American brokers and underwriters had to manage the risk of political opprobrium during the Revolutionary War. Although American brokerage offices were too small to become main targets of public condemnation, they had visibly proliferated during the war, and they were known to be controlled by America’s wealthier merchants—that is, by people already subject to charges of placing profit over loyalty by price gouging, privateering, and trading with the enemy.
The prices of imported goods skyrocketed during the early years of the war, provoking violent public response. Virginians rioted over the price of salt in December 1775, and additional riots broke out in at least six other states over shortages of imported goods like sugar, rum, molasses, and tea. To limit currency inflation and price gouging, the Continental Congress recommended in 1775 and 1776 that the states should set maximum prices for certain imported goods. A few states heeded the Congress’ advice, but price inflation continued.
Merchants disliked price limitations, but they had to frame their objections carefully in order to avoid accusations of profiteering. A safe approach, some seemed to believe, was to blame for the high prices of the goods they sold on the cost of their insurance. In July 1776 a Philadelphian calling himself “Mercator” made the case to the readers of the Pennsylvania Evening Post that merchants importing salt were actually losing money under imposed price caps and that the reason for this was insurance. Before embarking on a set of elaborate calculations to support his case, Mercator attempted to establish the principle that, in any viable form of commerce, the merchant must be able to pay for insurance and still make a profit. “It is an old established maxim amongst merchants,” he wrote, “that a trade which will not bear insurance is not worth following, and also he that doth not insure is to calculate as though he did.” In other words, insurance was nonnegotiable. Even if a merchant opted not to buy insurance, he effectively self-insured, and thus insurance still needed to figure into his pricing calculations.
But how much could it possibly have cost to insure a ship full of salt? Mercator informed his readers that the insurance premium on a round-trip voyage from Philadelphia to the West Indies for salt would, under current political conditions, most likely be 75 percent. He went on to calculate that a merchant purchasing four hundred pounds of salt (Virginia currency) would have to pay an insurance premium of fourteen thousand pounds. Thus, even if the merchant marked up his salt to nearly forty times what he had paid for it, he would barely be able to cover his expenses.
If you have just wondered how a 75 percent premium on goods worth four hundred pounds could cost fourteen thousand pounds, it is because you have come across a peculiarity of eighteenth-century insurance. Mercator assumed that the merchant would buy an insurance policy that covered not only the price of the goods but also the cost of the insurance premium itself. He was insuring himself in such a fashion that, if he lost his vessel and goods, he would walk away from the loss indemnified in full for his “outlay,” without owing his insurer even the cost of what would, in any case, have been an exorbitant insurance premium.