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