Despite its unrivalled severity, the financial crisis of 1914 is virtually unknown. The reason is straightforward – it is simply absent not only from general texts but also from most of the specialist literature. Several journalistic accounts appeared in 1915, but ever since it has been overlooked – until now, the 100th anniversary.
Why? Well, presumably because the financial crisis was overshadowed by the diplomatic crisis and then the military conflict. The life and death 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. Moreover, the crisis was effectively managed and, as it turned out, there was no headline-making casualty. There was no Barings or Lehman Brothers.
Nevertheless, it was the most severe systemic financial crisis that London has ever experienced. And not just London. Some 50 countries around the world had financial crises with runs on banks and stock market slumps. It was the most extensive and acute global financial crisis ever.
Breakdown
The countdown to war began with the assassination of Austrian Archduke Franz Ferdinand in Sarajevo on 28 June. The markets took the murder in their stride. After all, there had been Balkan crises in each of the previous three summers and all had been defused.
Market perceptions of the risk of war were transformed by Austria’s belligerent ultimatum to Serbia on the evening of Thursday 23 July. This was the ‘Minsky moment’ when greed tuned to fear – collateral damage from the diplomatic crisis before a shot had been fired. There was an immediate international scramble for liquidity – meaning the dumping of assets and the withdrawal of credit. Continental bourses crashed and there were runs on savings banks.
In London, the foreign exchange and money markets broke down early in the week beginning Monday 27 July. Then on Friday 31 July, the London Stock Exchange, for the first time in its 117-year history, shut its doors. Displaced brokers and jobbers milled around in Throgmorton Street like “swarming ants around the destroyed heap”. (See main photo above)
The English joint-stock banks, which included some of the world’s largest banks, became increasingly concerned about their vulnerability to a run on deposits. Their assets were becoming more and more illiquid, while their liabilities were mostly demand deposits. From Wednesday 29 July, the banks rationed payment to depositors of gold sovereigns, £1 gold coins that were the key circulating medium, and paid out instead in Bank of England £5 notes, the smallest denomination banknote. Since a £5 note was equivalent to around £400 in today’s money, it was useless for everyday transactions, so recipients made their way to the Bank of England to change their notes for sovereigns, as they were free to do under the classical gold standard. This resulted in long queues that presented the appearance of a run on the Bank. A Financial Times reporter found “…a queue of people, some 200 to 250 strong, resignedly awaiting their turn to obtain access to the magical counter where cash was being poured forth in a steady stream…”.“Gold, gold, gold, gold, Bright and yellow; hard and cold.”
This was undoubtedly what was wanted, and when a red-cloaked official shouted ironically, “Silver! Anybody want silver? Plenty of silver going cheap”, a dead silence followed and on many faces was to be observed a sardonic smile. No, cheap silver was not wanted, and the outflow of the precious yellow metal continued…
A Financial News journalist reported witnessing an evening newspaper vendor shouting “Run on the Bank. Run on the Bank” to the crowd of onlookers outside the Bank of England. He summoned a policeman, who arrested the newsboy.
