The historical context highlights the evolution of the credit rating industry and helps to explain the current position of CRAs in the financial markets. The rating industry is only about one century old. Originally, capital markets developed without CRAs. Over the last few decades CRAs have become key actors whose position has evolved along with the various uses of ratings by market participants and regulators. or almost three centuries, capital markets developed without the benefit of external ratings. In fact, in the early decades of US history, business was inherently local and therefore transactions were between people who knew each other. Early nineteenth-century American merchants could rely for much of their credit information on personal ties. This system worked well as long as trade was local or conducted by merchants who traveled and came into direct contact with suppliers and customers. However, the nineteenth century heralded the era of industrialization. In this context, the expansion of capital markets was needed to foster the pooling of sufficient resources to modernize the industrial infrastructure. The scale and geographical scope of transactions increased. At the same time, credit information on suppliers about whom business merchants had no personal knowledge was needed as the US population and the volume of trade increased. Informal channels were no longer sufficient to satisfy the rising need for information. More particularly, the market area expanded as the construction of railroads required the allocation of significant resources. Railroad corporations were indeed America’s first big businesses, in the sense of multi-divisional enterprises operating over large geographical distances and employing cadres of professional managers.
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