Bring Back the Gilded Age – Part Two


This is the second of a two-part series on innovation, economic history, and living standards. Read part one here.

The 1950s and 1960s have often been invoked as a “Golden Age.” Nostalgia used to be fashionable among conservatives, who remembered the political stability and patriotism and respect for business and family values. Lately, it is the fashion among liberals to look back to a time of higher taxes (the top marginal tax rate was 91 percent under Eisenhower), strong unions (35 percent of the workforce was unionized in 1954, compared to 12 percent today), a lot less inequality (the top 1 percent got just over 10 percent of the income in the 1950s compared to over 20 percent today), and decent wages for the working class (wages of high school dropouts have fallen sharply since the 1970s). But nostalgic liberals and conservatives are both missing something: we were coasting.

The suburban idyll of the 1950s was the mature legacy of Henry Ford, Thomas Edison, etc. But the 1950s were not producing new Henry Fords and Thomas Edisons. Why not? What was the mid-twentieth century doing wrong that the decades before 1914, and the 1920s, were doing right? The short answer is “laissez-faire capitalism,” but it’s worth reviewing a few of the main features of the mighty capitalism of the Gilded Age.

1. Laissez-faire. Upton Sinclair’s book The Jungle was a landmark in the Progressive movement, and it provoked federal inquiries that eventually led to the establishment of the Food and Drug Administration. Sinclair wrote about misery in the immigrant working class and unsanitary practices in the Chicago meatpacking industry. Nowadays, the government intervenes to protect consumers and workers against practices like those of the Chicago meatpacking industry. Yet the Chicago meatpacking industry, by pioneering novel mass production methods, was making meat cheaper and more accessible to working-class budgets. Not only that, the “disassembly lines” developed by Chicago meatpackers provided a model for Henry Ford’s assembly line. Ford made cars, previously the preserve of the wealthy, cheap enough for the common man to afford. What looked like an abuse to a writer like Sinclair was the seed of a world-changing revolution in manufacturing whose benefits flowed down to all strata of the population. But do the ends justify the means? Wrong question. Morally, the main thing you need to know about the meatpackers is that their dealings with workers and consumers were consensual.

Another famous muckraker, Ida Tarbell, wrote a book against the elderly philanthropist, John D. Rockefeller, who had formerly run Standard Oil, the dominant player in the emerging oil industry, for aggressive monopolistic tactics. Her work helped to inspire antitrust legislation, and since then it has been considered a function of government to ensure the competitiveness of every industry. Yet it is not easy to say what harm Standard Oil’s monopolistic practices did. It helped to make the liquid fuel industry, which freed many workers from the back-breaking job of shoveling coal, and in due course fueled the automobiles that delivered breadwinners in the 1950s to and from their suburban homes.

Economist Joseph Schumpeter, a pioneer in the study of dynamic technological change, pointed out that much of the innovation that helped raise the living standards of the common man during the heyday of capitalism came from the monopolists. He also argued that the competitive threat that really mattered to most businesses was not from other companies doing the same thing, but from the innovator that might, at any time, invent a new and better way to serve the same market. The competition that matters, said Schumpeter, is not Coke vs. Pepsi, but Netflix vs. Blockbuster.

The muckrakers might have had a point then and now, but the wave of regulation and social safety nets they motivated stifle innovation. Bad working conditions, environmental hazards, and anti-competitive practices are often among the growing pains of new industries. To suppress these dark sides is to impede the emergence of new industries, and thus to slow down growth. Business has become more civilized and predictable. It has been put in a cage. Caged birds don’t fly very high.

2. The gold standard. The leading industrial countries were right to go off gold in the 1930s in the face of runaway deflation. And most people who want to bring back the gold standard want to do so for the wrong reason. It does not really matter whether currency is “backed” by something real. Whatever is accepted as money is money. Yet the gold standard in its heyday had important virtues.

