Creditworthy

A History of Consumer Surveillance and Financial Identity in America

Josh Lauer

• Publisher: Columbia University Press
• Year: 2017
• ISBN:
  9780231544627
• Topic: Historia
• Subtopic: Historia de Norteamérica

The first consumer credit bureaus appeared in the 1870s and quickly amassed huge archives of deeply personal information. Today, the three leading credit bureaus are among the most powerful institutions in modern life—yet we know almost nothing about them. Experian, Equifax, and TransUnion are multi-billion-dollar corporations that track our movements, spending behavior, and financial status. This data is used to predict our riskiness as borrowers and to judge our trustworthiness and value in a broad array of contexts, from insurance and marketing to employment and housing.

In Creditworthy, the first comprehensive history of this crucial American institution, Josh Lauer explores the evolution of credit reporting from its nineteenth-century origins to the rise of the modern consumer data industry. By revealing the sophistication of early credit reporting networks, Creditworthy highlights the leading role that commercial surveillance has played—ahead of state surveillance systems—in monitoring the economic lives of Americans. Lauer charts how credit reporting grew from an industry that relied on personal knowledge of consumers to one that employs sophisticated algorithms to determine a person's trustworthiness. Ultimately, Lauer argues that by converting individual reputations into brief written reports—and, later, credit ratings and credit scores—credit bureaus did something more profound: they invented the modern concept of financial identity. Creditworthy reminds us that creditworthiness is never just about economic "facts." It is fundamentally concerned with—and determines—our social standing as an honest, reliable, profit-generating person.

1

“A Bureau for the Promotion of Honesty”

THE BIRTH OF SYSTEMATIC CREDIT SURVEILLANCE

“There is, probably, no other country in which credit is so purely personal as in the United States.” This was the assessment of Francis J. Grund, an Austrian-born math and language teacher who immigrated to America in the 1820s. After working at private schools in Boston and Philadelphia, he made a name for himself as a political journalist and partisan hack. His observations on credit appeared in The Americans (1837), a book written at the same time and in the same spirit as Alexis de Tocqueville’s more famous work. Though Grund is best remembered as a political chameleon, one who plied his acid pen in the service of vying Whig and Democratic candidates during the mid-nineteenth century, his admiration for the egalitarian experiment in America remained constant.

Among the many things Grund found remarkable about the young nation was the trust that its citizens invested in one another when granting credit. American creditors, he explained, cared more about a borrower’s character and hard work than they did about what he owned. It was the opposite in Europe. There, credit was reserved for men with ample collateral, land, or inherited fortunes, thus reinforcing Old World hierarchies and class-bound distributions of wealth and opportunity. “In America the case is different. Men there are trusted in proportion to their reputation for honesty and adaptation to business. Industry, perseverance, acquaintance with the market, enterprise, in short, every moral qualification of a merchant increases his credit as much as the actual amount of his property.” This, Grund concluded, was the true “genius” of the American system of credit.1

The liberality of American credit was as much a product of practical necessity as it was of any democratic ideology. During the early decades of the nineteenth century, credit relationships became increasingly far-flung and complex. Grund arrived just as the young nation was entering the throes of the “market revolution,” a period of intense commercial and technological change that drew Americans from all walks of life into newly integrated circuits of exchange and finance.2 The family farm and the small business, once tangential to great flows of mercantile capital, were incorporated into a torrent of economic growth through distant commodity markets, piecework and wage labor, mortgages, insurance contracts, speculative investments, and a new entrepreneurial ethos that privileged profit and risk. This capitalist transformation not only recast traditional systems of production and distribution in the United States; it also reordered American society and monetized new dimensions of work, trade, and human relationships.

Credit was at the heart of this transformation. Borrowing was nothing new, of course. Colonial Americans were inveterate debtors, and the new nation had financed its freedom with international loans.3 But credit and negotiable financial instruments took on new importance during the early republic. Lengthening inland trade connections, shortages of circulating currency, and burgeoning industrialization all contributed to a proliferation of lending in America. “Credit is the vital air of the system of commerce,” Daniel Webster reminded his fellow senators in 1834. “It has run deep and wide into our whole system of social life.”4 A mid-nineteenth-century newspaper illustrated the extent of such financial entanglements in folksy microcosm. “I shall doubtless be able to pay you in a few days—a month at most,” a cheerful recipient of credit-bought goods reassured his lender. He would have money as soon as Squire Jones paid his woodcutter, who paid the butcher, who paid the shoemaker, who paid the tanner, who finally paid him. Such interlocking local obligations were at one end of a very long chain that extended to the highest levels of transnational finance at the other.

