100 years ago today: the 1914 financial crisis
The aftermath of Franz Ferdinand
by Richard Roberts
Thu 24 Jul 2014
The diplomatic crisis that culminated in the outbreak of the first world war in summer 1914 is well known. But there was also another crisis – on world financial markets. Stock markets crashed, international remittances collapsed, banks suffered runs, credit evaporated, and small change vanished.
The upheavals began with the murder of Austrian Archduke Franz Ferdinand in Sarajevo on 28 June 1914. The financial markets took that in their stride. But Austria’s ultimatum to Serbia late on 23 July intensified perceptions of the risk of war. Greed turned to fear, triggering a universal scramble for cash.
From 24 July to 4 August, the world’s stock exchanges shut their doors. An avalanche of selling sent prices crashing, threatening brokers and banks. The closures began at the Vienna and Budapest stock exchanges and radiated outwards. By 30 July all the Continental exchanges were shut, and Canada’s too. On Friday 31 July, the London Stock Exchange, the world’s foremost securities market, closed. New York followed.
As the news travelled down the international telegraph cables, there was global contagion. Saturday 1 August saw closures in much of Latin America, South Africa and India. And then Germany declared war on Russia and France. On Monday 3 August the dominoes fell in China, Australia, Brazil and Japan.
By the middle of the first week of August only six of the world’s 120 stock exchanges were operating.
Austria’s 23 July ultimatum triggered runs on banks across continental Europe and beyond. In France, there were heavy runs at the Caisses d’Epargne. In Germany 20% of deposits were withdrawn. Malta, Turkey and Egypt saw bank runs and suspensions, as did Canada, where hoarding of gold coin was rife.
In Asia, bank runs and coin hoarding in Hong Kong and Singapore led to bans on the export of specie. Australia, India and Japan saw consternation among depositors. Runs were widespread in South America. Governments responded by declaring a bank holiday that shut the banks, generally for a week. It was extended in Argentina because the president died of a heart attack. Overall, 23 of the 29 leading financial powers experienced bank runs, setting off severe limits on deposit withdrawals.
Central banks were besieged by holders of bank notes seeking to change them for gold and silver coin, allowable under the gold standard. In Brussels, 10,000 people besieged Belgium’s National Bank. There were long queues at the central banks in London, Berlin, Paris and Amsterdam.
Central banks provided massive liquidity to commercial banks as the lender of last resort, providing funds against good collateral. The doctrine dictated that liberal lending should be accompanied by a penalty interest rate. By 5 August the 10 leading European central banks had all increased their rate. The Bank of England led the charge with rises from 3% to 10%.
Coin hoarding was widespread, making cash transactions impossible. The solution was the issue of small denomination currency notes as substitutes. Many countries introduced currency notes or expanded an existing issue. This meant an increase in the fiduciary issue, violating the rules of the gold standard.
By the end of the first week of August, among the 35 countries which had been on the gold or gold exchange standard before the war, 29 had suspended convertibility of notes into specie-based coins. Overall, some 40 countries introduced payments moratoria.
As the crisis abated, it became possible to relax, and then lift, emergency measures. Interest rates were soon lowered. By spring 1915, most of the world’s exchanges were open again. Moratoria were imposed for a limited period, but were often renewed. By summer 1915, most were moderated or gone.
There was no significant bank failure in 1914. Massive central bank discounting relieved liquidity pressures. Moratoria froze liabilities, protecting banks against runs. The only substantial instance of state financial support for the banking system was in Britain, where unprecedented interventions resulted in taxpayers effectively recapitalising the banks to the tune of 9% of GDP. But no government anywhere acquired an ownership stake.
Richard Roberts is a member of the OMFIF Advisory Board, professor at King’s College London and author of Saving the City: The Great Financial Crisis of 1914 (Oxford University Press, 2014) and co-author The Lion Wakes: A Modern History of HSBC (forthcoming 2015).
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