The unknown financial crisis of 1914
By Richard Roberts
The mounting diplomatic crisis in the last week of July 1914 triggered a major financial crisis in London, the world’s foremost international centre, and around the world. In fact, it was the City’s gravest-ever financial crisis featuring a comprehensive breakdown of its financial markets. But it is virtually unknown. The reason is straightforward: it is simply absent not only from general texts but also from most of the specialist literature.
The financial markets took the assassination of Archduke Franz Ferdinand of Austria in Sarajevo on 28 June in their stride. After all, the diplomatic crises of the previous three summers had been defused. But Austria’s presentation of an ultimatum to Serbia on Thursday 23 July transformed perceptions of the risk of a major European war. This “Minsky moment” triggered a scramble for cash. Continental stock exchanges were deluged with selling orders and banks besieged by depositors. They closed their doors. Governments mobilised for war and imposed drastic controls to safeguard their banking system and national finances.
The week beginning Monday 27 July saw the breakdown of the City’s foreign exchange and discount markets, and culminated in the closure of the London Stock Exchange on Friday 31 July. It stayed shut for five months. Long queues formed at the Bank of England of people changing Bank notes for gold sovereigns. It looked like a run on the Bank was underway. And it was believed that a run on the banks had begun.There had been no pre-war planning for such a crisis. Time was bought by the declaration of an unprecedented four-day Bank Holiday. During the break, at 11 pm on Tuesday 4 August, Britain went to war. The initial emergency containment measures were massive infusions of liquidity by the central bank plus a hike in the discount rate from 3 per cent to 10 per cent, following established crisis management doctrine. Then came novel policy measures: a “general moratorium” on contracted payments (which allowed banks to refuse to pay out deposits), and the introduction of hastily printed small denomination currency notes issued by the Treasury (not the Bank of England). When the banks reopened on Friday 7 August there was no run. The crisis had been contained.
Had worst fears been realised – mass failures among City financial firms and the banks requiring state bail-outs — the crisis might have assumed the magnitude and prominence of a financial catastrophe. But that did not happen in Britain. Hence there was no downfall of a major financial institution or prominent individual depriving the crisis of an iconic victim. The reason was massive and unprecedented state intervention. But that looked like wartime controls rather than financial crisis resolution.
The financial crisis of 1914 was also a global crisis. More than 50 countries or colonies experienced bank runs and asset crashes. For six weeks during August and early September every stock exchange in the world was closed, with the exception of New Zealand, Tokyo and the Denver Colorado Mining Exchange. The financial crisis of 1914 was an extraordinary and unique moment in global economic history.
Reinhardt and Rogoff’s quantitative study of financial crises identifies 10 countries as experiencing a financial crisis in 1914 (their list is significantly incomplete). The other major international banking crises they identify in the period 1800-2008 are: 1907, 8 countries; 1931, 20 countries; 1997-2001, 18 countries in Asia and Latin America; and 2007-08. So the financial crisis of 1914 ranks as one of the top five international episodes of banking crisis, making its obscurity all the more mystifying.
As regards qualitative surveys of financial crises, the best-selling text, Kindleberger and Aliber, Manias, Panics and Crashes: A History of Financial Crises makes no mention of it. Presumably because it was not a “proper” financial crisis in the sense of Kindleberger’s “Anatomy of a Typical Crisis” model with his series of build-up stages. Anna Schwartz does mention it, but ranks it as one of her “pseudo-crises”.
In its day, however, the financial crisis of 1914 was a very real and alarming episode as reflected in the press and in official and bank records. Several participants left crisis diaries that provide vivid testament. It also features in some general diaries and in contemporary novels. Keynes, who was marginally involved, published three journal articles on it in 1914. And three journalistic accounts appeared in 1915. But thereafter very little. The reason, presumably, is because the financial crisis was overshadowed by the diplomatic crisis and then the military conflict, of which it was collateral damage. Plainly, the existential struggle was more important and dramatic than the financial disintegration. Every political, social, cultural, and economic dimension of life was in crisis in summer 1914: there was nothing especially notable about the financial sector being in trouble.
Richard Roberts is Professor of Contemporary History at the Institute of Contemporary British History at King’s College London. He has held fellowships at Downing College, Cambridge, Princeton University, and the Bank of England. He specialises in financial history and is author of many publications in this field including histories of City investment bank Schroders (1992) and consortium bank Orion (2001). His contemporary studies Wall Street (2002) and The City (2008) are published by The Economist. His new book is Saving the City: The Great Financial Crisis of 1914.
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Image credits: Portrait of David Lloyd George as Chancellor of the Exchequer (1911), by Christopher Williams. Public domain via Wikimedia Commons.