By the 1840s American-style borrowing was recognized by its own citizens as a de facto economic reality, plainly dubbed the “credit system.” Though credit was entrenched in American life, its legitimacy and controlling mechanisms remained at the center of heated public debate throughout the nineteenth century. Webster’s defense of credit, after all, was no innocent paean to American ingenuity. It was ammunition for his assault on President Jackson’s plan to dismantle the Second Bank of the United States. While many investors and upstart merchants embraced the credit system as an instrument of economic development, others opposed it as a dangerous contrivance, one that gave unfair advantage to the wealthy and, even worse, tempted economic calamity by encouraging speculation. Evidence of such disasters was not difficult to find. The panics of 1819 and 1837 would serve as jarring reminders.

Yet what all sides in the debate understood was that credit, in addition to being an economic phenomenon, was distinctly social. The linchpin of the American credit system, as Grund had marveled, was social trust. In the small worlds of nineteenth-century commerce, this trust was a function of familiarity. Those with a reputation for hard work and honesty could generally count on receiving credit, while those who loafed, lied, or repeatedly bungled their affairs could not. When all was said and done, creditworthiness itself amounted to “little more than public opinion.”5 This view, expressed in Hunt’s Merchant’s Magazine, a leading commercial paper of the time, contained no hint of sarcasm. Creditworthiness and reputation were one and the same.

By the 1830s, however, traditional ways of assessing an individual’s creditworthiness had begun to lose their efficacy. As urban concentrations on the seaboard swelled and migration brought growing numbers inland, American society began to exhibit telltale signs of modernity. Chief among them was a breakdown of social trust within the commercial sphere.6 Though neighborly credit relationships remained unchanged, those who traded regionally or nationally found it increasingly difficult to gauge the trustworthiness of trade partners who were unknown to them and about whom little could be learned from provincial contacts. This was a major problem for city merchants, especially importers, manufacturers, wholesalers, and jobbers who sold to country retailers and tradespeople each spring and fall. During these biannual selling seasons, out-of-town buyers converged on New York and other coastal hubs to buy supplies for their home communities. Merchants and shopkeepers purchased new inventory, and tradespeople, farmers, and others acquired raw materials and equipment. Much of the merchandise was sold through credit arrangements. With so much business at stake, there was considerable pressure to trust people of unknown and unverifiable reputation.

The panic of 1837 underscored the perils of such risk taking. As the crisis unfolded, a cascade of defaulted debts wiped out investments, wrecked business, and crippled the American economy.7 Though many of the afflicted were victims of structural failure rather than heedless speculation or deceit, the difference was moot to their creditors. Those left holding worthless promissory notes, particularly notes belonging to distant strangers, experienced a sobering case of lender’s remorse. One of these rueful creditors was Lewis Tappan, an evangelical Christian and noted abolitionist who ran a silk wholesaling firm in New York with his brother Arthur. Bankrupted by uncollectable debts and looking for a fresh start, Tappan turned his meticulous habits of mind to an ambitious new enterprise: credit reporting. If creditors could no longer trust their own impressions or the reassurances of strangers, then Tappan would assemble the facts for them. In 1841 he launched the Mercantile Agency, an organization devoted to compiling detailed information about business owners in every corner of the nation.

Tappan’s agency would mark the birth of a new surveillance institution in the United States, one that would bring thousands of Americans into an expansive network of social monitoring. “This AGENCY,” Tappan announced in 1843, “was established … for the purpose of procuring by resident and special agents, information respecting the standing, responsibility, &c., of country merchants.… It is not a system of espionage, but the same as merchants usually employ—only on an extended plan—to ascertain whether persons applying for credit are worthy of the same and to what extent.”8 Tappan was not the first to hit upon the idea. His own firm was seeded with the records of a prior venture. However, it was Tappan’s Mercantile Agency that quickly became synonymous with commercial credit reporting and served as a model for subsequent ventures.9

