Is Risk Our Business?

a review by Mike O’Connor

Freaks of Fortune: The Emerging World of Capitalism and Risk in America
by Jonathan Levy
432 pages. Harvard University Press, 2012.

“Return to Tomorrow” was arguably one of the lesser lights in the pantheon of Star Trek episodes. Yet this particular installment of the series, aired in 1968, included a monologue that encapsulated much of what the show’s fans admire about the series. The episode finds the non-corporeal survivors of an advanced but long-deceased civilization desiring to inhabit the bodies of Enterprise crew members just long enough so that the aliens can use their advanced knowledge to build android bodies for themselves. When considering the offer with his senior advisers, Captain Kirk is entranced with the opportunities for knowledge and advancement. Others, however, are impressed by the obvious danger inherent in the proposition. In the end, Kirk turns the tide of opinion with an impassioned soliloquy, in which he asks the ship’s doctor, “[d]o you wish that the first Apollo mission hadn’t reached the moon, or that we hadn’t gone on to Mars and then to the nearest star?” Such a wish would be equivalent to “saying you wish that you still operated with scalpels and sewed your patients up with catgut like your great-great-great-great-grandfather used to. I’m in command. I could order this. But I’m not…” The music is swelling now, and Kirk begins speaking with greater passion. “…because Doctor McCoy is right in pointing out the enormous danger potential in any contact with life and intelligence as fantastically advanced as this. But I must point out that the possibilities, the potential for knowledge and advancement, [are] equally great. Risk…risk is our business. That’s what the starship is all about. That’s why we’re aboard her.”

Kirk’s Speech

Though this performance is nearly a half-century old, the ideas it expressed still resonate in the twenty-first century. Today, as in 1968, we celebrate the starship captain and the venture capitalist alike for their intrepidity in the face of physical or financial danger, which is to say, for their willingness to take risks. But this familiarity should not blind us to the utterly fantastic nature of such an idea. While Kirk’s paean to risk can be inspiring, in point of fact it is wildly inaccurate: risk is not our business. The purpose of the five-year mission of the Enterprise is not one of embracing risk, nor is risk-taking the raison d’être of commercial activity. Risks are instead a necessary evil, an unavoidable byproduct of the quest for those things that we might truly desire. The contemporary valorization of financial risk can blind us to its proper place in our lives.

Such a point would not be lost on Jonathan Levy, whose Freaks of Fortune is a history of the American response to financial risk in the nineteenth and early twentieth centuries. He explains that the very concept of risk originated in an economic context, specifically with regard to commercial sea voyages in which goods were likely to be lost or damaged. The response to this danger could have taken many forms—a religious stoicism, perhaps, or a search for alternative goods—but the actual reaction was a uniquely capitalist one. “Merchants,” Levy writes, “commodified their doubts into a new form of private property called ‘risk.’”[1] Today, “risk” is a fairly ordinary word, used in everyday language. But it was originally a technical term invented to meet the very specific needs of maritime financiers. The buying and selling of risk made possible the rise of insurance, first as an idea, then an industry.

Useful as this concept was, incorporating it into commercial discourse also raised some difficult questions. Since the financial conception of risk as a commodity was essentially created out of thin air, determining who owned a given risk could be difficult. Levy crystallizes this issue as it played out in the antebellum era by reference to an 1842 Louisiana Supreme Court case, Thomas McCargo v. New Orleans Insurance Company, which involved a rebellion aboard a slave ship. The mutineers took over the ship and forced it toward Bermuda; upon arrival the British authorities freed them from bondage. The financier of the voyage, Thomas McCargo, filed a claim with his insurance company, which refused payment by invoking standard policy language voiding coverage in the event of a slave insurrection. But McCargo’s lawyer, Judah Benjamin, a slaveholder who would later serve as a U.S. Senator from Louisiana and hold several positions in the Confederate Cabinet, advanced a novel, and no doubt disingenuous, argument. Since the rebellion expressed the essential desire for freedom, it was not an (uninsurable) human decision per se but an (insurable) “act of God.” Slave rebellions voided maritime insurance policies, but Benjamin claimed that the successful execution of the rebellion meant that, “the blacks asserted their freedom,” and were no longer slaves.[2] Even though all the same people were on the ship before and after the revolt, the fact that they were no longer McCargo’s property meant that their value had been lost to him. That an attorney advanced such a convoluted argument is perhaps less remarkable than the fact that Justice Henry Adams Bullard decided in favor of McCargo. Levy generously characterized his finding as one that “elided much,” but it nonetheless advanced a specific understanding that “to be a slave was to have someone else own the risk on your life,” while “[t]o be free was to own that personal risk yourself.”[3] McCargo’s victory signaled the burgeoning elevation of capitalist priorities over racialist ones.

Though Freaks of Fortune focuses on the concept of risk, the participants in the events it describes do not always evoke that notion in characterizing their own actions. Thus the book’s actual subject occasionally proves elusive. Of course, the imposition of coherence upon an otherwise unruly past is the very nature of the historian’s craft, and Levy’s interpretation of these events as embodying the evolution of risk is certainly plausible. But at times this interpretation could be brought more clearly to bear on the included stories. Chapter Four, for example, concerns the Freedman’s Bank. The tragic story of its failure, which evaporated 3.6 million dollars of the savings of former slaves, comes across as a tale of mismanagement and corruption on the part of Jay Cooke’s brother, Henry, rather than one of the advance or decline of a specific conception of risk.

