------------ EH.NET BOOK REVIEW --------------
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_.
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Published by EH.Net (July 2007). All EH.Net reviews are archived at
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