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Published by EH.Net (July 2024).

Hannah Farber. Underwriters of the United States: How Insurance Shaped the American Founding. Chapel Hill: University of North Carolina Press, 2021. 335 pp. $34.95 (hardcover), ISBN 978-1469663630.

Reviewed for EH.Net by Chris Kingston, Amherst College.

 

In this fascinating, deeply researched, and well-written book – a deserved co-winner of the 2023 Hagley prize for the best book in Business History – Columbia University historian Hannah Farber explores the connections between the American marine insurance corporations chartered in the 1790s and early 1800s and other institutions of the Early Republic, especially the federal and state governments. The title plays on the variety of meanings of the term “underwriting.” The companies’ main financial activity, of course, was to underwrite policies that insured merchants’ vessels and cargoes on trading voyages, and the security of these policies was founded on the companies’ capital stocks. By investing a substantial amount of these funds in (risky) government debt, Farber argues, the companies also “underwrote” the risky venture of the United States itself.

The book opens with an imaginative narrative prologue in which the reader is asked to imagine themselves as a Boston merchant in 1800, thinking through the complex choices involved in insuring a vessel: where to insure, negotiating the policy conditions, premium, and so on. Having anchored itself in the fundamental insurance transaction, the book then broadens its perspective to illuminate the many links between the development of the marine insurance industry and the development of other institutions, including banks and the state itself.

Early chapters trace the commercial and institutional development of marine insurance in Britain and its emergence in colonial America via the development of local brokerages during the French and Indian War and the Revolutionary War. This brings us to the book’s main focus: the chartering and subsequent activity of insurance corporations in the 1790s and early 1800s, at a time when the increased risks to trade during the extended period of warfare from 1793 to 1815 drew capital into the insurance sector and yielded substantial profits.

While the broad contours of this history are well known, what is novel here is the emphasis on marine insurance as a sector that was both independent and self-governing but that was also, Farber argues, “fundamentally and unavoidably political” (p. 18). The heart of the book is an incisive exploration of the many ways in which the companies’ interests at various times aligned with or diverged from those of the state, how the companies’ activities affected and were affected by the state, and how they navigated the tension between autonomy from the state and dependence upon it.

The founding of the corporations was very much a product of the time in which they emerged – one of extraordinary institutional innovation, in which many of the same people involved in founding insurance companies were also involved in the parallel creation of banks, with which the insurance companies were closely affiliated and even symbiotic. Incorporation, of course, required political action in the form of a state charter, and this, Farber argues, amounted to a “constitutional project” designed to bind them more closely to the state and establish greater public confidence in both.

Early American insurance companies invested a large fraction of their capital in bank stock and federal government bonds. The amounts were significant: back-of-the-envelope calculations suggest that insurance corporations held between an eighth to perhaps as much as a quarter of the overall national debt. This is the sense in which the insurance companies “underwrote” the United States, “making it bigger, stronger, and more capable of reducing the risks they faced as insurers and as state-chartered institutions” (p.134).

The companies’ importance extended well beyond finance, however. Commercial and political information was vital to their business, and they established networks that encompassed the state, private brokers, and merchants in the exchange of information and management of risk. Though they competed with each other and with private underwriters, they also cooperated and exchanged information when it suited them. During the “French Spoliations,” for example, merchants and insurers struggled to keep up with the fluid situation in the West Indies and the changing rules adopted by European powers regarding neutrality. Because of insurance companies’ expertise in gathering and evaluating commercial information, the premiums they set became viewed as an objective and authoritative barometer of the state’s diplomatic and military success in protecting its trade. Farber states, “When insurers calculated in public, they swayed public opinion, established the parameters for political action, and served as arbiters of national success” (p. 180).

Insurance was traditionally governed by the customary “law merchant,” but within this framework, Farber argues, insurance corporations were able to “wield capital’s power”, “regulating” merchants’ behavior by setting premium rates for the risks they were willing to insure, offering discounts for some kinds of risks, refusing to insure others, and imposing policy conditions regarding neutrality, contraband, convoy, and so on.  The companies, therefore, became “authorities” both in the sense of exercising informed judgment and through their governance of merchants, impinging upon state sovereignty. They also intervened directly in legal and political affairs, communicating with governments and seeking to influence policy to protect their interests and govern American trade – and later, to press indemnification claims for captured American vessels and cargoes during the Quasi-War between the United States and France in 1798-1800.

There are many other intriguing aspects to the story. Farber shows how insurance companies used corporate seals, portraits, and well-placed ceremonial gifts to establish an impression of prudence, solidity, and patriotism. Elsewhere, she uses several mid-nineteenth-century novels to reveal how commerce and finance in the early American republic became mythologized in retrospect.

After the end of the Napoleonic wars, ocean commerce became more secure, so premiums fell. Peace, a recession, and renewed competition from foreign insurers brought lean years for the marine insurance industry, and its influence diminished as America’s commercial focus shifted inland toward westward expansion. Farber tells this story by following the post-war career of Jacob Barker, a politically connected broker and financial speculator who engaged in a multitude of business ventures, beginning with marine insurance and shifting to trade with Latin America and creative financial maneuvering in 1820s New York, before his indictment for fraud following the Panic of 1826. This chapter feels somewhat thematically disconnected from the rest of the book, serving mainly to illustrate how the marine insurance industry’s early importance had faded.

Though meticulously researched, the book is written in an engaging and even jaunty style. Farber has an authoritative command of the historical and historiographical context and a talent for weaving the threads of her story together. At times, her enthusiasm for her subject may put her at risk of overstating her case. For example, although merchants’ choices were undeniably in a sense “governed” by the conditions laid down by insurers as conditions of contract and the variations in premiums associated with different kinds of risks, insurance was a competitive business, and merchants were also free to contract among each other, or insure elsewhere, if they found these conditions onerous. The companies’ “authority” was, therefore, tenable only to the extent that merchants voluntarily chose to submit to it. One might also quibble, for example, with Farber’s unorthodox view that in the case of the French spoliation claims, the United States itself became viewed as the “ultimate underwriter” (p. 216), responsible for covering the wartime losses of underwriters themselves.

Overall, Underwriters of the United States is an important, lively, and provocative contribution that will become a touchstone for future scholarship on the relationship between early American business and the state.

 

Chris Kingston is the Richard S. Volpert ’56 Professor of Economics at Amherst College and has published several papers on institutional change in the eighteenth-century marine insurance industry in Britain and America.

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