Because most countries’ currencies were pegged to gold, they were pegged to each other, facilitating international trade and investment. The gold standard protected people from inflation by profligate governments, such as the hyperinflations in Weimar Germany and post-Soviet Russia that helped bring Hitler and Putin, respectively, to power. Third, the gold standard supplied long-term price stability, in contrast to today’s fiat currencies, which, once inflated, never get deflated again. It has become fashionable to blame the crisis on irresponsible “home borrowers” who put no money down on houses they couldn’t afford, but if the Federal Reserve had let the general price levels catch up with housing prices, instead of letting housing prices fall, those “home borrowers” would look very smart. If the Fed will inflate your debts away, getting indebted is smart. That may be one reason for the debt surge before 2007.

Under the gold standard, there was less long-term uncertainty about the value of money. The gold standard was broken by accelerating economic growth—the same money supply chasing more and more goods means deflation—but it was a smart solution in the Gilded Age. If we restored the gold standard today, monetary policy would be very suboptimal, but wild doubts sometimes cross my mind about whether that might be a price worth paying to curtail the mission creep of independent central banks. The Fed’s interventions during and since the 2008 crisis have probably been, on balance, somewhat helpful, yet the sheer accumulation of power in the hands of an agency that owes so little accountability to the public is worrisome.

3. Thrift. In youth, a person relies on parents, university donors, mentors, and other benefactors, but in adulthood, he ought to be self-reliant, earning a living by labor, and he ought to save. Savings can tide a person over during times of illness or unemployment, and need to suffice to support a person in old age, when he can no longer work. Maybe he deposits money in a bank, or maybe he buys corporate stocks and bonds, but one way or another, his savings are channeled into investment. Factories, ships, railroads, power plants, and new machinery are built with his money, and he has a stake in them. In time of need, or in old age, he withdraws money from the bank, or sells financial assets, to keep his standard of living higher than his income. Meanwhile, society’s stock of productive capital is being built up. The Gilded Age was an age of thrift. A torrent of British savings, in particular, poured overseas to finance investment all over the world, and investment in the United States in the 1890s was almost 30 percent of GDP.

Today, thrift has been undermined by government policy. While authors sometimes lament a “cultural shift from spending to saving,” people are probably no less oriented to the future than they ever were. Widespread college education and homeownership suggest that people are trying to plan for the future. Savings rates have fallen sharply, to under 1 percent during the last decade, but government policy rather than culture is the prime culprit. The government subsidizes student loans, and more importantly home mortgage loans, through tax breaks and through agencies like Fannie Mae and Freddie Mac. Worst of all, the Social Security program is a direct attack on the incentive to save. Social Security taxes reduce working people’s incomes today, while at the same time promising benefits to them in the future. Both the means to save and the need to save are thus reduced. Less savings means less venture capital, less R&D, less investment in equipment and structures, less progress, less future wealth.

4. Open immigration. “Give me your tired, your poor / Your huddled masses yearning to breathe free / The wretched refuse of your teeming shore / Send these, the homeless, the tempest-tossed to me / I lift my lamp beside the golden door.” The famous Statue of Liberty poem, written by Emma Lazarus in 1883, is still sometimes quoted with some patriotic feeling, but modern America is unworthy of it. Not only does the United States turn away the vast majority of applicants for immigration visas, but it especially discriminates against the poor, homeless, huddled masses whom the Statue of Liberty welcomes in the poem, in favor of the highly educated. In the Gilded Age, though, it described a reality. Not only the United States but all of the world’s leading countries kept their borders almost entirely open to immigration then, not so much out of generosity, as because the bad idea that it is somehow acceptable to exclude peaceful migrants by force from a country through a comprehensive passport regime had not yet darkened the mind of man.

Considering that the United States was absorbing so many low-skill immigrants at that time, the statistics probably understate the superiority of U.S. economic performance in the Gilded Age, since productivity statistics do not even capture the jump in productivity that occurs when a person from an impoverished country in eastern and or southern Europe joined the population of the much wealthier United States. But immigrants also contributed to U.S. growth in several ways. First, then as now, some of the leading entrepreneurs, like Andrew Carnegie, and inventors, like Nikola Tesla, were immigrants. Nowadays, many advocate discrimination in favor of “high-skill” immigrants, but Carnegie was not “high-skill” when he arrived: He was born in a poor weaver’s cottage in Scotland. Immigrants also supplied a mass workforce and a mass market for factory-produced goods. A great theme of nineteenth-century capitalism was the drive for cheapness, as goods once enjoyed by the rich became affordable for the masses. Today, the world’s poor are kept out of America, so it’s harder for American capitalists to make fortunes by serving them.

