The Risk Ownership Society

Freaks of Fortune:
The Emerging World of Capitalism and Risk in America

by Jonathan Levy
Harvard University Press, 2012, 432 pp.

It is cliché now to say that we live in a “risk society.” We simultaneously celebrate “risk-takers” and blame those who undertake “risky speculations” without much pausing over the contradiction. Freaks of Fortune, by Jonathan Levy, is a history of the United States refracted through Americans’ evolving conceptions of financial risk. “Risque,” according to Levy, evolved from an arcane term-of-art in maritime insurance to the very anchor of what it meant to be free in nineteenth-century America.

What renders the book interesting is how familiar and natural, even self-evident and inescapable, this Gilded Age conflation of financialized risk-bearing and human autonomy remains today. The sine qua non of a free person is to own her risks, to enjoy successes or good luck, but to take responsibility for losses or setbacks. The word “own” is used advisedly. Levy describes what occurred as an “enclosure” of personal risk, both the “upside” and the “downside,” into alienable property.

Contemporary outrage toward finance reinforces this commodification more frequently than it challenges it. What renders today’s “banksters” detestable is not that they run financial risks, but rather a notion that Levy pulls straight from an 1856 business text: “a man had a moral ‘right to risk his own capital’ but ‘no right to risk the property of others.’” This moment’s malefactors are accused of capturing the upside of speculations while putting losses to others who had neither consented nor been compensated to bear the downside. That risk is a form of property, and that risk management must take the form of an allocation of that property, is axiomatic, invisible, and unchallenged by partisans at both ends of the pitchfork. We’re just fighting over who should own what.

But in 1842, the idea that an ordinary workman “owned” his risk was new, a surprising transplantation of maritime norms to a crippled railroad employee. Levy begins with the story of Nicholas Farwell, who was denied what today we would call worker’s compensation because, a court found, he enjoyed a “wage premium” for the hazards of his job: just as an insurer of a risky sea voyage enjoys a premium in exchange for accepting the cost of accidents, so too did an engineman on a railroad. Farwell sued under a common-law doctrine that, Levy tells us, “rendered ‘masters’ responsible for accidents caused by their ‘servants.’” By making him responsible for his own risk, the judge affirmed that Farwell was not a servant but a free man who had voluntarily accepted foreseeable hazards in exchange for cash compensation. A “warrant…of protection, and a comfortable subsistence, under all circumstances…[even] when want, misfortune, old age, debility and sickness overtake him” was, according to an 1860 treatise, the prerogative of a slave, the quid pro quo that justified bondage. How could a free man expect the indemnification that a slave labored a lifetime to enjoy?


To be free is to own one’s risk—this idea is the serpent in the garden. Once upon a time, a person’s place in the world was likely to be fixed by circumstance. Perhaps one was a slave, or, if free, bound by birth or marriage to a plot of land from which a subsistence might be earned. Uncertainty was an external, even providential, force with which communities coped as best they could. Traditionally, Levy tells us, the Jeffersonian ideal of landed independence was achieved through “safety first” agriculture. On plantations and small farms alike, crops were chosen to see to the direct needs of the land’s inhabitants. Only after subsistence was ensured was the remaining land allocated to “cash crops” bound for market.

But emancipation in the South and industrialization in the North interposed the institution of the wage between labor and a living. Landless workers could not choose to plant what was most certain to feed them. Their only crop was money, and the bounty of their harvest was at the whim of an impersonal market. Networks of interdependence once held in place by hierarchy or kinship or geography could no longer be relied upon. There were new opportunities in these more fluid arrangements. But each man’s risk was his alone, no kin or custom would spare him destitution if the money wasn’t there. This was, in Levy’s words, a “rising economic chance-world.” Individuals found themselves with little choice but to rely upon brave new institutions of corporate risk management. Today, it is conventional to say that financial markets are driven by “fear and greed.” After the Civil War, the conditions of financial fear and greed were suddenly universal. As Marx famously put it, “pitilessly torn asunder [were] the motley feudal ties that bound man to his ‘natural superiors’…[which] has left remaining no other nexus between man and man than naked self-interest.” Financial capitalism was the price of freedom.

Networks of interdependence once held in place by hierarchy or kinship or geography could no longer be relied upon. There were new opportunities in these more fluid arrangements. But each man’s risk was his alone, no kin or custom would spare him destitution if the money wasn’t there.

