12 December 1914 – Wall Street

American markets shrugged off the assassination of the Austrian Archduke, reckoning he was unpopular at home and would not be missed. The Austrian ultimatum therefore came as an unwelcome surprise to the New York Stock Exchange, which Treasury Secretary McAdoo closed in order to prevent a rush on gold reserves. Even a century on, the first months of the Great War remain the longest trading outage in American financial history. Today, with a new Federal Reserve system in place to backstop the banking system, new credit issues thawing the deep freeze of bond markets in Paris and London, and the destruction or blockade of Germany’s commerce raiders enabling a recovery in shipping insurance rates, Wall Street reopens for trading in expectation of a big market correction.

At the closing bell, the Dow Jones Industrial Average has taken its largest single-day loss in eighteen years of reporting. It might have been much worse, and the DJIA will recover, thanks in no small part to the European war effort paying off in exports; the greatest bank bailout in British history has solved the financial problem, but not the material one. Indeed, all combatant nations are experiencing production shortages. They will need horses, coal and iron, cordite, foodstuffs…this shopping list will require credit, which means profit, which means American banks.

The world of global finance has never been the same since this moment. In the course of the war, the center of the world’s capital markets will cross the Atlantic, where it remains today. Just as there are many different reactions to the war itself, there are many different reactions to this development in human monetary history. Most of them can already be found in the streets of New York City.

The Women's Peace Parade of August 29, 1914

The Women’s Peace Parade of August 29, 1914. By 1918, hemlines would be higher and women would not wear as many layers of clothing in a hot, crowded Summer street. It is the definitive beginning of the modern era

The war is understandably a popular topic of conversation in New York right now, though the war itself is understandably not so popular. Some German-Americans leave to enlist in the Kaiser’s ranks, while others oppose war but sympathize with their countrymen, while yet others resent the Kaiser and associate the ‘old country’ with reactionary authoritarianism. National sympathies thus do not divide neatly along clear national lines for anyone.

Nor can we draw clear, continuing political lines in the radicals of the day. Socialism and anarchism foment in the streets, producing more cacophony than unity. On the first of May this year, Russian-born anarchist Alexander Berkman, who has already served fourteen years in prison for trying to murder businessman Henry Clay Frick with a pistol and a dagger, spoke to a large crowd in Union Square. There were more rallies in June and August. He opposes the war, and its debts, and its commerce; he opposes a return to normal on Wall Street. In time, he will oppose America’s entry into the war, oppose the draft, and finally serve more time in prison for this activism before being deported. Yet he soon becomes disillusioned by Bolshevism, ending his days in Europe as an opponent of Soviet socialism.

Women’s suffrage is still a fringe cause, so the sight of women parading down Fifth Avenue in mourning black, or white dresses with black armbands, stands out among the noisome reactions of the war’s early weeks in New York. In a remarkable act of diversity, the peace march included a large contingent of black women, an affinity group of Indian women, a faction of Chinese women, and carloads of elderly women with small children.

Yet even among suffragettes, there are differences of opinion about the war now. Carrie Chapman Catt, great campaigner for the Nineteenth Amendment, remarks of the occasion: “If anybody thinks that a thousand, or a million, women marching through New York or talking about peace in the abstract will have any effect on the situation in Europe, it is because they don’t know the situation in Europe.”

Actor Douglass Fairbanks selling war bonds in a 1918 Wall Street rally

Actor Douglass Fairbanks selling war bonds in a 1918 Wall Street rally. Opinion on Wall Street closely tracks public opinion

In the long run, German policy, especially unrestricted U-boat warfare, antagonizes Wall Street as much as any sector of the now-neutral nation. The bear market of 1916-17, when the NYSE loses forty percent of its value in eleven months, is driven in part by the spike in shipping insurance rates at the height of the U-boat menace. It does not end until after America declares war and openly fights to clear the sea lanes.

But Wall Street is never enthusiastic about German expansionism. From their landmark Wall Street office, the company of the late J.P. Morgan sees plenty of profit in the extension of credit to French banks, but does not extend the same financial hand to the Kaiser. By October of 1916, forty percent of British war expenditure will take place in the United States, whereas trade with Germany is by then negligible because of the British blockade. Between now and the Spring of 1917, American bankers will loan eighty-five times as much to the allies of the triple entente as they lend to the Central Powers. German bond issues are consistently outperformed by Russian ones, even in the year of the Bolshevik Revolution, because they are seen as more risky.

