Bruce G. Carruthers, the John D. MacArthur professor of sociology at Northwestern University, has written a new book entitled “The Economy of Promises: Trust, Power, and Credit in America.” In his book, Carruthers thoroughly presents the history of America’s credit economy, going back to the beginning of the republic to modern times.
This will indeed be an insightful book for readers interested in understanding the steps that were taken to establish America as a credit-based economy. As Carruthers accurately states, his book is about “the modern history of a particularly important kind of economic promise: the commitment to pay a monetary debt.”
The author explains why these promises have been so important to our economy, but even more importantly, why another person or entity would accept that promise. Carruthers details how promises have come with varying risks over the past two centuries, and how the creditors and lenders accepting these promises have been able to lower their risks over time.
Developing Trust
“What made an individual look like a good borrower in 1821 (high moral character) is not the same as in 2021 (high FICO score),” he writes.Along with mutual trust between individuals, Carruthers also addresses the critical aspect of trust in the financial system. In other words, can these parties trust the item—money—passed between them?
The monetary system of the United States has been stable throughout its history, though with some notable bumps in the road, like the Great Depression. However, Carruthers notes that well before the Great Depression, and even before the Civil War, individual banks would issue their own currency. This led to massively fluctuating levels of trust, as the currency was reliable based on how solvent the bank was, and too often that was difficult to know.
Currency originating from a small bank, let alone one from another state, led to diminishing trust. Everything changed in the monetary system, however, with the post-Civil War establishment of the National Banking System, and to a much larger degree with the formation of the Federal Reserve System at the beginning of the 20th century.
With the establishment of a unified monetary system, trust was centralized—though not always perfect, as the author points out throughout the book. However, with this establishment, creditors and borrowers knew precisely what they were receiving regarding currency value. Even when the purchasing power of that currency fluctuated due to inflation or deflation, both parties could remain on the same page.
As the population grew and America expanded across the continent, trust between creditors and potential borrowers became strained. Carruthers notes this strain opened the door for credit agencies.
The Rise of Credit Agencies
The author discusses the early days of credit rating agencies. These agencies, like the Mercantile Agency (later known as R.G. Dun & Co.), which was founded in 1841 and later became known as Dun and Bradstreet (which is still a powerful player today), helped banks know the “creditworthiness” of loan applicants.Carruthers identifies early and often in the book what makes someone (be it an individual or a business) creditworthy: “character, capital, and capacity.” As he writes in the book: “As more financial information became available, capacity and capital became easier to estimate. Character, however, remained elusive.”
A Changing View of Debt
Just as the author explains how the degrees of separation have changed, he also explains how the American perspective on debt has changed. He indicates that debt in the 18th and 19th centuries was viewed negatively, practically as slavery (“debt slavery,” to be precise). That view changed in the 20th and 21st centuries as a means of wealth and luxury. Loans in the early American centuries were taken out of necessity or for potentially profitable investments. Today, loans, primarily through the issuance of credit cards, are not often used out of necessity, and even more rarely for profitable investments.
In 1800, trust and creditworthiness grew out of direct knowledge of someone’s personal character or direct connection through personal or familial relations. By 1950, these personal bases had been supplemented, and even eclipsed, by impersonal institutions that created trust by providing information or reducing the vulnerability of creditors. And today, “big data” makes the allocation of credit dependent on pervasive information routinely harvested from people’s on- and off-line lives. The overall effect has been to sustain an economy that, to a remarkable degree, relies on promises.Along with the relationship between lender and borrower, Carruthers discusses the impact of the railroads (mass borrowing), the rise of bankruptcy law, credit insurance, government financial intervention (of which he speaks too fondly for my liking), and more.
“The Economy of Promises” is an insightful read, though it is indeed dry, written in much the same way as a college textbook. The book houses a plethora of information on the country’s credit economy.
It would probably be impossible to know all of this information beforehand, but one has the sense that most people with any economical understanding have a good idea of where we are and, to an extent, how we got here. It is in this regard that I found myself wondering if the book will have any impact on the conversation of how credit works in the American system.
This is why “The Economy of Promises” felt more like a textbook than a presentation of new ideas or a significant economic analysis.
For those searching for an explanation for how we (consumers, creators, and creditors) established this economy, certainly this is a profitable source.
by Bruce G. Carruthers provides information on America's credit economy. (Princeton University Press)
