The National Interest
Spring 2001

Their Gilded Age—and Ours

by Fouad Ajami

 

. . . "I speak to my daughter-in-law so my neighbor can hear me", goes an Arab maxim. Which is to acknowledge that all these journeys into the past are, of course, meditations on our time, on our Second Global Economy, to use Krugman's term, and ruminations about our own fate. States smashed the liberal world in 1914, the "commanding heights" were claimed by political men, and the regulatory state emerged out of the wreckage of a global time of troubles. No age exactly repeats what has gone before, it must be granted right away. But increasingly we are writing our world, and reading it, into the way the First Global Economy was put together, and then came apart.

Raging, Tearing, Booming

Often enough, we are reading that world through the lives of great men. In the age of Bill Gates, Steve Case and Warren Buffett (the "Oracle of Omaha"), it is natural to think of John D. Rockefeller, J.P. Morgan and the Rothschilds. Those giants of finance lorded over a global economy sustained by Pax Britannica, underpinned by the ideology of free trade, transnational in its sources and movement of capital. But even they could not prevent the ground from being pulled from underneath them as political support cracked and the liberalizing gains of six to seven decades were irretrievably lost. They are the characters that act out the plot.

The best portrait of the Gilded Age has been sketched for us by the historian and writer Jean Strouse in her magnificent biography, Morgan: An American Financier. A biographer at once tireless and possessed of a delicate touch, Strouse has captured a seminal figure in American economic history against a rich and crowded and tumultuous background. Her work will stand as one of those books that do justice to a single, important life, but place the subject in a whole, big world. Now and then a life illuminates an age, and it was J.P. Morgan's luck and fate to come into his own as America itself was being remade. . . .

If Morgan's odyssey was so thoroughly American, the tale of European finance was the tale of the House of Rothschild. From the Judengasse (Jews' Lane) of Frankfurt, this extraordinary family rose, over the course of the nineteenth century, virtually to invent the international bond market, and to tower over European finance and diplomacy.

The tale of the Rothschilds is the stuff of legend: a dealer in rare coins, one Mayer Amschel Rothschild (the family name comes from the German for "red shield", for the placard on the door of their house in Frankfurt) works his way out of the ghetto in the late years of the eighteenth century, and his five sons are dispatched to the capitals of Europe, in time to become Europe's wealthiest financiers. This is the material that the young and prolific Oxford historian Niall Ferguson works in his sprawling two-volume economic history of the Rothschilds.

There was indeed a great irony surrounding the rise of the Rothschilds, one of no small measure of interest to readers today who are tempted to think that a new age of finance has come—and has to come—at the expense of the state. The House of Rothschild prospered as bankers to states and princes. Carl, the third- youngest of the sons of Mayer Amschel, who had also come to England to practice the "rag trade" (textiles), attained wealth and power by solving the riddle of supplying Wellington's armies with the gold bullion they needed to prosecute the war against Napoleon. War financing was the first big break for the Rothschilds. As Ferguson puts it, it was the Rothschild gift to make cash available at reasonable rates to an army on the march. . . .

The world that the Rothschilds mastered and knew was giving way by 1914. The financing of the Great War had shifted westward: the City had lost out to New York, and the Rothschilds had never managed to crack the American market. "That blasted country", as the Rothschilds called the United States, was in the main terra incognita to them. It had its own peculiar business culture, rambunctious and decentralized. It lacked a national bank, akin to the Bank of England or the Banque de France, with which the Rothschilds could build a working relationship (Andrew Jackson had seen to the destruction of the Bank of the United States). The world over, family banking was being outflanked by joint stock companies. The cohesiveness of transnational elite culture, which was the mainstay of the Rothschilds, was eroding by the day. The fourth and fifth generations of the Rothschilds could not master these deep changes in world finance and politics. The "guns of August", and the brutal history that followed, were one long obituary, a grim farewell to that age. . . .

Every age, every great edifice, begets its own nemesis, and in the end is undone by the very forces it unleashes. The received wisdom is that the first age of capital was undone by the onset of a global war. But in truth, as the more careful economic historians tell us, protectionism, illiberalism and regulation predated the outbreak of war. Liberalism and declining tariffs were being reined in long before 1914. By the end of the 1870s, protectionism had reared its head. What "convergence" took place in the Atlantic economy after 1870, we are told by the economists Kevin O'Rourke and Jeffrey Williamson in their methodical and careful work, Globalization and History, was less a function of trade liberalization and declining tariff rates than of the decline in transportation costs and of the overall yields of technological advance. Outside such strongholds of free trade like England and Denmark, economic liberalism had run into the very resistance its success had stirred up. Tariff rates were going up and protectionism was ascendant throughout the Atlantic economies.

Our own times offer no built-in resistance to the historical process of liberal success and illiberal backlash. There is no iron law that decrees the triumph of the market. Since 1989, economic liberalization has had the upper hand ideologically. American-style globalization—minimum government expenditures, fiscal discipline, free trade, mobility of shares and capital—has had behind it the success of the American model and the power of the American imperium. American triumphalism has played out against a background of retrenchment in Europe and Japan, and against a wider sense that the regulatory state has had its day and has lost.

But this kind of triumph is by its very nature short-lived. It must continue to rely on the success of the American example, and on the willingness of Pax Americana to shore up the global trading system and to keep it going. Economic ideas are fickle. No victory in that domain is irreversible, or beyond the power of contingency and performance. It is patently obvious that a good deal of globalization's and liberalization's success has derived from the long and remarkable bull run of the American economy. But as the issue of valuation has arisen once again in the American economy, and as the nasdaq has lost roughly half of its value from its heights in March 2000, the triumphalism has begun to recede, and the faith in markets has given way to a subdued anxiety of reckoning. . . .