Will The AI Boom End Like The Railroad Crash Of 1873? — ft. Liaquat Ahamed

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Exchanges on the economic impact of AI. Exchanges on gold, energy, and the commodity markets. For the sharpest analysis on finance, business, and the economy, count on Exchanges, the Goldman Sachs podcast. Listen now.

Listen to me.

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Markets are bigger than us. What you have here is a structural change in the world distribution.

Liaquat Ahamed (1:29)

Cash is trash.

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Stocks look pretty attractive. Something's going to break.

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Forget about it. Welcome to Prof G Markets.

Another AI datacenter operator just shelved its IPO. That news, along with a growing number of delayed datacenter listings, is raising questions about investor appetite for these infrastructure assets. And it's also fueling an even bigger question, which is, is the datacenter boom actually a bubble?

As investors try to make sense of this moment, many are turning to history for comparisons, including the railroad bubble of the 1800s. Ben Carlson called it one of the closest historical analogies to this moment. Derek Thompson published a newsletter titled, AI Could Be the Railroad of the 21st Century. And a recent Yahoo Finance article warned, don't overlook how this moment is also creeping up on the railroad bust in the late 1800s. But how closely does today's AI build out actually resemble the railroad boom? What happened in the years leading up to the crash? And are we seeing the same warning signs today?

To dig into that question, we are bringing in Pulitzer Prize-winning author and financial historian who recently wrote a book all about the railroad bubble. Satya Nadella called it the book to read right now, and noted all of us are reading this. So here is our conversation with Liaquat Ahamed, author of 1873, The Rothschilds, The First Great Depression and The Making of the Modern World. Liaquat, thank you so much for joining us. You wrote that the year 1873 marked the first, you said, truly significant global financial crisis. Many have called it the panic of 1873 Let's just rewind a little bit. Let's start with the events that led to this crash. How did this boom begin and how did it turn into a bubble?

Liaquat Ahamed (3:22)

Let's turn the clock back to 1870 The world has been through a 20-year boom. And it's a boom that is the first era of globalization. GDP doubled in those 20 years. Trade went up five times. And fueling the boom was a new technology, the railroads. And that was a truly global phenomenon. There was a railroad boom in Europe. There was a railroad boom in the US. And there was a railroad boom actually around the world, in Argentina, right around the world. And making this boom possible was an expansion in borrowing through the bond market. The bond market had been invented essentially to finance governments in the early 19th century. And from around 1850, it shifted to becoming the primary financing vehicle for railroads and most of the money was borrowed. So, the $3 billion a year that was eventually went into railroads, three quarters of that was borrowed money. So, not equities. So, that's the lead up.

A giant cloud appeared in 1871, and that was war.

The most surprising war in the 19th century started by the French Emperor, Napoleon III, who was a sort of, how shall I put it? He was a celebrity with no coherent ideology, who came to power through the ballot box, and then used his power to make himself emperor. So, I don't want you to draw too many analogies to today, but he was a character. And he launched the most disastrous war in French history when he attacked his neighbor, Prussia, thinking that this is the way that he would dominate Europe. Instead, he was defeated on the battlefield.