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Harvard Studies in Business History • 50 Published with the support of the Harvard Business School Edited by Thomas K. McCraw Isidor Straus Professor of Business History Graduate School of Business Administration George F. Baker Foundation Harvard University A Culture of Credit Embedding Trust and Transparency in American Business Rowena Olegario Harvard University Press Cambridge, Massachusetts, and London, England 2006 Copyright © 2006 by the President and Fellows of Harvard College All rights reserved Printed in the United States of America Library of Congress Cataloging-in-Publication Data Olegario, Rowena. A culture of credit : embedding trust and transparency in American business / Rowena Olegario. p. cm. — (Harvard studies in business history ; 50) Includes bibliographical references and index. ISBN-13: 978-0-674-02340-6 ISBN-10: 0-674-02340-4 1. Commercial credit—United States—History—19th century. 2. Mercantile system—United States—19th century. 3. Corporate image—United States—History—19th century. I. Title. II. Series. HG3754.5.U6O44 2006 332.7'42097309034—dc22 2006043380 To Charles with love and gratitude Acknowledgments This book owes its origins to William Gienapp, whose chance remark about “some credit-reporting ledgers in Baker Library” led me to the topic of my dissertation. Bill passed away in 2003. He was a wonderful teacher and advisor, and his work stands as a model of clarity and rigor. I am deeply saddened to be unable to share this book with him. Bill was not an effusive man, but I would give much to hear even his reservations and corrections. They were always a spur to do better, and always given with the spirit of helpfulness for which his graduate students esteemed him. I had the good fortune to work for several years as a research associate of Thomas McCraw at the Harvard Business School. Tom was involved with this enterprise at crucial times: in the beginning when I was fumbling to articulate my dissertation’s central theses, and at the end, when I needed help refining the book’s introductory chapter. Those who have encoun- tered Tom as both editor and friend know that his formidable abilities are exceeded only by his kindness and generosity. Stephan Thernstrom was an early supporter of this project, when it looked nothing like what it even- tually became. I am grateful to Stephan for his vote of confidence when I was a fledgling scholar and teacher. I spent three stimulating years at the University of Michigan Business School as a member of the Society of Scholars. The program no longer ex- ists, but its founders and administrators—Janet Weiss, Gautam Kaul, and James Hines—along with my fellow SOS members—Eric Guthey, Joe Hen- rich, Joshua Margolis, and Leslie Perlow—created an atmosphere of intel- lectual fellowship that helped nurture this book. Alexander Dyck recruited me to contribute to the research for the World Bank’s World Development Report, Institutions for Markets (2002). Shortly thereafter, I was invited by Margaret J. Miller to write a chapter for a book on international credit reporting systems, sponsored by the bank. Along with Roumeen Islam, viii Acknowledgments director of the World Development Report, they pushed me to clarify my ideas so that this history might be useful to policy makers, as well as of interest to my academic colleagues. Their careful reading of my work, and their probing (sometimes skeptical) questions, helped me to place the institution of credit reporting in a more global and interdisciplinary per- spective. Robin Schauseil, president of the National Association of Credit Management, gave me unfettered access to the NACM’s archives and kindly provided a pleasant space for me to work. Her interest in this book allowed me to extend the narrative into the 1920s. I benefited from the help of numerous librarians and archivists who over- see the collections that quite literally made this book possible. I especially thank Laura Linard and the staff, past and present, of Baker Library, Har- vard Business School; and Travis Blackman, former archivist of Dun and Bradstreet, for his early and open-minded enthusiasm for this project. The comments of anonymous referees of the manuscript and of the article that became the book’s fourth chapter were enormously helpful. Walter Fried- man and Susan McCraw gave me assistance during a critical phase of the publication process, and I am grateful for their competence and friendship. Charles Wilson first encouraged me to trade in a career in market analy- sis and consulting for the more precarious world of academe. His support and enthusiasm for both my career switch and this project have never wa- vered. With patience, love, generosity, and humor, he made the experi- ences not only possible but enjoyable. His integrity and open-hearted regard for others, and his ability to combine a ferocious drive to succeed with an almost complete indifference to the trappings of success, are a continuing source of inspiration. For all of those things—and so much else besides—this book is dedicated to