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Published by EH.Net (February 2003)

Kenneth Lipartito and Carol Heher Peters, Investing for Middle America: John

Elliot Tappan and the Origins of American Express Financial Advisors. (New

York: Palgrave for St. Martin’s Press, 2001) pp. X + 268.

Reviewed for EH.Net by Douglas Steeples, retired Dean of the College of Liberal

Arts and Professor of History, Mercer University.

The year 1894 was not an auspicious one for launching a new business in the

United States, let alone one that steered a course into uncharted financial

waters. The country was in the depths of its worst business depression of the

nineteenth century. Unemployment in many urban and industrial areas was 20,

even 25 percent. Farmers of wheat, corn, and cotton faced the lowest prices for

their crops in a generation. Workers with jobs averaged a bit more than a

dollar a day, working seven 10-hour days per week when they were fully

employed. Charities were strained to their limits and beyond. The jobless

picked over garbage hoping to find something edible. More than five hundred

banks had failed, and 20 percent of the nation’s railroad mileage was in

receivership. Revelations of mismanagement in finance, manufacturing, and

transportation; of outright fraud in securities trading of excessive reliance

of giant firms on credit in speculative overexpansion and attempts to achieve

monopolies; and of abuses of trust on the part of insurance companies struck

heavy blows at the confidence of many Americans in their business system. The

country’s deep-rooted ethic of self-reliance and manliness in personal affairs

and finance faced a withering challenge.

The United States was in fact passing through a great transition. Hitherto, the

country’s people pursued a dream of saving to achieve economic independence.

Hoping to rise from the ranks of employees to those of at least small business

owners or members of the professions, people viewed saving as the way to

accumulate the necessary capital. It was, too, a sign of virtue and thus a

measure of character. But with the increasing scale of enterprise, a shrinking

percentage of people could hope thus to climb the socioeconomic ladder. The

exhaustion of readily tillable western lands as an avenue of individual

opportunity played a role, too, as did increasing urbanization. To a constantly

growing degree, Americans faced the prospect of remaining employees lifelong.

Instead of adding to land holdings, if farmers, so that descendants could

support them in their old age, or if they dwelt in cities then accumulating

capital of other sorts for the same purposes, they faced a new prospect filled

with uncertainty. A young insurance industry, yet largely unregulated, was

often little more than a lottery. So, too, were investment schemes that

sustained themselves by drawing on money from new investors to pay returns to

their predecessors (pyramids) or that depended on high rates of lapsation and

forfeiture to generate income from which to pay returns (tontines).

John Elliott Tappan was born to parents of New England stock on a farm in

Vinland township, close to the junction of the Fox and Wolf Rivers at Lac Butte

des Morts near Oshkosh, Wisconsin, in 1870. His father died suddenly when

Tappan was but two years old, leaving his mother with three children and a

93-acre farm worth about $6,500. By 1877 his mother had sold the farm and

relocated to Minneapolis. Ten years later, in an extreme manifestation of the

prevalent belief that real men must confront the challenges of the world

outside of the home, seventeen-year old John Tappan began a three-year stint in

California and up the West Coast to Washington Territory. During the while he

tramped, hopped freight cars, worked in mining and lumber camps, and completed

college preparatory classes in Seattle. After a fire burned the city to the

ground in June, 1889, he returned to Minneapolis, hardened by life on the

fringes of civilization and imbued with a deep love for the out of doors and

nature but ambitious for a middle class career. After a month at home he

journeyed to Duluth and took an office job, a first step toward the middle

class career to which he aspired. Completion of a stenographic course added to

his business skills, and he later, while working, he finished legal studies at

the University of Minnesota and was admitted to the bar. In the interim, he

sold bonds and insurance, gaining knowledge of how independent sales agents

worked and of how to make actuarial calculations that would result in sound

business planning.

