentally shape the evolution of credit-reporting firms over the course of the nineteenth century.

The credit-reporting firms focused on borrowers’ financial circumstances and past behavior to determine creditworthiness. This information was most reliably derived from local knowledge provided by correspondents who were mostly attorneys but also included sheriffs, merchants, postmasters and bank cashiers. This local standing of individuals was viewed as the key to their trustworthiness and explains the Tappan agency’s used of local correspondents who knew the community.

Olegario explains some of Tappan’s organizational and managerial problems and uses surviving circulars to illustrate his efforts to create legitimacy for his new steps into a brand new industry. Most of these arguments were essentially based on the increased efficiency that creditworthiness information made possible. These new agencies, not surprisingly, created deep suspicion among some who viewed the scrutiny as humiliating. Olegario writes that, “Attaining legitimacy was contingent on increased familiarity: as credit reports became more widely used, they became perceived as essential to the responsible management of risk” (p. 59). Eventually, the credit ratings agencies won the battle for public perception and increasing numbers of firms were willing to pay for the information they provided.

Robert G. Dun joined the Mercantile Agency in 1846 and became a Milwaukee reporter four years later. He would push aggressively into the South and West and also sought to diversify the client base beyond wholesalers to include banks, fire insurance companies, manufacturers and commission houses.

In Chapter 3, Olegario describes risk assessment methods that were defined on a specific set of character traits primarily because payment histories were nearly impossible to obtain. In the nineteenth century, there was no generally held belief that creditors should share information about client payment histories with each other, mostly out of fear that sharing positive information about clients would lead competitors to steal those clients. Credit reporting firms saw character manifested in traits of honesty, punctuality, thrift, vices (specifically drinking and gambling), energy, experience, marital status, age and focus. Olegario also points to “other considerations, including past behavior and experience” as important, although it is not clear specifically what she means here. Evaluations of creditworthiness would also typically include examinations of public records on mortgages and taxes paid on real estate, supplemented by visits to the establishments themselves. Credit ratings were therefore largely based on information that had some bearing on the probability of repayment, at least as understood at the time.

Chapter 4 focuses on Jewish merchants to shed some light on the insistence of credit reporters on transparency rather than the traditionally closed networks common to Jewish merchants despite the advantages of the closed networks (particularly a greater capacity to maintain stability during economic downturns). Olegario also uses the Jewish example to emphasize the role that ethnic communities played in an increasingly integrated national market. Specifically, these ethnic communities often provided the local knowledge that bolstered the confidence of outside creditors.

Chapter 5 focuses on the ways in which mercantile credit changed late in the nineteenth century, primarily in response to the Civil War. The most significant change was the shortening of credit terms, largely in response to the suspension of specie payments between 1862 and 1879 when sellers tried to compensate for the fluctuations in currency values by shortening the credit period to as little as fewer than thirty days. There was, of course, the pressure to attract and keep customers with generous and flexible credit terms. Despite these relatively minor changes, there were no major changes to the criteria and sources for determining creditworthiness in the late nineteenth century.

Growth continued despite competition (there were forty credit reporting firms in New York alone in the years from 1873-78) because as the economy grew larger, scale became a clear advantage and this was the distinguishing characteristic of the Bradstreet and Dun companies. They pushed aggressively westward, even moving into areas not yet reached by the railroad system and competition also drove them to become more inclusive of as many businesses as possible, regardless of size. In 1859, the R.G. Dun reference volumes rated 20, 268 companies but this number grew to nearly 1.3 million by 1900.

In addition to growth and competitive pressures, the fifth chapter revisits the continuing efforts of credit-reporting firms to gain broader legitimacy with the public ? efforts that were largely successful according to Olegario’s analysis. Articles appeared in newspapers and professional manuals extolling the virtues of the credit-reporting agencies. There was still scattered resistance to the agencies but the efforts to gain legitimacy in the business community and broader public ultimately proved a success. Some of the objections raised were spurious but others seemed to be more serious. In particular, objections were made on the huge spread in the published ratings keys (which would say things such as “worth $250K-$500K,” that rendered them largely meaningless. Some of the reports were old and some correspondents were simply inexperienced in rendering judgments about creditworthiness. The courts played the most prominent role in the struggle for legitimacy since lawsuits were frequently brought against credit reporting agencies but the courts increasingly broadened the definition of privileged communications and determined that as long as the agencies were reasonably diligent, they could not be held responsible for losses.

There are some areas where Olegario’s analysis could benefit from some quantification to the extent that it is possible, since readers will sometimes find themselves asking J.H. Clapham’s familiar questions of “How large? How long? How often? How representative?” At times, the book also seems to be pieced together leading to some repetition that occasionally impedes the flow of the text. Despite these relatively minor qualms, the book presents a fascinating account of the emergence of credit reporting in the U.S. and does a good job of illuminating some previously unknown factors in this important and understudied area of business history.

Brandon Dupont is an Assistant Professor of Economics at Western Washington University. His most recent publication is “Bank Runs, Information and Contagion in the Panic of 1893,” which is forthcoming in Explorations in Economic History.

Subject(s):Financial Markets, Financial Institutions, and Monetary History
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII