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Yves here. By e-mail, Michael added:
One thing the article doesn’t specifically call out, and maybe should, is that the evangelical movement in the days of abolitionism was solidly, almost radically anti-slavery and anti-racism. Those are the same people whose ideological descendants are wearing red hats. Oh, how times change, huh?
By Michael Olenick, a research fellow at INSEAD whose recent articles can be read at at innowiki.org
Economics and long-simmering racial issues were pounded together like the fuel of a nuclear weapon to revive serious problems in the US related to race and economics. Commentators have noted that credit and racial issues are tied together but few realize how deep those ties are.
Interestingly, credit and racial justice in the US were strongly influenced by one man, Lewis Tappan. Born just before the invention of the cotton gin, Tappan lived through an enormous uptick in slavery, worked as a fervent abolitionist then innovated the modern credit bureau which continues to have an enormous impact against poor people and, especially African Americans.
To say that Tappan reviled slavery is an understatement. He was a fierce, fearless, and tireless opponent of the “peculiar institution” as slavery proponents referred to it. Good and decent people in modern times hope they would’ve acted against slavery like Tappan did in his time.
Born 1788, Tappan saw enormous change during his lifetime that left an imprint on history that ripples today. When Tappan was a baby, fellow northerner Eli Whitney invented the cotton gin. That vastly increased the profitability, size, and scope of slavery in the then-new United States.
Tappan spent the first of his life as an entrepreneur, operating stores in Philadelphia and Boston. They initially thrived, building to a staggering book value of $800,000, then ultimately failed due to bad investments. Bankrupt at almost 40 years old, Lewis went to work at a store he’d funded for his brother, Arthur, trading silk in New York City in 1827.
The Tappan’s were extremely religious Christians. Their position as merchants allowed them to meet people through all walks of life. During his early years in New York City, Lewis recruited a network of morality spies. People anonymously reported brothels, gambling halls, and other places of ill repute to Tappan who would then coordinate to raid and shutter the dens of iniquity. His network had tentacles throughout New York City.
Influenced by a Unitarian minister, the Tappan’s eventually focused on slavery as the ultimate sin. Lewis and Arthur turned their full attention towards abolition. Initially, they worked with a group called the American Colonization Society to return free African Americans, including escaped slaves, to Africa. The group soon realized the vast majority of American black people were Americans who wanted to live as free people in the US rather than as African colonialists. Lewis, the more radical of the two, pivoted to advocating interracial marriage on the theory that, eventually, racially blended children would make racism irrelevant. However, that was a long-term strategy and in the short-term, the barbarous conditions of slavery required a more immediate solution.
Lewis and Arthur eventually helped form the American Anti-Slavery Society and, after losing control, the American and Foreign Anti-Slavery Society. Their business was boycotted, their houses firebombed, and they were continually harassed. The brothers actively circulated anti-slavery pamphlets throughout the South and funded and supported the Underground Railroad. “A great number (of people) then proceeded to the house of Lewis Tappan, his wife and children being at the time with him at Harlem. They broke open the door, smashed the blinds and windows, the looking-glasses, crockeryware, and threw the furniture into the street. The mob next lighted a fire and fed it with the beds and bedding taken from the house,” read one account at the time.
The Tappans funded the Amistad case, where a group of kidnapped Africans forcefully took control of their slave ship after kidnapping Africans for slavery was outlawed by international treaty. While freeing themselves and taking over the ship, the Africans killed several people. With the Tappans’ help, the slaves prevailed in the US judicial system and were acquitted under self-defense theories.
Due to their political work, the Tappans’ store suffered boycotts from pro-slavery merchants and their supporters. To lure customers, the brothers were forced to extend credit despite their personal distaste for debt on religious grounds.
“A few words with regard to the credit system that so generally prevails among men of business,” Tappan wrote. “The supposed gains, under this system, are very fallacious, while the net gains in the long run, under the cash system, would be much more lucrative to the individual and more beneficial to the community. Besides, it is not easy to determine what one’s income or actual gain really is, when the credit system so generally prevail.”
After an economic downturn, many customers were unable to pay their bills and Arthur, unable to pay its own creditors, found his store effectively bankrupt in 1837.
As Arthur rebuilt, Lewis Tappan realized some customers were more likely to repay their bills than others. That is, some were lower credit risks. However, there was no reliable way to sort customers by risk since many of the attributes Tappan deemed likely to be creditworthy involved private behavior. The current system of relying on letters from other merchants, lawyers, or ministers was prone to gamesmanship and fraud.
Lewis soon realized his network of morality spies could serve a dual purpose, reporting not only on vice but also the perceived virtue of repayment ability and likelihood. Tappan’s morality network, which he branded “reporters,” would record various traits potential borrowers engaged in that might lead to a mindset where they would or wouldn’t, could or couldn’t, repay their debts. He quickly realized these credit reports were useful to other businesses and, in June 1841, at 53 years old, created a business selling the information, The Mercantile Agency. Coming under attack from both privacy and slavery advocates, the credit reporting business initially sputtered but eventually caught on. “In prosperous times they will feel able to pay for the information and in bad times they feel they must have it,” wrote Tappan.
Tappan grew his reporting business along with his abolitionist work by expanding, professionalizing and paying the network of morality spies many who were abolitionists. “My business leads me to keep up an extensive correspondence throughout the free States & Territories, and especially with eminent lawyers, and the sentiments they frequently express on the subject of slavery, in an incidental way, satisfies me that anti-slavery principles are rapidly pervading the country,” Tappan wrote in an 1844 letter to English abolitionist Thomas Clarkson.
Soon enough, his credit reporters extended beyond New York City to all northern states. One of Tappan’s reporters was a young attorney in Illinois, Abraham Lincoln. Later, Presidents Grant, Cleveland, and McKinley would also work as reporters.
In 1849, Tappan retired and sold the business to Benjamin Douglass, his chief clerk. In 1858, Douglass transferred it to his brother-in-law, Graham Dun, who renamed it after himself. Years later, in 1933, the firm merged with a competing firm run by John Bradstreet. Tappan’s firm, born in the fire of abolition, was renamed Dun & Bradstreet and remains one of the dominant credit reporting agencies to this day.
A New Type of Control
American slavery was enormously complex but had two defining attributes, 1) white supremacy including human chattel and 2) the economic benefit of free labor without constraints related to worker rights.
Economists start every theory with “all things being equal.” For capitalism to work correctly the invisible hand of the market must be unbound and people allowed to freely make choices. Slavery obviously perverts these ideals: with slavery, things couldn’t be more unequal. However, the consumer successor of Tappan’s reporting system – combined with ongoing racial discrimination – often has a negative impact on minorities to this day. Consider:
- Predominantly white cities have median credit scores about a hundred points higher than predominantly black cites. Urban Institute
- Internally in cities, predominantly non-white areas are far more likely to have median subprime credit scores. Urban Institute
- Whites are 30% more likely to own their homes than rent, a difference experts attribute largely to systemic racism inherent in credit. CNBC
- Whites are twice as likely to have credit-cards than African Americans. CreditCards.com & Federal Reserve
- Allowing credit scores in the hiring decision process substantively reduces the recommended starting salary of African Americans. O’Brien, Kiviat, 2018
- The credit scores of black Americans are “systematically damaged.” Washington Post
- Black people are 80% more likely than whites to live paycheck-to-paycheck and 50% more likely to say they have “too much debt right now.” CNMC Study
- Good credit scores are being proposed as a precondition towards permanent residency and US citizenship by the Trump Administration. Market Watch
Quoting The Guardian, “Credit reports and scores are not race-neutral. Rather, they embed existing racial inequities in our credit system and economy – to the point that a person’s credit information serves as a proxy for race.”
Poor people cannot borrow from their families. They are often uneducated about personal finance. They’re far more likely to be lured into a debt trap of student loans, subprime loans, payday loans, and other predatory loans than children born to wealthier parents. Children of wealthy parents aim for the same colleges and universities their parents went to, or something similar, and avoid sketchy for-profit schools. They’re taught how to make the system work for them.