In the two decades after 1914, internationalist nineteenth-century liberalism was routed on all fronts. The Russian Revolution of 1917 brought into the world a monstrous new order that crushed markets and slew tens of millions in its grisly 70-year global career. Mussolini and Hitler, the National Socialist (let the etymology of the word “Nazi” never be forgotten), were as contemptuous of the bourgeoisie and as enamored of state power as were Lenin and Stalin. U.S. Isolationists in the 1920s put a stop to free immigration and trade and helped precipitate the Great Depression, then social democracy swept through Europe and the United States.  Sky-high taxes and populism immobilized the leaders of the capitalist economies. The Roosevelt administration tried to micromanage the economy through the NRA, and later Britain’s postwar Labor government nationalized key industries. By the 1950s, there were no fortunes being made, no new tycoons, only a staid managerial capitalism, albeit one stable enough to raise living standards for a couple of decades by completing the implementation of the technological legacy of the Gilded Age.

Joseph Schumpeter, the great economic thinker of dynamic technological change, wrote a sad book in 1942 with these two famous lines:

“Can capitalism survive? No, I do not think it can.”

“Can socialism work? Of course it can.”

Schumpeter was no socialist. He celebrated the dazzling achievements of Gilded Age capitalism. He stressed that they arose precisely from the laissez-faire free-market system. He disliked socialism, doubting whether it was compatible with democracy and freedom. The U.S. victory in the Cold War makes Schumpeter’s pessimism look foolish. But notice the sense in which he was right. Yes, something that calls itself “capitalism” has survived, but it is not the mighty capitalism of the Gilded Age; it is a regulated, heavily taxed capitalism, caged within national borders, bled by the welfare state. No, the Soviet Union did not prove that communism doesn’t work. It proved that it does work, albeit badly. And the social democratic West has proved that semi-socialism works, a bit less badly. But it is not as innovative, not as conducive to progress, as nineteenth-century liberalism. It has not led to disaster. It has led to the Great Stagnation.

A solution suggests itself. Bring back the Gilded Age. Reverse the absurd overextension of the commerce clause and restore constitutional limits on Congress’s power to manage the economy. Close the FDA and the EPA: Let the environment and food safety be a matter for the states and the courts. Privatize Social Security, so that people save for their own retirements and their savings fund entrepreneurial ventures, not politicians’ profligacy. Leave it to churches, private charities, and occasionally local government to care for the needy. Above all, open the borders to immigration.

Yes, we would have to be a bit less squeamish. Like Americans of the Gilded Age, we would have to tolerate more poverty in the streets, more crowded immigrant slums, perhaps more pollution. Why should we do that, even if it does accelerate technological change? Two big reasons. First, for the benefit of posterity. We enjoy the high standards of living we do because people a hundred years ago ran the world on the basis of laissez-faire capitalism. We can enrich all the generations of future humanity if we do the same.

Second, to help the poor. Some imagine that the welfare state is morally meritorious because it helps the poor. The truth is that the poorest people, in their billions, live far beyond the reach of Medicaid, TANF, the EITC, and the rest of the welfare apparatus. There are two main ways we can help the neediest members of mankind. First, we can let them move to America, where they tend to see their earnings rise tenfold. Second, we can accelerate our own economic growth as much as we can, creating demand for poor countries’ exports, and even more, creating new technologies that they can use.



Nathan Smith is a professor of economics and finance at Fresno Pacific University and the author of Principles of a Free Society and Complexity, Competition, and Growth. He blogs at Open Borders: The Case (

comments powered by Disqus


* indicates required


November 2014

It's been 40 years since F. A. Hayek received his Nobel Prize. His insights, particularly on the distribution of knowledge and the impossibility of economic planning, remain hugely important today. In this issue, we look back on the influence of his work. Max Borders and Craig Biddle debate whether liberty must be defended from one absolute foundation, further reflections on Scottish secession, and how technology is already changing our world for the better--including how robots, despite the unease they cause, will only accelerate this process.
Download Free PDF