• September 4, 2015

Risk as We Know It

Sail forth! steer for the deep waters only!
And we will risk the ship, ourselves and all.

—Walt Whitman, "Passage to India" (1871)

In the 19th-century United States, voyage was an im­age that Americans invoked time and again to capture what it was like to live on the stormy seas of capitalism. In 1871, Walt Whitman offered a maritime allegory of the experience of individual freedom. To do so he evoked risk. Long a technical concept in the financial arena of marine in­surance, at the end of the 18th century "risk" still simply referred to the commodity bought and sold in an insurance contract. Outside the world of long-distance maritime trade, risk had very little meaning or use.


The spread of capitalism had brought the insecurity of the sea to the land. Human beings had long associated the power of chance with the capricious tides of the high seas. Now the image of the ship on stormy waters became a powerful metaphor for the perils and possibilities of life under capitalism. Nineteenth-century Americans spoke of howling winds, thunderclaps, unknown breakers, and tempests and storms and cyclones that swept over the deep—for which they were not responsible. But they had to learn to cope with them, and even to profit from them. As daunt­ing as the task of managing risk could be, there was also the existential thrill of taking a risk. That tension was at the very operational and moral heart of both capitalism and a rising liberal order.

In the 19th century, Americans had their own term for this ten­sion, for all of the sudden economic twists and turns, booms and busts, and ups and downs that were newly and inexplicably in their midst. They called them "freaks of fortune."

Since risk is now so ubiquitous, it might seem impossible to write its history. Yet risk does have a history. As a human invention, as a historical protagonist, risk has a biography. And in the United States, the most decisive chapters in risk's history were written in the 19th 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.

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," merchants in long-distance trading purchased from one another financial compensation in the contingent event that a "peril of the seas" or an "act of God" struck their 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 16th-century French risqué, and even further to the 13th-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 uncharted 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 16th 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 19th 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 the people 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, most of all, land—anchored economic se­curity. Risk management was for offshore hazards, inapplicable to dan­gers onshore, where men might tremble before "acts of God" instead of commodifying them.

Many onshore dangers—fire, disease, a bad harvest, a premature death—were, after all, still biblical in nature. Religious au­thorities counseled that in the end, divine providence ruled the fu­ture. And if the future was certain because God determined it, then risk management might be unnecessary, if not altogether wrong. After migrating 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 19th century Americans began to react to the insecurities of capitalism and its "perennial gale of creative destruction," in Joseph Schumpeter's phrase, 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 offset the risk of losing the ability to earn income in a market economy; a derivatives contract hedged against the risk of market-price volatility. Nonfinancial collective strategies did not completely die off. 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 19th-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. In 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 20th 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.

The thread that runs most consistently through risk's history is a moral one. For risk triumphed in the 19th-century United States in the context of the nation's moral struggle over freedom and slavery. A generation—financiers, abolitionists, actuaries, jurists, preachers, legislators, corporate executives, philosophers, social scientists—developed a vision of freedom that linked the liberal ideal of self-ownership to the personal assumption of "risk." In a democratic society, according to the new gospel, free and equal men must take, run, own, assume, bear, carry, and manage personal risks. That involved actively attempting to become the master of one's own personal destiny, adopting a moral duty to attend to the future. Which meant taking risks. But it also meant offloading one's risk onto new financial corporations—as when a wage worker insured his productive labor against workplace accident, an ex-slave opened a savings account, or a Wall Street financier hatched a corporate profit-sharing and employee-benefit plan. A new vision of what it meant to be a free and secure actor thus took shape in the new material and psychological reality created by the modern American corporate financial system.

Liberal notions of selfhood had long emphasized the need for self-mastery, even in the face of uncertainty. But only in the 19th century did self-ownership come to mean mastery over a personal financial "risk." The moral conundrum that posed, and still poses, is that individual freedom required a new form of dependence. A dependence, that is, upon a new corporate financial system, the central nervous system of a rising capitalism that fed off radical uncertainty and ceaseless change.

Therefore corporate risk management time and again manufactured new forms of uncertainty and insecurity. That was the essential truth taught by the freaks—economic events that eluded the grasp of corporate risk management. As free men began to assume their own personal risks, old forms of security and dependence perished. Not assuming risk, that is, was no longer an option. Whitman was right. The only thing certain on life's voyage would be uncertainty itself. Within the economic chance-world of capitalism, desire for risk manage­ment and longing for the freaks of fortune constitute one and the same history.

Jonathan Levy, an assistant professor of history at Princeton University, is a fellow at the Center for Advanced Study in the Behavioral Sciences, at Stanford University. This essay is adapted from Freaks of Fortune: The Emerging World of Capitalism and Risk in America, new from Harvard University Press. Copyright (c) 2012 by the president and fellows of Harvard College. Used by permission. All rights reserved.

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