Family wealth leads to more financial options which lead to better education and subsequently better financial choices over a lifetime. By the time a young person understands any of this, especially a poor person doing their best to advance, they’re often saddled with tens or even hundreds of thousands of dollars in student loan debt that will follow them for life. Student loan debt cannot be discharged in bankruptcy. Eighteen-year-olds are considered years too young to buy liquor are old enough to take on a mountain of complex non-dischargeable loans. The economic fate of too many people – especially but not solely minorities – is too often determined before entering the birth canal, much like it was in Europe for the peasants the founders of the US fled from. And the misuse of the credit reporting system that Tappan created bears much of the blame.
Lewis Tappan and his abolitionist reporting network would likely be upset but not surprised at the current state of affairs. He would likely be livid that the credit reporting system he invented is being used to trap and control, especially African Americans.
Tappan realized later in life that fighting to free the slaves was the very least, the absolute minimum, whites could do to begin repenting for the historic catastrophe. “When will the poor negro have his rights? Not, I believe, until he has a musket in one hand and a ballot in the other,” he wrote after the Civil War.
What he didn’t realize, and surely would never approve of, is the credit bureau, an idea he created, would be one of the primary drivers of ongoing oppression, a tool to enforce a new type of post-Civil War economic slavery.
Credit certainly isn’t the only cause for the economic subjugation of African Americans in the US but it’s a prime contributor. Poor credit leads to lower homeownership, higher rent, far higher loan and insurance costs, unavailability of startup capital, systematic but legal hiring discrimination, and a myriad of other ills. The system Tappan created to fund the elimination of systematic American racism has instead become one of the bedrock enablers. The system also affects poor whites and those who lack financial education.
Credit agencies argue their systems are a vital part of modern life. Without modern credit reporting, they say, there would be no availability of credit or the cost would be far higher. However, France has no private credit bureaus and no credit scoring system yet home loans, auto loans, and personal lines of credit are available at the same or lower rates as in countries that rely on credit bureaus.
Credit systems are designed to control not only financial but social behavior. The government-run Chinese credit bureau lowers scores for trivial crimes like jaywalking and increases scores watching propaganda videos from the Chinese Community Party. Westerners argue those factors are frivolous to finance while simultaneously enabling the use of bill repayment history to set auto insurance rates rather than, say, driving history.
Of course, some people are more likely to pay their bills than others. The problem is the credit system exerts control well beyond repayment likelihood. Credit bureaus enjoy the status quo where they have virtually no liability or responsibility for accuracy or even fairness. However, the political winds are shifting and the bureaus are unlikely to find their friends in DC empowered indefinitely. It’d be better for them to make needed reforms, now, rather than wait for more stringent reforms to be mandated, later.
Credit reporting should be limited solely to money lending decisions and banned for use in employment decisions, insurance rates, or anything not directly related to repayment risk. Errors should be easy to adjust. Credit scoring algorithms should be open-sourced so the public can search for bias. Any type of redlining, whether geographical or behavioral, should be criminalized with mandatory minimum prison sentences, not just fines.
Nobody benefits from inaccurate, misleading, or the misuse of credit reports. Employers and insurers using credit miss the opportunity to find high-quality customers and employees by failing to look at more meaningful data. Their reliance on credit points to a personnel problem in underwriting and their own human resources offices, not with applicants.
US credit reporting came from Tappan’s morality police and, to a large extent, remains that way. However, the system that stemmed from abolition has been pivoted towards a modern electronic chain to bind people, especially black people, into doing the bidding of some often-unseen force. The invisible hand of the market, including credit scoring, needs direction. However, the successor businesses to Tappan’s credit reporting too often tilt the scale in favor of the already wealthy who happen to be overwhelmingly white.
 Who Made America
 https://books.google.fr/books?id=d9QxAQAAMAAJ. Quoting pamphlet by Lewis Tappan “Is it Right to be Rich?”
