Accurate credit reporting vastly lowered the risk of lending and, with it, the cost of capital.
Lewis Tappan
Tappan was a strident Christian who did not believe in credit. His brother and he went bankrupt, twice.
Tappan and brothers were busybodies, known to snoop and report on New York City gaming houses, brothels, and other immoral activities. They believed they were doing God’s work by shutting down sin. In their store, they refused to charge interest and disdained credit on religious grounds.
The brothers became outspoken abolitionists resulting in a boycott of their stores by Southerners. To stay afloat, they reluctantly offered to sell on credit rather than cash.
After a recession caused a $1.1 million loss, in 1837, the store recovered but Arthur Tappan was again forced to extend easy credit. Lewis recognized the need to extend credit but decided to keep methodical files on customers and behavior.
In 1841, at age 53, Lewis wrote to a friend he was “worth nothing.” However, he did have one asset, files he collected on the creditworthiness and morality of his customers.
The Origin of Credit Reporting
Due to his files snooping on sin, other merchants would come to him for background information focused on creditworthiness. Eventually, Tappan realized the value of the information itself but he needed to collect more. For this, he relied on a network of abolitionist friends spread across the country who would file reports. In return for reporting, his reporting agents could sell the reports to potential creditors.
Lewis left full-time work at his brother Arthur’s store to set up his own business of agents and credit reports, the Mercantile Exchange.
“In prosperous times they will feel able to pay for the information and in bad times they feel they must have it.”
Lewis Tappan (Evans, They Made America)
Agents were sparse in the south but common in other places; Abraham Lincoln himself was a Tappan agent.
Dun & Bradstreet
Tappan installed his manager, Benjamin Douglas, a pro-slavery Southerner as a part-owner and tasked him with running the business. He bought Tappan out in 1854 and continued to grow the business.
Later, Douglas handed the business to Robert Graham Dun. In 1864, Dun published a book emphasizing the use of financial statistics over character-based reports for credit decisions. The slang verb “to dun” comes from Dun’s last name and the use of his reports to coerce payment lest credit be destroyed.
In 1855, John Bradstreet opened a competing business, putting information into books (something that worried Douglas, who had lost a defamation lawsuit and was jailed for 20 days). Dun followed suit, with a locked book, and renamed the business R.G. Dun & Co.
After his death, Tappan’s company of snoops merged with Bradstreet’s company to become Dun & Bradstreet, which still exists.