The spirit of Levy’s account then shifts from Marx to Hyman Minsky, whose “financial instability hypothesis” attributes an oscillatory dynamic to capitalism. Risk mitigation leads inexorably to risk magnification, stability begets crises. Minsky was a theorist of the twentieth century, but his analysis applies perfectly to the institutions and events of the Gilded Age. Wage laborers and freedmen heeded sanctimonious exhortations to take responsibility for their risks by accumulating money in savings banks, only to see those banks go bust from speculation in railroad bonds. With the reputation of banks tarnished, fear drove people to life and accident insurance industries backed by “scientific” guarantees, whose vast pools of capital then financed a speculative boom in frontier mortgages.

There’s a running refrain on Battlestar Galactica: “All this has happened before, and all this will happen again.” One of the delights of Freaks of Fortune is to learn just how true that has been of finance:

• Following the crisis of 2008, it has become common to call for a separation between “speculative” and “safe” finance. The so-called Volcker Rule would prohibit banks from making certain kinds of risky investments. More radical proposals would bifurcate the financial system into safe “narrow banks” that invest only in government securities and investment funds that would function without any form of government insurance. All of these proposals echo the Depression-era Glass-Steagall Act, which imposed a separation between “safe,” federally insured “commercial banks” and risky “investment banks.” But Glass-Steagall itself is an echo of the status quo prior to 1873, when banks were divided into “savings banks,” intended to preserve the wealth of ordinary people and restricted to conservative investments, and “commercial banks,” the risky, freewheeling profit-seekers. In the 1870s, as in the 1990s and 2000s, the managers of “safe” banks lobbied and innovated and cheated around restrictions on the use of funds in their care.

• Private mortgage-backed securities, with their slicing-dicing reassignment of loans to unidentifiable groups of investors, are often described as novelties. In fact, Levy points out, “mortgage debentures” that bundled, tranched, and resold mortgage cash flows were a staple of the 1880s. They were justified on the same theories of diversification that would be dolled up with math and trotted out again a century later. Mortgage lenders of the Gilded Age bore no resemblance at all to the George Bailey–style local banker. New York financial firms held western mortgages acquired through brokers. To borrowers, a mortgage was a faceless master.

• Financiers have evaded accountability with appeals to the quantitative, statistical, “scientific” nature of their art long before supercomputers and stochastic calculus. In 1877 the president of the Equitable of New York refused to justify his firms’ valuation practices to a regulator: “There are certain fundamental rule[s]…which can only be understood by actuaries.” When such appeals proved insufficient to deter inquiries, a captured New York legislature explicitly stripped policyholders of the right to ask.


So, all this has happened before, and it will happen again. Must it always? Is there no way out? Levy describes four countermovements to financialized risk: the slave South, “fraternalism,” welfare corporatism, and the welfare state.

The first and third countermovements have little to offer modern readers. If finance capitalism really is the price of freedom, we’ll pay it and tolerate its disruptions rather than return to a slave-based or feudal society. Welfare corporatism is the subject of the most fascinating chapter of the book, which follows the career of one George Walbridge Perkins, Sr., a “one-man interlocking directorate” at the turn of the twentieth century. Perkins was ahead of his time, foreseeing arrangements we’d now describe as something between “Fordist” and “fascist.” But at the turn of the twenty-first century, these ideas seem spent. It is neither practical nor desirable for individuals to accept near-total control in exchange for life-long relationships with large industrial firms that provide retirement and health security as well as labor income. Perkins’s welfare corporatism amounted to a kind of depersonalized, “scientific” reconstitution of slavery. We may carry some nostalgia for a less submissive version, with corporate power checked by legal rights and collective bargaining, but Levy’s account of welfare corporatism’s first evangelist offers very little that would appeal to reformers today.

Fraternalism, the second countermovement, does offer contemporary seekers something to think about. Following the Panic of 1873, many Americans simply wanted out of the unruly corporate risk-management system. Yet they still owned their financial risks, and needed some means to manage them. Into this void emerged “fraternal orders,” which disavowed formal trappings of corporate insurance while providing much of the same substance. Fraternal orders were not merely “lodges” where dudes would hang out and dabble in bizarre fabricated rituals. They also, “in the spirit of fraternity,” promised financial support if misfortune befell a member. Pointedly, they did not offer insurance contracts. Instead they offered “certificates,” which they claimed were not legal documents. For a while (but not forever), the courts agreed. Despite the absence of legal compulsion, certificates were often honored, and fraternal orders emerged as a competitor and threat to unpopular corporate insurers. The fraternal movement was eventually defeated by a combination of enticement (corporate insurers began to mix speculative lotteries into their insurance policies) and an increase in courts’ willingness to enforce certificates as traditional insurance contracts, which forced the fraternals to formalize themselves in ways that left them essentially identical to corporate insurers.

