Freaks of Fortune [Hardcover]

The practice of managing risks of the unknown was a major preoccupation of 19th century Americans. One major form of risk was the loss of physical wealth (e.g., a ship's cargo); the other was the loss of monetary wealth, through a change in prices. According to author Jonathan Levy, both forms of risk were tied to the concept of personal liberty--of self-ownership: free people owned themselves, and therefore, owned the risks associated with their situation within the industrial system.

This book is organized into eight chapters with a thematic (and mostly chronological) structure. The first two address the philosophical and pragmatic issues of maritime insurance, with chapter two especially focused on the antebellum dilemma of insuring cargos of slaves (slavery plays a major role in this book because of the revolutionary impact of emancipation). As the coastal trade in human captives runs its baneful course, finance and the slave power confront each other over the risks insurers are obligated to bear: is a bid for liberty the sort of disaster a policy is supposed to cover? Insurers and their lawyers battled over this in Southern courts where the expression of abolitionist ideas was virtually a capital offense.

With the liquidation of slavery, the freedmen and the planter alike needed to accumulate reserves against the risk of early death or incapacitation. Life insurance (§3) had, until the 1850s, been unusual and primitive in the US; now it boomed. In the past, all types of farm proprietor had accumulated capital mostly in the form of land and improvements (and in the South, slaves). After 1865, the saving bank (§4), farm mortgage (§5), and life insurance policy became major forms of personal capital accumulation. In fact, savings bank management and life insurance companies, with rapidly growing portfolios of deposits/reserve funds, turned first to the railroads and then to farm mortgages as an outlet.

Levy frequently frames the quest for risk management as a "countermovement" (after Polanyi); Polanyi coined the phrase to refer to the tendency of people to resist the uncertainty inherent in a rapidly evolving market economy. As more and more social institutions were replaced by putative markets (markets for labor, land, and capital, among others) and as good from far away become competitors to those produced locally, people increasingly insisted on legislation to reduce uncertainty about the future. Polanyi was interested in measures such as statutory restrictions on markets, such as agrarian protectionism. Levy is interested in the "countermovement" of the market itself to the uncertainties it produced: the emergent technology of risk management (1).

But as the market introduced new ways of alienating and commodifying risk, it created more risk. Partly this was a simple effect of moving the risk of commercial ventures onto new markets farther away from the original: insurance companies rather than merchants, for example, took a large part of the financial risk of shipping; farm mortgages, the hot new repository for savings deposits and insurance premia, were quickly pooled, securitized, and traded (until that particular form of risk arbitrage blew out in 1893). However, the pooling and securitization of risk itself was--from the very beginning of US history--multiplied outward to create lucrative investment opportunities. Instead of the risk of a price movement being split up (and presumably easier to bear), the risk was replicated, pantograph-like, for all the people who wanted to gamble on the upside risk of a price movement. So, for example, in 1888, when American farmers harvested 415 million bushels of wheat, experts estimated 25,000 trillion bushels of wheat were traded in futures contracts (2). This multiplier effect had a ripple effect through the global economy.

In addition to the derivatives market (§7), which is well known to followers of the 2008 Global Financial Crisis, there was also the countermovement of "fraternalism" (§6). Movements such as a Ancient Order of United Workmen (AOUM) or Knights of Columbus emerged to provide support for members' dependents in the event of death or disability. In the fullness of time (i.e., 1905), litigation had reduced these to mutual insurance associations, but the fraternal orders did outperform the insurance companies during the financial catastrophe of the 1890s (3).