 Tappan had an early business relationship with Edward E. Dunbar of Boston but after three years the partnership broke up and fell into arbitration with the arbitrators awarding the entire business to Tappan. https://books.google.fr/books?id=iY0vAAAAYAAJ
Having worked with credit bureaus I wholeheartedly support all of this.
This part is trickier. This article never pinpoints the exact way the purported redlining operates and doesn’t explain what is behavioural redlining. Scoring models certainly be biased and I understand that there is a legacy of literal redlining, but that’s incidental to the scoring itself. I haven’t seen a convincing case of why the currently used scoring is racially biased. Also the scoring must be compared with the decisions made by human being who are also not yet completely free of biases.
i suppose one way redlining could be done besides where one lives, is by what you do (visit etc), and a scoring can be biased just like any of might be able too, so any thing using models could have built in bias, and may not know unless they have another model that checks the first huh? since almost every has different behaviors, but some may have more of certain ones, than others might.
Thanks for posting, excellent article.
This is just one more example of the blessings of tight labor markets. When employers really need new workers, they will often overlook the irrelevant “debits” such as bad credit scores.
The tight labor markets of late 2019 also saw the only progress in years in the hiring of ex-cons.
Incidentally, the link to Michael’s personal blog is not working.
Whoops – thanks! WordPress redirect gone wrong.
I’m redirecting to my innovation wiki, innowiki.org. There are a few articles and the results of an ongoing study on major innovations – lots of them that flew off the rails (at least for the innovators). I could write an entire NC series, or maybe a book, just on those.
The rich rules over the poor, and the borrower becomes the lender’s slave. Proverbs 22:7
If that’s the case and we’re anti-slavery then how do we justify government privileges for a private-credit-for-usury cartel?
Because TINA to that or a stagnant economy? We should think again since inexpensive fiat, if justly created and distributed, could reduce the need to borrow in the first place. That and land reform so that no citizen need pay rent just to have a place to live would go a long way to eliminating modern day slavery.
Btw, the above suggestions are Biblical and should face no opposition from Biblically literate Christians – though those may be in short supply …
Well, there are evangelicals and evangelicals. Many Northern evangelicals were antislavery–but not always anti-racist or abolitionist. If you are talking about the burned-over district of New York State, sure. But Southern Protestants were no slouches at evangelism, and in the late 18th century brought large portions of the enslaved population into their orbit. The differences among evangelical Protestants over slavery split the Northern and Southern Baptist and Methodist denominations. Protestant theology was a thriving concern in the antebellum era, and much of it was strongly proslavery. Yale and Princeton produced the cream of slavery-justifying ideologues.
Thanks for this. Interesting that the French disallow this unnecessary, discriminatory and lucrative layer of social control and are none the worse for it. I have mentioned before that The Fair Credit Reporting Act allows prospective landlords to obtain the SS# of tenant applicants to obtain credit scores. My recent refusal to share my SS# with a prospective landlord put the kibosh on a nice rental unit that I liked despite three upstanding members of the community including two former landlords trooping into the rental office in my support. To say that this mightily pi$$ed my off does not adequately describe it. Putting a “freeze” on your credit report is simply slight of hand. Nice to see that there is some movement towards serious reform.
Without credit bureaus bank’s customers are likely to face high switching costs as only their bank knows about their past performance. I would love to know how this issue is solved in France. Can I go to a different bank to get a loan? How cumbersome is the process?
Add the Rating Agencies to the Credit Bureaus when reforming. They are both above the law and cause misery without being accountable, hiding as they do in their versions of walled gardens.
Mistakes were made, lives were ruined, nothing to see here, move along…
Something interesting I have noted recently – I have been paying off debt, generally cleaning up my personal balance sheet – a nice privilege and I don’t mean to boast, I want to make a larger point. As part of my financial plan I keep a monthly log of my credit score. And I have noted a disturbing trend – as my personal balance sheet is improving, MY CREDIT SCORE HAS GONE DOWN! For three months running, despite paying off heloc and credit cards.