There was a boom in fraternalism, as there had previously been in savings bank deposits and insurance policies. But unlike those other risk mitigators, the fraternalist boom ended in a whimper rather than a bust. No panic attended revelations of speculative malinvestment by fraternal orders, because the orders never collected any premiums to invest. The fraternal orders were, in modern parlance, “pay-as-you-go” mutual insurance schemes. The capital that would fund member claims existed, but it remained in the pockets of other members until misfortune mobilized it. It was never gathered into the vast, centrally controlled pools that aggregated and sometimes squandered bank deposits and traditional premiums.

In contemporary policy debates, “pay-as-you-go” has become something of an epithet, the bad thing to which “prefunded” or (better yet) “fully funded” insurance plans are compared. “Pay-as-you-go” sounds fragile, because what if people don’t pay? But that’s what courts are for. Nothing but some accidents of history prevented the fraternals’ pay-as-you-go schemes from being enshrined in legally enforceable contracts. What would be the problem with an insurance plan whose monthly premiums varied in order to cover each month’s payable claims? It is obvious what the problem would be from the perspective of financial industry insiders, whose power and wealth are inevitably proportionate to “assets under management.” But it is worth asking whether conventional disdain for pay-as-you-go insurance reflects any actual deficiency of the arrangement, or mere disfavor by an interest group with oversized influence over what is to be conventionally disdained. Perhaps pay-as-you-go insurance is a solution, however partial, to the conundrum at the heart of Freaks of Fortune, this trade-off between freedom and the dislocations of corporatized finance.

It is worth asking whether conventional disdain for pay-as-you-go insurance reflects any actual deficiency of the arrangement, or mere disfavor by an interest group with oversized influence over what is to be conventionally disdained.

In the epilogue, Levy touches very briefly on a fourth countermovement, New Deal–era regulation and social insurance. During 1940s, 1950s, and early 1960s, macrofinancial risk was markedly absent. Were we actually less free in the mid-twentieth century because of this? Levy seems to think so, citing social critics who bemoan bureaucratic conformity, ossified elites, a lack of individual daring and venture. But to what degree were both the stability and the conformity of the era outgrowths of the welfare corporatism foreseen by Perkins, rather than of the welfare state per se? What should we make of nations like Denmark that seem to be able to mix freedom and dynamism with a pervasive and effective welfare state?

Levy wonders, “is it too much of a stretch to suggest that in some quarters the freaks [of fortune] were still longed for?…The New Deal social order bred…a desire for a more authentic, individual selfhood. That desire demanded a reinvigoration of the old link among freedom, self-ownership, and the personal assumption of risk.” I don’t think much of this theory—that New Deal stability was willed away in order to escape the ennui. But if it were true, it would condemn a stable and effective private financial system as surely as it condemns the New Deal. Individuals don’t require financial crises to experience the personal assumption of risk. The stock market and Las Vegas were open throughout the 1950s.

To claim that New Deal stability as a whole (as opposed to particular regulatory restrictions) was a hindrance to American vigor is to argue for compulsory assumption of systemic risk. Financial fragility becomes a feature, rather than a bug, not just for financial insiders who get to gamble with other people’s money but for all of us dragged onto the virility-enhancing roller-coaster ride. We didn’t fall from the garden, after the serpent offered a taste of freedom. We fled. We chose the glittering cacophony of the casino because Eden is bad for us. I suspect that this take will earn a more sympathetic hearing among Wall Streeters than with the rest of us.

Freaks of Fortune provides a timely source of perspective on the financial dislocations of the last decade. We have been here before. Maybe we have been nowhere else since the guns fell silent at Appomattox. Freaks of Fortune is a scholarly and affectionate recounting of a journey, which, despite hustle and heartbreak, controversy and countermovement, seems always to leave us right back where we started. We are left with a difficult question: if we wish to be free in the way that Americans understand freedom, have we no choice but to submit to a faceless, periodically psychotic “economic chance-world”?


Steve Randy Waldman blogs at Interfluidity.