Credit, Classification and Cognition: Credit Raters in 19th-Century America

Abstract

In the U.S. economy, investors and lenders often depend on third-party sources of information to help resolve information asymmetries about the creditworthiness of borrowers. Rating agencies now play a central role in U.S. capital markets. Both the rating agencies, and their 19th-c. predecessors the mercantile agencies, produce assessments of creditworthiness that conform to a specific format: Ordinally-ranked categories. These category systems are cognitive devices used by investors and lenders to simplify and make sense of inherently ambiguous situations. This paper examines the early evolution of credit rating systems, from the 1850s until the 1880s, with a particular focus on their categorical features. It traces both divergence and convergence in rating conventions and shows that raters were not simply interested in being “accurate” but were also particularly concerned to protect intellectual property and reduce legal liability.