Meanwhile, in London, Albert Grant, an indefatigable stock promoter who served as the model for the crooked financier Augustus Melmotte in Anthony Trollope’s “The Way We Live Now,” was taking advantage of the benign investment climate to issue shares in far-flung ventures of uncertain provenance, including the Lima Railways and the Lisbon Steam Tramways Company. In Germany, Bethel Henry Strousberg, whom Ahamed describes as “a mysterious Prussian railroad magnate,” built a business that employed a hundred and fifty thousand people and controlled more than fifteen hundred miles of track across Prussia, Hungary, and western Russia. In three years, some four hundred and fifty startups, many of them infrastructure-related, issued stock in Berlin, and the prices of many larger, more established companies doubled. Bank stocks were a particular favorite. Even members of the landed aristocracy, who had traditionally scorned the grubby world of finance, couldn’t resist the frenzy. “Ministers, generals, princes, and counts gamble in stocks in competition with the most cunning stock-exchange wolves,” Friedrich Engels, who was an interested observer, remarked.
It’s customary to describe this sort of speculation as a bubble, but it’s important to distinguish between unproductive bubbles, in which the objects of speculation have little or no intrinsic worth, and productive bubbles, which inflate around objects that ultimately create a great deal of lasting economic value. When the trade in exotically colored tulips collapsed in seventeenth-century Amsterdam, or when the meme-stock phenomenon went bust in 2021, nothing valuable had been created. In contrast, the railway boom and the internet stock bubble bequeathed to the economy some vital infrastructure, such as tracks, rolling stock, and fibre-optic cables.
Much has been made of the sums that A.I. labs and cloud companies such as Amazon Web Services and Microsoft Azure, which are known as hyperscalers, are spending on data centers and other A.I. infrastructure. Indeed, they are vast. According to the research firm I.D.C., worldwide outlays on servers, storage, and networking alone will be close to half a trillion dollars this year. One analysis estimates that A.I spending by the hyperscalers alone could total two per cent of U.S. G.D.P. But relative to the size of the economy the sums raised and expended on building out the railroads were even bigger. “Within three years, nearly one and a half billion dollars poured into the railroad bond market, an unprecedented commitment of capital that at its peak amounted to an extraordinary 5 percent of GNP,” Ahamed writes. “Railroad companies multiplied accordingly—by the close of 1872, more than three hundred had their securities listed on the New York Stock Exchange.”
It remains to be seen just how many A.I. startups beyond Anthropic and OpenAI go on to issue stock. But another parallel with the railroad era is already in place: the frenzy for stocks connected to A.I. has gone global. Take South Korea, home to chipmakers such as Samsung Electronics and SK Hynix. During the past twelve months, the Kospi stock index has virtually tripled, with many investors taking out margin loans to play the market or expand their positions. Last week, it emerged that this leveraged buying has proceeded so far that Korean brokerage firms have reached the regulatory limits on how much credit they can extend to their customers.
Leverage is a perennial feature of bubbles; so are warnings that they cannot last. In August, 1872, a piece in The Nation noted that out of three hundred and fifty railroad companies that filed accessible financial accounts, fewer than a hundred paid a dividend. Walter Bagehot, the editor of The Economist, warned his friends to avoid speculative investments like the ones being promoted by Grant and others. From Frankfurt, Mayer Carl von Rothschild, the head of the German arm of Europe’s largest financial house, wrote to his English partners, “The wild speculation in all the new bank shares continues to be the chief topic of conversation.” He went on to decry “all these new rubbishing schemes which absorb a good deal of money.”
