Bruce Carruthers (Northwestern University)

The Economy of Promises: Trust, Power, and Credit in America

Today’s economy depends on promises as millions of borrowers commit to repay their loans: people borrow to buy houses, finance their education, and support household spending. Firms borrow to fund investment, finance inventory, or bridge gaps between revenues and expenditures. How do lenders decide whose promises to believe? Lenders weigh their uncertainty about the borrower’s future with the extent of their own vulnerability. Initially, lenders judged a borrower’s personal character and exploited the social ties that connected them for information and advantage. But starting in the mid-19th century, lenders began to use a system of scores and information provided by specialized credit rating agencies. Ratings, which spread from short-term business credit to long-term corporate bonds and eventually to individual consumers, transformed the assessment of trustworthiness. Personal qualitative judgements were replaced by impersonal quantitative measurements, making it possible to lend on a much greater scale. Regulators followed lenders and investors in relying on ratings. These changes dramatically affected business and consumer credit, and even government borrowing. Widespread use of credit scores and ratings set the stage for current developments in “big data,” and poses important questions about discrimination and algorithmic decision-making.