FROM REPUTATION TO WRITTEN RECORD

Until the early nineteenth century, credit evaluation was an informal, personal practice. In small communities, direct observation provided a measure of security—perhaps illusory—that one knew whom one was dealing with. “The most trifling actions that affect a man’s credit are to be regarded,” Benjamin Franklin instructed. “The sound of your hammer at five in the morning, or eight at night, heard by the creditor, makes him easy six months longer; but if he sees you at the billiard-table, or hears your voice at a tavern, when you should be at work, he sends for his money the next day.”10 The judicious creditor actively surveilled his neighbors, looking and listening for evidence of integrity or, contrarily, sloth and vice. This information, culled from prying eyes and ears, was distilled in community opinion, which could be tapped as needed.

Knowledge of an individual’s property and financial assets was important, but even more useful was insight into his or her character. It was not simply a matter of whether one had the means to repay one’s debts, but whether one was the sort of person who felt sufficiently constrained, by conscience or social obligation, to do so. Not everyone did. Legal remedies for collecting debts were imperfect, and efforts to legislate insolvency, beginning with the short-lived Bankruptcy Act of 1841, exposed the difficulty of verifying assets, sorting out claims, and separating “honest” debtors from those who used the law as a sly escape hatch.11 Not surprisingly, jilted creditors sought more penetrating and reliable information about the financial reputation of would-be borrowers, especially those they did not know.12

When credit information could not be obtained personally or through the word of a trusted acquaintance, letters of recommendation were often accepted as surrogates. These open-ended testimonials, written by clergymen, lawyers, bankers, and business associates, vouched for the honesty of their bearer, thus providing a modicum of security in the absence of contradictory evidence.13 Such letters became more common as the geography of American commerce expanded. Seeking to drum up new business in the South, the Tappans, for instance, advertised their willingness to extend credit terms to all who could produce “respectable letters.”14 Unfortunately, these flimsy endorsements were not difficult to obtain, through persistence or collusion, and the Tappans suffered great losses by trusting a system vulnerable to misrepresentation.

Commissioned investigations were embraced as a more dependable way to sound out distant strangers. Individual storekeepers and lawyers in the South would sometimes provide local credit information to eastern wholesalers, but this was rarely shared or systematic.15 In the early nineteenth century, some large firms employed traveling reporters to canvass various areas of the country for information about businessmen who sought credit relationships, an approach that was both slow and expensive. One notable exception was Thomas Wren Ward, a retired Boston attorney who worked for Baring Brothers & Company, a London-based financial house.16 Hired in 1829 to report on the firm’s American interests, Ward traveled from Maine to Louisiana to inquire into the standing of local businesses. This labor-intensive endeavor centered almost entirely on personal consultations. “Merchants were averse to writing particulars about their neighbors and competitors,” as one historian of nineteenth-century credit reporting noted. “They would tell much more in private conversation, but that method involved constant travel.”17 Ward’s good reputation and network of acquaintances gained him access to the candid opinions of his contacts, which he dutifully submitted to Baring Brothers until 1853. His terse reports, the first of their kind, summarized the subject’s capital and character. For example, “William Goddard [of Boston]—Safe and handsome property. $60,000 upwards. Very particular—energetic in business—has influence—apt to like strongly and dislike strongly.”18

THE MERCANTILE AGENCY SYSTEM

Tappan’s mercantile agency system represented a revolutionary...

Table of contents

• Cover
• Series Statement
• Title Page
• Copyright
• Contents
• Acknowledgments
• Introduction
• 1. “A Bureau for the Promotion of Honesty”: The Birth of Systematic Credit Surveillance
• 2. Coming to Terms with Credit: The Nineteenth-Century Origins of Consumer Credit Surveillance
• 3. Credit Workers Unite: Professionalization and the Rise of a National Credit Infrastructure
• 4. Running the Credit Gantlet: Extracting, Ordering, and Communicating Consumer Information
• 5. “You Are Judged by Your Credit”: Teaching and Targeting the Consumer
• 6. “File Clerk’s Paradise”: Postwar Credit Reporting on the Eve of Automation
• 7. Encoding the Consumer: The Computerization of Credit Reporting and Credit Scoring
• 8. Database Panic: Computerized Credit Surveillance and Its Discontents
• 9. From Debts to Data: Credit Bureaus in the New Information Economy
• Epilogue
• Notes
• Selected Bibliography
• Index