Tappan had as a boy experienced the depression of the 1870s. He grew up as the

nation passed through a generation of heated argument over monetary policy, as

proponents of gold, of silver, or a paper currency, and other schemes argued

over how best to assure prosperity. No radical, but surely an innovator, he

framed an idea that sought to marry western ideas of financial reform – those

that would make it easier for ordinary people to save and thereby advance in

the world – “with eastern financial orthodoxy” that sought to protect the

stability and soundness of money. His idea was for a new type of investment

instrument, to which he gave the name “face amount certificate.” This device

worked like zero coupon bonds. Purchased at a discount, they were to be held

until they matured to their face values of $1,000. The initial period to

maturity was twenty years. In order to make the investment more attractive,

Tappan in stages reduced it to twelve, then ten years. Tappan planned to sell

them for monthly installments. The actual return would vary depending on the

amount paid in and the certificates’ maturation period. As a rule, customers

received about a 6 percent return, double or triple what railroad bonds or

government bonds yielded. The monthly payment plan made these instruments

accessible to middle Americans, both wage earners and such professionals as

teachers, attorneys, and physicians who constituted the middle class in the

nation’s heartland. Unlike other instruments, these would rest on investments

in improved real estate. They thus were far less chancy than corporate bonds,

which in addition to higher risk typically sold in larger denominations and for

cash so that only well off individuals could buy them. Tappan’s Investors

Syndicate, incorporated in 1894, proposed to be something that would rest on

the ideals of thrift, honesty, and manly independence. It would be a mechanism

through which small investors’ monthly payments could be pooled. Customers

would benefit from expert management of their investments. They would be

protected against fluctuations in the country’s modernizing economy. They would

gain the advantages of working with a firm that was at once local (emphasizing

investments in real estate in and around Minneapolis and only gradually

expanding beyond) and then national, firmly controlled by management of

unquestioned integrity, and for many years small enough to be personal in

feeling even as it participated in the emergence of an economy in which giant

firms were predominant. In addition, the firm’s location in Minneapolis was

advantageous in that it could appeal to Midwesterners and Westerners suspicious

of eastern banking and financial centers.

The authors of Investing for Middle America are uniquely qualified to

write this book. Kenneth Lipartito is professor of history at Florida

International University and a specialist in the history of business. Earlier

works include The Bell System and Regional Business (1989) and

(coauthored with Joseph Pratt) Baker and Botts in the Development of Modern

Houston (1991). The excellence of his work has won recognition from the

Business History Conference, which awarded him the Williamson Prize in 2000,

and conferral of the Newcomen Award for Excellence in Business History Research

and Writing (1995). Carol Heher Peters is the great granddaughter of John

Elliott Tappan and is Communications Editor at the Princeton Environmental

Institute, Princeton University. This book grew out of genealogical research

begun by her grandmother, which led to her discovery of a collection of nearly

20,000 letters that Tappan wrote between 1894 and 1919. Six years of research

resulted in a draft manuscript that eventually reached Lipartito, who saw in it

a uniquely interesting point of entree into the daily conduct of finance during

a time of transition for which records are slender. Lipartito and descendants

of Tappan ultimately agreed that he would place Tappan’s life and business

career in a broader context that combined his personal life and story with

broader developments on the national business scene.

The Investors Syndicate, which Tappan founded and oversaw until he sold his

interest in it in 1925 after the other two principal stockholders conspired to

sell their majority holding, ultimately became Investors’ Diversified Services

(IDS), before its acquisition by American Express and renaming as American

Express Financial Advisers in 1984. The narrative becomes greatly compressed

for the years after Tappan sold his interest in his firm, leaving one with

relatively little information about the evolution of Investors Services into

Investors Diversified Services and then its present evolution under the

umbrella of American Express. Tappan lived until 1957 and continued to practice

law well into his later years. As an innovator, Lipartito and Peters do not

claim too much in comparing him to A.P. Giannini, father of “retail banking,”

Henry Ford, and Thomas Alva Edison. His contribution was to raise financial

intermediation to a new level. He took a simple idea – use expert and reliable

agents to solicit funds from investors, pool them, draw on expertise and

knowledge to place them where they would earn a higher rate of return than that

paid out to his investors, employ sound actuarial calculations to factor in

realistic lapsation rates, manage efficiently and prudently with clients’

interests in mind – and built a firm that in time became both a model and a

giant in the financial services industry. Integrity brought it through several

investigations prompted by the shady practices of others. It met the

competitive pressures of sales of government Liberty Bonds during World War I

(Tappan actually encouraged certificate holders to purchase war bonds with

their certificates). It grew enormously during the Great Depression of the

1930s when the stock market saw values fall by 90 percent. Tappan, meanwhile,

never wavered from his original aims. He could have become immensely wealthy,

but that was not his purpose. Instead, he reinvested the company’s profits for

many years while taking no salary and supporting himself with his law practice.

He remained true to the goal of making systematic and profitable savings

through conservatively managed, sound pooled investments possible to the mass

of middle Americans. He had, true, only one idea – but it evolved into the

mutual funds industry, and his firm remained a leader long after he had left

the scene.

Readers will find this book a lucid introduction to a fascinating subject.

Lipartito and Peters share a rare gift for lucid discussion of what in other

hands could be impenetrable subjects. Their narrative adeptly and seamlessly

interweaves the story of Tappan’s life with those of his company and of changes

in the nation’s economy. The research has been comprehensive (one might wish

only for references to Democracy in Desperation, by Steeples and

Whitten, 1998; Mary Ryan’s 1981 Cradle of the Middle Class; and Kim

Townsend’s 1997 Manhood at Harvard). Errors are few and trifling: Rotary

International originated in the twentieth, not the nineteenth century.

Investing for Middle America deserves to become a classic, and to win

for Lipartito yet another award. It should enjoy a wide readership among those

interested in American business and social history, 1870-1950.

Douglas Steeples is retired as dean of the College of Liberal Arts and

Professor of History from Mercer University. A specialist in nineteenth century

western and business history, he most recently published Advocate for

American Enterprise: William Buck Dana and the Commercial and Financial

Chronicle, 1865-1910 (2002).