Most of the chapters, though, explain how the ideas and practices that define today’s commercial landscape first emerged as responses to problems brought about by inadequate conceptions of risk. The value of the book’s contributions is most apparent when it is viewed from this angle. A look at U.S. history through the lens of risk reveals a people who, when forced to choose between the presumptions of liberal capitalism and other values—be they cultural, religious or political—consistently took, or had imposed upon them, the former. Chapter two, for example, concerns the development of the actuarial perspective, a view from which large amounts of data can determine the likelihood that a specific event will happen to any given person. In 1844, abolitionist Elizur Wright brought to the United States from England the actuarial tables that made effective life insurance possible. Prior to Wright’s intervention, many believed that life insurance was an attempt to evade God’s power over life and death; it was, in the words of one 1849 writer, “a sinful distrust of Providence.” Those who favored it, on the other hand, based their support on “the Yankee principle of self-ownership.” On this understanding, selling one’s risk was no different than selling any other piece of property. In the end, it was the liberal conception that came to define American capitalism.[4]

The other chapters make similar points, slowly marching through time and accumulating an impressive variety of evidence. Chapter five tells the fascinating story of how mortgage-backed securities were originally a product of the late nineteenth century, rather than the twenty-first. The Homestead Act embodied the Jefferson ideal of independence based the possession and working of land. In the face of illness, debts and even weather, farmers quickly realized that without cash, land alone could not provide the desired security. Increasing numbers of them took out mortgages, and were required in turn to purchase life insurance in order to backstop those. Meanwhile, the largest purchasers of mortgages were life insurance companies. “The mortgage-insurance complex chipped away at the foundations of landed independence,” even to the point of determining which crops that farmers would be allowed to grow. Rather than Jefferson’s “chosen people of God,” farmers became simply another form of merchant.[5]

Perhaps the most fascinating chapter concerns the development of commodities futures trading in the late nineteenth and early twentieth centuries. At its most fundamental, this activity represents a hedge for the agriculturalist. Guaranteed of a buyer for a crop in the future, the farmer can plan accordingly when planting crops. Investors who held these futures contracts, however, began to realize that those who held orders to deliver crops could merely “set off” with those who held order to purchase them. Rather than go through the hassle of buying and selling actual crops, when the relevant date arrived, the two traders would calculate the difference in price and one would simply pay the other. Thus the activities of the Chicago Board of Trade came increasingly unmoored from the work of actual farmers, and resembled nothing so much as speculating on the price of commodities. At the same time, smaller-scale, frequently rural, “bucket shops” performed similar operations without the pretense of delivery. Thus their patrons were, actually and technically, gambling. But they were often farmers seeking to minimize the risk of their precarious financial existence, by “betting” in one direction with their actual planting, and then hedging that decision by going a different way at the bucket shop. The association with gambling, however, threatened both institutions in the moralistic Progressive Era. Levy convincingly argues that the actual gambling of the bucket shop provided a more socially useful function than the not-quite-gambling associated with legitimate futures trading. In the Supreme Court, however, Oliver Wendell Holmes wrote a decision that declared otherwise. He found futures trading to be legitimate, while simultaneously issuing a separate ruling that made it impossible for the bucket shops to continue. Based on the premise that futures trading “kept the world of immaterial trade in line with the physical economy” but that “[b]ucket-shop trading did not,” Holmes’s logic sat, in Levy’s view, on “remarkably weak footing.”[6] Like many of the other stories described in Freaks of Fortune, this decision represented an elevation of the priorities and needs of the capitalist class over those of others.

Levy’s final chapter tells the story of George Walbridge Perkins, Sr. An executive at J.P. Morgan & Co., U.S. Steel and, eventually, International Harvester, Perkins had Teddy Roosevelt’s ear and managed his 1912 third-party campaign for the presidency. Like many in the period, he believed that the large corporation had rationalized economic activity, rendering the notion of competition an obsolete one. Unlike most of these corporate champions, however, Perkins thought that the logical outgrowth of this turn of events would be a partnership between workers and management that would work to the benefit of both. He championed such things as profit-sharing and wage-earner insurance. These ideas were so far out of the mainstream among his business associates, however, that Perkins came to believe that government, rather than large corporations, would have to assume this role.

After Roosevelt’s defeat, both Perkins and his policies were marginalized. Though Levy makes little of this, it would seem that many of Perkins’s ideas were resurrected in the New Deal. That period is beyond the scope of this book, but certainly those who worked for Franklin Roosevelt saw themselves as attempting to minimize the role of economic risk in the lives of American citizens. The postwar era brought unprecedented prosperity, and Keynesianism promised to minimize the risk inherent in the business cycle itself. This period of relative comfort, as Levy notes in his epilogue, bred a revolt against “big, impersonal social forces—whether it was big business or big government—that promised stability, security, and control.” People wished to restore the “old link among freedom, self-ownership, and the personal assumption of risk.”[7] In light of the 2008 financial crash, the subsequent recession and growth in inequality, and the recent government shutdown, they appear to have gotten their wish. Risk is, again, our business.

Mike O’Connor’s book A Commercial Republic: America’s Enduring Debate over Democratic Capitalism will be published in May by the University Press of Kansas.