Upon reflection, it seems to me that the credit bureaus, which are an arm of the financial industry, are adjusting their algorithms deliberately in order to make credit more expensive and less available. Because the basic identity is this: lower FICO score = higher interest rates on debt (or even called debt, as happened to many businesses in 2007-8 when their credit lines were cancelled).
This portends tighter credit and tighter money coming, IMHO. Anyone else noticed similar or related trends?
not new. when pressed, the bureaus will tell you, score isnt based on amount of credit, but how much credit in relation to income (care to guess where that came from?) and payments history
now what sort of breaks this is that the way they put the ‘files’ together, is not solely on SSN (though it is important), or name (same)…or DOB (not even used)…or address (not used)….they will use different parts of the data…looking for some commonality..to make ‘your’ file…which means ‘your’ file doesnt really contain just ‘your’ file
now the CRAPA protects the bureaus, as they are publishers, one wonders can we sue the creditors instead?
what created and protects the credit bureaus is Congress …they wrote a law i call CRAPA …or credit reporting agency protection act.
in theory its suppose to allow business to get the information they need to make a decision on credit. which i suppose it does. but the ‘bureaus’ arent exactly helping them out much (never mind that minor mess from a few years ago where one of them delayed putting a security fix on…..and thus enabled hackers to be able to see the data on…a few 100 million people…..basically with all of the hacks to date….just about every one in the US has been exposed…makes one wonder whats the point of doing this…if any one’s data has been exposed to world ). what isnt mentioned much …is that almost all of the companies that grant credit….are required to use them (they cant avoid using them)….by law ….now as far as i know…the insurance companies …and others….have no legal requirement do so… but they can use that process to sort of kinda make it look like they are unbiased decisions…course the bureaus love it…more money for them…course every few years (decade) Congress has to decide to extend this..or not….and the bureaus always say they are ‘customer’ friendly….and that they are still needed (profits?)…but after they get the votes done…they go back to being ….as anti consumer as they can be….to the point you cant call them….at all…as there is no number to do so …
Fun to read this history of Tappan’s “morality police.” And the only response to this institution inspired by the evangelist enlightenment of the early 1800s is, Why do we still even have the stupid thing? It (credit ratings) is an anachronism if there ever was one. Even the Fed is born again – just look at how they are sort of experimenting with “backing” small countries with sovereign but tenuous currencies so that those countries don’t have to take draconian terms to borrow money. They can borrow with the backing of a big brother. That’s still debt and not as good as their own sovereign direct spending would be, but they are small countries with treasuries that are too small to fund their fiscal projects, I assume. (Can’t remember which country it was.) So this is just evidence that the whole concept of “credit risk” has morphed by the realization that if you don’t fund humanity sufficiently it falls apart. No matter how much you pontificate about good and bad risk.
Thanks for the article. Of course credit bureaus are only intended to oppress the “little people” as otherwise how could someone like Trump ever have gotten a loan.
and then there is
the multiple bankruptcies
any one else…and we would be lucky to have roof over heads…that didnt let in all but a small amount of all the water that hit it…on good days only
Trump’s bankruptcies were all business bankruptcies. None of them were personal bankruptcies.
And they were in 6 or 7 of the 200+ corporations he’s owned over time. You are not going to like hearing me say this, but Trump was one of only 2 major NYC developers not to have to undergo a major restructuring (as in giving up equity to the bank or declare BK) in the nasty early 1990s recession. The other major NYC developer in that category, Steve Ross of Related (my client) was appalled. He couldn’t understand how Trump got away with it given Trump was in no better shape than any of the other developers that the banks put through the wringer and the folks at Related thought Trump was a blowhard and not a very good operator (and Related had to go through monster negotiations and financial disclosure to persuade the banks they were OK).
Thank you for this article. I always realize here how much I don’t know. Amazing how corrupt things have become. What I have noted over my adult years is that you need to pay attention to these scores, because they’re so insanely mistake ridden. If they can get a higher interest rate due to something that should have been dropped, say from a dissolution of a marriage from many years ago, and you don’t contest it, they will take advantage.