Financial History Issue 120 (Winter 2017) | Page 12

EDUCATORS ’ PERSPECTIVE

Spies , Abolitionists and the Origins of Credit Rating Agencies

By Brian Grinder and Dan Cooper
Lewis Tappan closed the door of Arthur Tappan & Co ., his brother ’ s silk-importing business , for the last time . As he walked away from the failed firm that had been such an important part of his life for the past 14 years , he must have felt a sense of foreboding . What was a 53-year-old man doing starting out in a new , untested line of business ? Would it not be better to play it safe and find a more stable source of income or , better yet , retire ?
Retirement was out of the question . The Panic of 1837 left Arthur Tappan & Co . reeling . The Tappan brothers ’ abolitionist activities hurt business in the South and forced Arthur , who preferred to sell on a cash-only basis , to begin extending generous longterm credit to new customers in an effort to recoup lost Southern business . By May 1837 , the company owed creditors over $ 1 million and was forced to suspend payments . It was one of the most notable business failures during the Panic . Only Arthur ’ s solid reputation prevented foreclosure , and Arthur , true to his word , eventually paid back every penny to his creditors . But the business stumbled along barely able to make ends meet until Lewis finally decided it was time to move on to something else .
On top of all his business troubles , Lewis ’ s teenaged daughter had recently died after a long struggle with tuberculosis . Lewis had every right to be discouraged and downcast , but his deeply-held Christian faith had seen him through many trials , and he was not about to give up . The Tappan brothers ’ abolitionism was only the latest in a series of Christian endeavors that brought scorn and derision from much of the New York business community .
Abolition , especially the immediate emancipation espoused by the Tappan brothers , was about as unpopular in 1830s New York as it was in the South . Arthur served as the first president and chief financier of the American Anti-Slavery Society , while Lewis served on the Society ’ s
Tell father that Mr . Tappan whose son I know — and whose clerks young Tappan and Waldo are — has invented and established a new and very important business — which Waldo thinks could allow them to burn 99 out of 100 of the stores in NY which now only offset and cancel out one another . It is a kind of intelligence office for the whole country — with branches in principal cities , giving information with regard to the credit and affairs of every man of business in the country . Of course it is not popular in the South and West . It is an extensive business , and will employ a great many clerks .
— Henry David Thoreau to Sarah Thoreau , May 22 , 1843
executive committee . Their abolitionist activities led to dire consequences for both brothers . Lewis ’ s home was ransacked during an anti-abolitionist riot , and newspapers in the South called for the heads of both brothers .
In Louisiana , protesters pledged $ 30,000 to the person who delivered the brothers to New Orleans , and a minister in South Carolina offered $ 100,000 if abolitionists La Roy Sunderland and “ old Arthur Tappan ” were brought to the South . On hearing the latter offer , Arthur purportedly replied , “ If
Lewis Tappan , founder of the Mercantile Agency . that sum is placed in a New York bank , I may possibly think of giving myself up .”
Lewis ’ s involvement in the abolition movement also hindered him when he tried to expand his new venture , the Mercantile Agency , into the South . However , his dogged persistence coupled with his superb management skills more than compensated for the troubles caused by his adherence to the abolitionist movement . The Mercantile Agency , according to historian James H . Madison , “… offered a new kind of service to American businessmen . … The Mercantile Agency was the first organized effort to provide all who wished to subscribe to its service with detailed credit information about businessmen across a broad expanse of territory . In both purpose and scope , the commercial credit reporting agency was a novel business institution .”
After the Panic of 1837 , Lewis began to realize that the current methods of determining creditworthiness were deeply flawed . These methods relied heavily on personal relationships between New York wholesalers , such as Arthur Tappan & Co ., and their many customers scattered throughout the country . Historian Lewis Atherton noted that , “ As late as the Civil War , merchandise was sold to country stores on a credit of six months without
10 FINANCIAL HISTORY | Winter 2017 | www . MoAF . org