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Published by EH.Net (September 2023).

Bruce Carruthers. The Economy of Promises: Trust, Power, and Credit in America. Princeton: Princeton University Press, 2022. 408 pp. $35 (hardback), ISBN 978-0691235387.

Reviewed for EH.Net by Bradley A. Hansen, University of Mary Washington.

 

In The Economy of Promises: Trust, Power, and Credit in America Bruce Carruthers sets out to provide “an interpretive essay rather than an encyclopedia of the history of credit” (p. 28). Despite disclaiming status as an encyclopedia, the book is comprehensive in its coverage, from the colonial era to now and including trade credit, bank lending, loan sharks, corporate bonds, mortgages, credit cards, student loans, and sovereign debt. Yet interpretive essay is an apt description because Carruthers provides coherence to the history of credit in America by identifying the common themes across the diverse ways in which Americans have used credit. The central theme is the evolution of the ways that creditors have decided whom to trust, moving from dependence on personal knowledge and individual judgment to standardized ratings and rules.

Carruthers begins with the conceptual issues raised by the title. He notes that there are many kinds of promises, but that he is interested in a specific kind of promise: the promise to pay a certain sum of money in the future. Such promises underlie much of the economy. Households pay for goods, buy homes, and invest in education based on their promises to pay in the future. Financial institutions obtain funds, businesses finance their operations, and governments fund their activities based on their promises to pay in the future. Recognizing the centrality of these promises to the economy leads to the question: whom to trust? How do creditors tell which promises to believe. Carruthers notes that just as there are many kinds of promises, there are many kinds of trust. He makes clear that he is not studying the sort of generalized trust encountered in the social capital literature. He is interested in what it means to trust a specific person to do a specific thing: “If person A trusts another person B, then A proceeds with the expectation that B is going to act in a certain way or do certain things. A trusts B to do X, where X is some specific action” (p. 32). Thus, the issue is not whether some people are more trusting than others, but how in a specific case a lender can come to expect that a borrower will keep their promise.

The first type of credit that Carruthers analyses is trade credit, the credit provided by businesses and manufacturers to other businesses when they deliver goods with the expectation that payment will be made in the future, for example, in sixty days. In America, trade credit was the first type of credit that was transformed by the shift from reliance on local knowledge and personal judgment to standardized ratings and routines. During the Colonial Era and Early Republic, most people made such promises to people they knew, or at least people who knew people they knew. They formed their expectations about whom to trust based upon personal, often tacit, knowledge. Trusting people beyond this community required the creation of substitutes for this local knowledge. In 1841, the Mercantile Agency began to collect such local knowledge and sell it to manufacturers and merchants, making it possible for them to evaluate the credibility of businesspeople they did not know personally. It was soon followed by other credit reporting agencies. At first, these reports were just collections of the sort of informal local knowledge about the character of individuals that merchants who knew them personally would have used. Over time, the assessments of the trustworthiness of merchants became standardized into ratings, although the process by which the ratings were created remained relatively ad hoc for much of the nineteenth century. The innovations in credit rating supported the expansion of interstate commerce fueled by falling transportation and communication costs and rising incomes and population. The developments in trade credit set the pattern that would be followed throughout the rest of the economy, the routinization of decisions about whom to trust. Most of the subsequent chapters in the book examine this process as it transformed credit markets throughout the economy.

Bank lending soon followed the pattern set in trade credit. Banks began to use the reports of the credit reporting agencies to evaluate whom to trust. Later they developed their own credit departments, with their own approaches to rating loan applicants. As they developed these new tools, banks moved away from insider lending, based on personal connections, toward routinization of lending decisions based upon criteria reflected in standardized forms. The pattern for individual and consumer credit is complicated, but ultimately followed a similar pattern. Consumers had long relied upon credit from storekeepers, but over time a variety of other lenders appeared. Small loan agencies, often called loan sharks, made cash loans, typically to borrowers with regular employment, relying on either a wage assignment or the threat of garnishment to support their expectation that the promise would be kept. Retailers of large-ticket items used buy now, pay later schemes, relying on the threat of repossession to encourage repayment. Later, credit cards provided a means for consumers to obtain credit for almost any purchase. By the middle of the twentieth century, consumer credit was being transformed in the same manner that trade credit and bank lending had been, as lenders adopted standardized forms and the Fair, Isaac Co. created the FICO score. Rather than trust based on deep personal knowledge of an individual, trust could be based on a single number. Similar transformations occurred with mortgage lending and corporate and government bonds.

Carruthers also provides a chapter on what happens when someone fails to keep their promise, an issue that gained greater prominence as innovations in determining who to trust opened up novel connections between debtors and creditors. Overall, this is a story of movement away from punitive responses, like debtor’s prison, to restorative responses, like the discharge of debts in bankruptcy. The trend toward more forgiving laws reversed somewhat in the 21st century.

Of course, government action is central to the story of debt collection, and throughout the book, Carruthers highlights the many ways in which government influenced and was influenced by the developments in credit markets. For instance, he considers the ways that credit was used to support agriculture and housing markets and how government policies at different times either encouraged or discouraged discrimination in credit markets. More broadly, discussions of the relationship between promises to pay and power also permeate the book. Borrowing could be a path to expanded freedom for someone starting a business or purchasing a house, an education, or even an automobile. But it could be just the opposite for the sharecropper or the person who assigned their wages to a loan shark. The standardization of the process of deciding whom to trust opened opportunities for many people, but it did not always open them up equally.

Although Carruthers says that this book is not an encyclopedia, it could serve as one. Whatever aspect of the history of credit in the United States you are interested in, you will find useful information about it in this book. More importantly, however, he accomplishes his stated mission of providing an interpretive essay. He weaves the developments in the various forms of credit into a coherent story, and in doing so he highlights one of the most important phenomena in modern business and economic history: the transformation of activities that depended on the tacit knowledge of individuals into processes that could be made explicit, standardized, and replicated on a large scale.

Finally, I would like to point out that The Economy of Promises is a model of good social science history. Carruthers is a sociologist who clearly values the work of other social sciences. One can see the influence not just other sociologists but of economists, political scientists, historians, and legal scholars. Regardless of your chosen discipline, The Economy of Promises is the best place to start if you want to learn about the evolution of credit in America.

 

Bradley A. Hansen is Professor of Economics at the University of Mary Washington. His most recent book is Bankrupt in America: A History of Debtors, Their Creditors, and the Law in the Twentieth Century, co-authored with Mary Eschelbach Hansen (University of Chicago Press, 2020).

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