The Birth of Risk Management

Jackson Lears selected Freaks of Fortune: The Emerging World of Capitalism and Risk in Modern American by Jonathan Levy as his selection in the Chronicle of Higher Education’s most influential books of the last 20 years. According to Lears, “Levy illuminates the transformation of fundamental ideas about property, personhood, liberty, and security as an agrarian market society becomes a modern industrial state.” Here’s a selection of the book talking about the history of risk’s maritime roots.

Risk does have a history. As a human invention, as a historical protagonist, risk has a biography. In the United States, the most decisive chapters in risk’s history were written in the nineteenth century. For by the end of that century, much like throughout the world today, risk was in fact everywhere. Before that century of capitalist transformation, however, it was not. But risk did not appear out of nowhere. It was born on the deep, in the act of maritime voyaging.

Sometime during the nineteenth century it became all but impossible to imagine the modern condition without the word “risk.” By 1871 Whitman was able to invest risk with great lyrical power. Capitalism — an economic system that thrives o radical uncertainty — was asserting control. Meanwhile, men had begun to insure their own lives, brokers had begun to sell mortgage-backed securities, and farmers were beginning to buy commodities futures contracts. Uncertainties and anxieties — some old, some new — had to be managed and coped with, perhaps even capitalized upon. Risk management was born.

Risk was first synonymous with marine insurance — a financial instrument for coping with the uncertainty of transporting commercial goods across maritime space. Buying and selling “risks,” long-distance trading merchants purchased from each other financial compensation in the contingent event that a “peril of the seas” or an “act of God” struck their long-distance voyages and destroyed their property. Risk did not then mean extreme peril, hazard, or danger. It did not refer to the immaterial fear of an undesirable event. Rather, it originally referred to something material: a financial instrument for coping with the mere possibility of peril, hazard, or danger.

The etymology of the word reflects this historical origin. It can be traced back to the sixteenth-century French risqué, and even further to the thirteenth-century Italian rischio. Beyond that, all possible roots, including the likely Arabic candidate, appear in maritime “commercial contexts.” It is possible that mariners invented the term to refer to un- charted waters upon which they would not voyage. The Oxford English Dictionary emphasizes that risk connoted the possibility of “damage to merchandise when transported by sea.” Risk made its appearance in the English language in the sixteenth century, but in the United States even as late as the 1820s it had yet to be fully anglicized from “risque” — the commodity exchanged in a marine insurance contract. Then, rather suddenly, risk exploded in everyday language. So would financial risk management.

Risk management was one way to cope with an uncertain future. But at the opening of the nineteenth century there were other ways to do the same. Commerce was ever-present, but America was still very much a rural and hierarchical society. The large majority of persons were legal dependents: wives, children, servants, and slaves. Households and communities achieved social security by coping with the burden of peril together. For men who were masters of households, the ownership of physical forms of capital and wealth — slaves and above all land — anchored economic security. Risk management was for o shore hazards, inapplicable to dangers onshore, where men might tremble before “acts of God” instead of commodifying them. Many onshore dangers — re, disease, a bad harvest, a premature death — were after all still biblical in nature. Religious authorities counseled that in the end divine providence ruled over the future. And if the future was certain because God determined it, then risk management might be unnecessary, if not all together wrong. After mi- grating inland risk management competed with other ways to cope — socially, economically, culturally — with the perils of an uncertain future. It would always remain in competition.

Nevertheless, across the nineteenth century Americans began to react to the insecurities of capitalism and its “perennial gale of creative destruction” in a new way. As slavery was abolished and the United States became more urban and industrial, increasingly men began to hedge the perils of life under capitalism by using financial instruments born of capitalism itself. Finance transformed perils, hazards, and dangers — some perennial, some new because of capitalism — into risks. An insurance policy o set the risk of losing the ability to earn income in a market economy; a derivatives contract hedged against the risk of future market price volatility. Non financial collective strategies did not completely die o . Families still shouldered burdens together. Many individuals still believed in an otherworldly fate. But this transformation was ultimately momentous, marking the emergence of risk as we know it today.

The world of capitalism and risk thus formed as nineteenth-century Americans became ever-more dependent upon new financial institutions, markets, and forms of wealth for their security. These included insurance policies, savings accounts, government debt markets, mortgage-backed securities markets, bond markets, futures markets, and stock markets. With this, the corporation became risk management’s institutional home ground. Corporate risk communities offered a new form of social security. To provide economic security, corporate actors accumulated financial forms of capital and wealth. Doing so corporations also brought about a cultural transformation. They became the reserves of new probabilistic, statistical explanations of future change that secularized old providential beliefs. In sum, by the opening of the twentieth century the modern American corporate financial system had come to life.

Risk thus recasts the history of American capitalism from the standpoint of powerful new financial corporations. Finance is an expansive terrain. But analyzing the nitty-gritty details of new financial practices demonstrates how risk burrowed into popular consciousness. Moreover, following risk across many registers of thought, action, and experience captures much of the human drama of capitalist transformation. The spread of commerce; the rise and fall of American slavery; the Industrial Revolution; the economic development of the West; the ascendance of the corporation — all were at stake in the rise of corporate risk management. But so was how Americans thought about the future, felt about the future, acted upon it, managed it, and sometimes simply resigned themselves to it.