him. Nashville, Tennessee June 2006 Contents Introduction 1 1 Mercantile Credit in Britain and America, 1700–1860 13 2 A “System of Espionage”: The Origins of the Credit-Reporting Firm 36 3 Character, Capacity, Capital: How to Be Creditworthy 80 4 Jewish Merchants and the Struggle over Transparency 119 5 Growth, Competition, Legitimacy: Credit Reporting in the Late Nineteenth Century 139 6 From Competition to Cooperation: The Birth of the Credit Man, 1890–1920 174 Epilogue: Business Credit Reporting in the Twenty-First Century 201 Notes 211 Index 269 A Culture of Credit Introduction Much of the business of [the United States] is to-day done on credit through what is known as the Open Book Account System ...Often the promise to pay is merely implied. Orders are placed most generally without any definite promise to pay. The transaction is largely one of faith, supplemented by information the seller has as to the character, reputation, financial standing and ability of the buyer to pay. — CHARLES A. MEYER, MERCANTILE CREDITS AND COLLECTIONS, 1919 This book is a history of how creditworthiness was determined and com- municated in the United States from the 1830s to the 1920s: that is, how what is now called “transparency” in credit transactions became a vital el- ement of American business culture. I am concerned here primarily with mercantile credit, offered by wholesalers to retailers throughout the coun- try. Mercantile credit was employed to move goods to and between dis- tributors: from manufacturers to wholesale middlemen—importers, jobbers, factors, commission merchants, and the like—and from these middlemen to retailers. The book is much less concerned with bank or consumer credit. I begin with six propositions corresponding roughly with the six chap- ters of the book: First, British assumptions and customs crossed the Atlantic and became embedded in American trade practices. They included a strong willingness to use mercantile credit as a way to make up for the lack of specie (coined money) and as a means to attract and keep customers in a competitive business environment. Mercantile credit tended to bind sellers and buyers together in a trading relationship characterized by mutual flexibility—an especially important quality in an unstable and undeveloped economy. Second, the credit-reporting firm (the best-known being Dun and Bradstreet) was invented in the United States. It represented a radical break from traditional closed networks, both in the United States and other countries. This new institution changed the cultural assumptions about business transparency. Third, nineteenth-century creditors used a method for assessing risk 1 2 Introduction that was based on a narrow, specific set of “character” traits, all of which gave an indication of borrowers’ ability and willingness to pay their debts in a timely manner. Credit reporters did not tend to scrutinize other traits, such as church attendance, sexual behavior, or membership in organizations, that were purely social or political in nature. Gender was central to credit ap- praisals; some criteria—most notably the quality known as “energy,” or the ten- dency to be aggressively enterprising—were valued differently in men than in women. For blacks, race was a fundamental criterion, and it was clearly indi- cated in nearly all the credit reports on black enterprises. But assessments of gender and race were subject to the larger set of traits—honesty, punctuality, sobriety, and thrift being the most important—that were used to assess all businesspeople. Fourth, ideas about transparency were resisted by many in the business community. A case study of American Jewish merchants reveals how the increasingly powerful credit-reporting agencies declined to grant legitimacy to closed networks and “secretive” business practices. Fifth, the idea of transparency took several decades to attain maturity and legitimacy. In the 1870s and 1880s, growing numbers of subscribers and increasingly favorable court decisions signaled an important shift in at- titudes: the desire among creditors for more transparency had largely over- come their concerns about the strict accuracy of credit reports. In 1896 the establishment of the National Association of Credit Men (NACM) marked the professionalization of the credit-granting function. The new association officially endorsed the move toward greater transparency, and it lob- bied for more sharing of debtors’ payment records among creditors. After World War I, and despite much internal debate, the association succeeded in establishing a national bureau in Saint Louis for the exchange of do- mestic credit information and the Foreign Credit Interchange Bureau for suppliers wishing to sell internationally. Finally—and here I leave the historical account and speculate a bit about the future—the establishment of American-style business credit reporting to developing countries will likely involve a process of legitimization, sim- ilar to the one that the United States itself experienced during the nineteenth century.

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