Chrystia Freeland - Plutocrats

Citigroup more recently devised a variation on the theme, a thesis it calls the “consumer hourglass theory.” This is the notion that, as a consequence of the division of society into the rich and the rest, a smart investment play is to buy the shares of super-luxury goods producers—the companies that sell to the plutocrats—and of deep discounters, who sell to everyone else. (As the middle class is being hollowed out, this hypothesis has it, so will be the companies that cater to it.)

So far, it’s working. Citigroup’s Hourglass Index, which includes stocks like Saks at the top end and Family Dollar at the bottom, rose by 56.5 percent between December 10, 2009, when it was launched, and September 1, 2011. By contrast, the Dow Jones Industrial Average went up just 11 percent during that period.

On February 10, 1897, seven hundred members of America’s super-elite gathered at the Waldorf Hotel for a costume ball hosted by Bradley Martin, a New York lawyer, and his wife, Cornelia. The New York Times reported that the most popular costume for women was Marie Antoinette—the choice of fifty ladies. Cornelia, a plump matron with blue eyes, a bow mouth, a generous bosom, and incipient jowls, dressed as Mary Stuart, but bested them all by wearing a necklace once owned by the French queen. Bradley came as Louis XIV—the Sun King himself. John Jacob Astor was Henry of Navarre. His mother, Caroline, was one of the Marie Antoinettes, in a gown adorned with $250,000 worth of jewels. J. P. Morgan dressed as Molière; his niece, Miss Pierpont Morgan, came as Queen Louise of Prussia.

Mark Twain had coined the term “the Gilded Age” in a novel of that name published twenty-four years earlier, but the Martin ball represented a new level of visible super-wealth even in a country that was growing used to it. According to the New York Times , the event was the “most elaborate private entertainment that has ever taken place in the metropolis.” The New York World said the Martins’ guests included eighty-six people whose total wealth was “more than most men can grasp.” According to the tabloid, a dozen guests were worth more than $10 million. Another two dozen had fortunes of $5 million. Only a handful weren’t millionaires.

The country was mesmerized by this display of money. “There is a great stir today in fashionable circles and even in public circles,” the Commercial Advertiser reported. “The cause of it all is the Bradley Martin ball, beside which the arbitration treaty, the Cuban question and the Lexow investigation seem to have become secondary matters of public interest.” Then as now, America tended to celebrate its tycoons and the economic system that created them. But even in a country that embraced capitalism, the Martin ball turned out to be a miscalculation.

It was held at a time of mass economic anxiety—in 1897, the Long Depression, which had begun in 1873 and was the most severe economic downturn the United States experienced in the nineteenth century, was just gasping to an end.

Mrs. Martin offered a trickle-down justification for her party: she announced it just three weeks beforehand, on the grounds that such a short time to prepare would compel her guests to buy their lavish outfits in New York, rather than in Paris, thus stimulating the local economy. The city’s musicians’ union agreed, arguing that spending by the plutocrats was an important source of employment for everyone else.

But public opinion more generally was unconvinced. The opprobrium—and, on the crest of the wider public anger toward the plutocracy the Martins had come to epitomize, the imposition of an income tax on the super-rich—the Martins faced as a result of the ball prompted them to flee to Great Britain, where they already owned a house in England and rented a 65,000-acre estate in Scotland.

The Bradley Martin ball was a glittering manifestation of the profound economic transformation that had been roiling the Western world over the previous hundred years. We’ve now been living with the industrial revolution for nearly two centuries. That makes it easy to lose sight of what a radical break the first gilded age was from the rest of human history. In the two hundred years following 1800, the world’s average per capita income increased more than ten times over, while the world’s population grew more than six times. This was something entirely new—as important a shift in how societies worked as the domestication of plants and animals.

If you lived through the first gilded age, you didn’t need to be an economist to understand you were alive on one of history’s hinges. In 1897, the year, as it happens, of the Bradley Martin ball, Mark Twain visited London. His trip coincided with Queen Victoria’s Diamond Jubilee, the sixtieth anniversary of her coronation.

“British history is two thousand years old,” Twain observed, “and yet in a good many ways the world has moved farther ahead since the Queen was born than it moved in all the rest of the two thousand put together.”

Angus Maddison, who died in 2010, was an economic historian and self-confessed “chiffrephile”—a lover of the numbers he believed were crucial to understanding the world. He devoted his six-decade-long career to compiling data about the transformation of the global economy over the past two thousand years—everything from ship crossings to tobacco sales. He had a genius for crunching all those numbers together to reveal big global trends.

One of his most compelling charts shows just how dramatically the world, especially western Europe and what he called “the Western offshoots”—the United States, Canada, Australia, and New Zealand—changed in the nineteenth century: in the period between AD 1 and 1000, the GDP of western Europe on average actually shrank at an annual compounded rate of 0.01 percent. People in 1000 were, on average, a little poorer than they had been a thousand years before. In the Western offshoots the economy grew by 0.05 percent. Between 1000 and 1820—more than eight centuries—the average annual compounded growth was 0.34 percent in western Europe and 0.35 percent in the Western offshoots.

Then the world changed utterly. The economy took off—between 1820 and 1998 in western Europe it grew at an average annual rate of 2.13 percent, and in the Western offshoots it surged at an average annual rate of 3.68 percent.

That historically unprecedented surge in economic prosperity was the result of the industrial revolution. Eventually, it made all of us richer than humans had ever been before—and opened up the gap between the industrialized world and the rest, which only now, with the rise of the emerging market economies two hundred years later, can we start to imagine might ever be closed.

But wealth came at a tremendous social cost. The shift from an agrarian economy to an industrial one was wrenching, breaking up communities and making hard-learned trades redundant. The apotheosis of the Bradley Martins and their friends was part of a broader economic boom, but it also coincided with the displacement and impoverishment of a significant part of the population—the ball, after all, took place during the Long Depression, an economic downturn in the United States and Europe that endured longer than the Great Depression two generations later. The industrial revolution created the plutocrats—we called them the robber barons—and the gap between them and everyone else.

The architects of the industrial revolution understood this division of society into the winners and everyone else as an inevitable consequence of the economic transformation of their age. Here is Andrew Carnegie, the Pittsburgh steel tycoon and one of the original robber barons, on the rise of his century’s 1 percent: “It is here; we cannot evade it; no substitutes for it have been found; and while the law may be sometimes hard for the individual, it is best for the race, because it insures the survival of the fittest in every department. We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment; the concentration of business, industrial and commercial, in the hands of a few; and the law of competition between these, as being not only beneficial, but essential to the future progress of the race.”