Levy concludes with (§8), a cautionary introduction to the quixotic George W. Perkins, partner of J. P. Morgan. An architect of industrial consolidation (NYLIC, US Steel, International Harvester), Perkins sought to first unify industry--eliminating competition within heavy industry--and then guarantee social welfare to employees. Perkins did not hesitate to describe this dream of his as "socialism," albeit socialism of a singularly undemocratic kind. The paternalistic scheme he aimed for was lampooned relentlessly, and while he was well-connected, association with him would prove highly radioactive (4). But Perkins' downfall was his conflict with other plutocrats, who insisted on the fiction of the uncertain market--a market that would never brook the luxury of gracious benevolence towards its workforce.
_______________________________________________
(1) "Emergent": a type of order that arises in groups of things (like cells in an organism) that cannot be predicted by examining the constituent parts in isolation. An example is a hurricane: parts of a hurricane, or little bits of hurricane-like behavior, cannot be found in the constituent bits of the atmosphere. For an introduction to the concept, see Peter T. Macklem, "Emergent phenomena and the secrets of life," _Journal of Applied Physiology_ June 2008 vol. 104 no. 6 1844-1846. One of the passages in Polanyi's _The Great Transformation_ addressing the [statutory] countermovement begins on p.152 (2001 edition). An extremely helpful introduction to the concept of emergence in economics may be found in the 2011 edition of Debunking Economics, beginning on p.207.

(2) Levy, p.238. In 1888, a bushel of wheat had a mean price of $0.93/bushel (see USDA Economic Research Service, Wheat Data).

(3) The fraternal organizations formally repudiated any actuarial estimate of risk valuation until 1888, on the grounds that risk pricing was morally sordid. The fraternal movements are the one form of countermovement mentioned by Levy that really correspond to Polanyi's original sense.

(4) George W. Perkins managed Theodore Roosevelt's attempted political comeback of 1912; Wilson's campaign targeted Perkins, rather than Roosevelt. Wilson's form of populism took the form of anti-conspiracy (which would presumably mean free markets and free men). Perkin's (and Roosevelt's) populism took the form of industrial peace and paternalism. Perkins was "exposed" repeatedly for conspiring to restrain competition, as in the New York State legislature's 1905 hearings on consolidation in the insurance industry. Perkins never broke the law, but he was very good at supplying his enemies with ammunition.

"Freaks of Fortune" is an exhaustively researched account of how America's financial system evolved in the nineteenth and early twentieth centuries to absorb increasing amounts of risk from the perils of the "economic chance-world." Levy traces the development of risk management principles from marine insurance to life insurance, farm mortgages, and eventually the dominance of commercial trusts in the early 1900s.

Even though Levy deserves praise for his research and scholarly contribution, the book itself does not make for great reading. The 300 pages are divided into eight long, largely standalone chapters that average 37.5 pages each. Chapter 4 is a entirely a history of the Freedman's bank; Chapter 8 is a biography of financier George Perkins. The book lacks a strong overarching theme to pull each chapter's subjects together. Levy lays the groundwork for a discussion of how the meaning of identity changed as individuals shifted more of life's day-to-day risk to third parties, but this theme was not robustly treated throughout the book.

This book is most appropriate for economic history scholars like Levy and for readers with particularly strong interests in the history of insurance. I am afraid most readers will find this book clearly impressive but ultimately too long and too disjointed.

This book has opened my eyes to depths and meanings of risk, risk transfer, insurance, and a great array of related topics, I never grasped at anything like this level before. (I'm a law teacher of some 3 decades' experience, without a formal finance background.) In this sweeping canvas, we also witness a seafaring adventuring people transforming into the land-based capitalists of the great emerging American cities. This is a great example of those books on the 17th, 18th and 19th centuries that give such deep insight into the formation of our modern ideas and ways. The explanations here are well-researched and well-crafted, sailing far above so much dreck clogging the bookshelves these days. This is a skilled and erudite author. Vignettes of the lives of the participants, from capitalists to laborers, alongside examples of transactions, court cases, and a big picture of the flow and development of business, are masterfully blended and paced. If the title seems to your liking, I feel assured the whole book will be.
I finish at least a book per week, and this is my favorite discovery of the last year, alongside two others in law and finance history: "Novus Ordo Seclorum" by Forrest McDonald (I got in audio form) on ideological and legal origins of the U.S. Constitution, and "The Origins of Value: The Financial Innovations that Created Modern Capital Markets" by various authors. All these books have that high-quality value of building deep history-based insights into things we might otherwise see only shallowly. If only every book I start into could be this good!