Book Review: The Great Financial Crisis of 1914

Seemingly countless articles have been written comparing 2014 to 1914—politically, economically, socially, every which way. Richard Roberts’ Saving the City: The Great Financial Crisis of 1914, published last year by Oxford University Press, has a different agenda. First, and most important, it sets out to acquaint the reader with a financial crisis that remains largely unknown and, second, it draws parallels between the events in London at the start of World War I and the most recent financial crisis.

On July 31, 1914—more than a month after the assassination of Archduke Franz Ferdinand in Sarajevo and about a week after the ultimatum from Austria to Serbia, after a few days of “the weirdest prices” as London became, in the words of The Economist, “a dumping ground for liquidation for the whole Continent of Europe”—the London Stock Exchange closed, with the NYSE following later in the day. (p. 14) London would not reopen for five months, on January 5, 1915. The NYSE resumed trading “in the full list … with restrictions” on December 15, 1914, “and on a pre-crisis basis on 1 April 1915.” (p. 223)

“The financial crisis of 1914,” Roberts writes, “was the most severe systemic crisis London has ever experienced—even more so than 1866 or 2007-2008—featuring the comprehensive breakdown of its financial markets. The 1914 crisis was not a ‘typical’ financial crisis…. There was no preceding credit expansion, speculative mania, asset bubble, or ‘Minsky moment’. However, there was a very clear ‘displacement’ moment [the Austrian ultimatum] that transformed risk perceptions of the possibility of a major European war. … As fear supplanted greed there was a universal dash for cash, preferably gold. All sellers and no buyers meant that markets quickly ceased to function.” (p. 5)

It was not only the stock and bond market that broke down but the foreign exchange market and the discount (money) market as well. “The scramble for liquidity broke the markets’ mechanisms.” (p. 22) And there was a run on the banks, although, as commentators were quick to note, not a panic. Depositors withdrew their money (asking for gold but getting notes instead) and then flocked to the Bank of England to change these notes for gold.

Roberts details, and lauds, British efforts to stem the crisis. “Remarkably,” he writes, “there were no failures among major financial institutions, casualties amounting to just a dozen London Stock Exchange firms, a minor discount house and some small savings banks. … The avoidance of significant failures was an important achievement of the authorities’ measures—which is not to overlook individual tragedies, with more than a score of bankrupt brokers and 145,000 impoverished depositors at National Penny Bank. There were at least six suicides attributable to the crisis in the City.” (p. 232)

Although there are several parallels between the crises of 1914 and 2007-2008 and how governments dealt with them, the greatest difference is that the earlier crisis did not morph into a recession. World War I provided ample economic stimulus to prevent this consequence, perhaps the only positive thing one can say about what most people today regard as a futile conflict.