Yet there are limits to this narrative. For example, a comparison of prewar lending shows that Britain and France already enjoyed a 60-1 loan ratio over Germany when the fighting began. The Reichsbank and Wilhelm’s Finance Minister were already worried about their nation’s lack of “financial armament” before the war. Germany simply isn’t in the habit of borrowing the way London and Paris already do in 1914.

In a classic case of market response, Wall Street is less concerned with who is right or wrong than the soundness of the investment — and Germany is surrounded by enemies, having failed to knock France out of the war to avoid a war on two fronts. It is also a matter of priorities, for instead of foreign borrowing, Germany uses paper currency, sells silver reserves, and disestablishes the gold standard in all but name.

The modern era of financial systems turning away from ‘hard money,’ and towards fiat currency, has begun. There are many reactions to this moment in history, including a mythology that places blame for the Great War on bankers, and greed, and the excesses of capitalism; another reaction is a conspiratorial obsession with the gold standard, blaming ‘big government’ and the liberal-industrial state for the Great War that helped create them. These narratives get the truth of the matter precisely backwards. Wall Street did not spark this war, but rather has responded to it, the same as everyone else in the city of New York.

  • Gregory Robert Zieren

    J.P. Morgan died in 1913. It’s his son, J.P. Morgan, Jr. who heads up the bank for the next 20-odd years. Yes, the Morgans were more sympathetic to Britain and France, and had long-established relationships in the markets for American securities, especially RR securities. But there are a couple other factors at work. Firms like Speyer and Belmont were founded by German-Jewish immigrants, and so might be expected to be more favorable to the Second Reich and its attempts to raise money on Wall Street. But even they were deterred by the institutional obstacles of trying to arrange international payments in wartime. And I would put a slightly different interpretation on the ease of British loan capability as opposed to the German. Britain had deep pockets of investments around the world that could, and eventually would, be liquidated to pay their debts. As a relative newcomer Germany’s investment pockets weren’t as deep nor as extensive. My guess is that no one on the German side gave this a moment’s notice because no one, or few at least, expected the kind of long war where finances would be key to keeping armies in the field.

    • OsborneInk

      You are of course correct about Morgan and I have fixed the error.

      Your second point is also correct, but I am waiting to address it in more detail later with a post focused on Germany. To preview, I think it’s a very revealing example of German war planning, or rather the lack thereof, being driven by unrealistic expectations of a short and victorious war. On the one hand, Krupp had just finished building the guns necessary to destroy Belgian forts, Tirpitz had only just reached his goal of constructing a surface fleet 2/3rds the size of Britain’s, the Kaiser’s global radio network had just been completed…these are all ‘just in time’ elements of German war planning, evidence that Wilhelm felt the time was now or never. On the other hand, Germany had not stored up the necessary diplomatic or financial clout to keep Britain out of the war, or to sustain a long war. I say that understanding this gap is critical to understanding how and why the Kaiser went to war. His regime issued a steady stream of propaganda accusing their enemies of being jealous of their prosperity, which IMO suggests that Germany carried a chip on their shoulder about the lack of national financial clout.

      • Gregory Robert Zieren

        Germany’s clout in world markets was roughly 20 years old, not enough time to become the dominant player in trade and investment or to depose the king of the hill(UK). I agree that Wilhelm and Tirpitz certainly were aware of this and resented the superiority it gave Britain, a superiority nothing could change except long term German economic progress to achieve parity. There’s a certain paradox here, it seems to me. Take out the Russians now (1914) because German superiority will never be so great again, or wait until Germany has clearly surpassed Britain some time in the future. You can’t have it both ways, so the Germans brought down on their shoulders the worst of both worlds, a two-front war and the avowed enmity of Britain and soon the US.

        • OsborneInk

          Yes! The chief ‘sins’ of the Kaiser were envy and contempt.

          It shouldn’t surprise us that a similar material calculus took place when a different German leadership decided to attack Russia before Soviet production growth altered that balance of power. It’s the central crisis of two world wars. In this blog, I’ve focused on the loss of Germany’s global empire and the development of Lebensraum-thinking to point out these continuing crises, which IMO explain Germany during the first half of the 20th Century in Europe. Competing answers to this German crisis after those two wars explain much of the second half of 20th Century European history. Even today, the German-Russian power crisis is central to understanding events in Europe.

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