Better off in a Stocking
- Saving the City: The Great Financial Crisis of 1914 by Richard Roberts
Oxford, 320 pp, £20.00, November 2013, ISBN 978 0 19 964654 8
Shortly after ten o’clock on the morning of Friday, 31 July 1914, less than an hour before trading was scheduled to begin, the London Stock Exchange closed its doors to business for the first time since its establishment in 1801. Crowds of brokers gathered in the narrow streets outside the building, many already wearing straw hats and holiday clothes instead of the traditional silk hat. The crisis in Europe had worsened dramatically over the previous week – Austria-Hungary had begun its bombardment of Belgrade just two days earlier – but few had expected that fear of war would bring business in the City to a complete halt. As news spread of the markets’ sudden loss of nerve, anxious queues began to form outside the Bank of England. It was the Friday before the busiest bank holiday of the year, so a full-scale run was averted: many people had already left London. Nonetheless, this was a crisis on an unprecedented scale. By 1914 the Stock Exchange was trading a third of all securities issued anywhere in the world. Its closure made clear that the situation in Europe was far worse than many had realised. ‘We all went away for our holidays,’ the financial journalist Hartley Withers recalled, ‘to come back to a new strange world, in which many of the old lights that guided us had been put out and the red glare of war had taken their place.’ By 4 August, Britain would not only be at war with Germany, but at the centre of the first truly global financial crisis.
That crisis is almost completely forgotten today, overshadowed by the war that followed on its heels. But it was the worst ever systemic collapse of the British financial system and the first to be transmitted nearly instantaneously across the globe: to East Asia, Latin America, Africa and the Pacific. It also marked the beginning of the end of Britain’s global economic hegemony: after 1914, London was gradually overtaken by New York as financial capital of the world.
The immediate trigger for the crisis was the aggressive ultimatum Austria-Hungary issued to Serbia on the evening of 23 July, which was widely seen as a pretext for invasion. Convinced that war had become possible, Europeans raced to turn their investments into cash, and the panicked selling of securities caused prices to collapse. Between 20 and 30 July, the price of shares in major businesses fell dramatically: Canadian Pacific Railway and Rio Tinto Copper dropped 15 and 24 per cent respectively. With everyone looking to sell, and almost no one to buy, the market in securities evaporated. On Sunday, 26 July, the bourses in Vienna and Budapest decided to close, followed by Brussels and Oslo, and then the Paris Coulisse market (the unofficial stock exchange) the day after. Word of the panic was transmitted by telegraph across the world: on Tuesday, stock exchanges in Portugal and Spain were shut as fist fights broke out on the streets of Barcelona. By Wednesday, the contagion had spread to Amsterdam, Berlin, St Petersburg, Montreal and Rome, and by Thursday, to Shanghai and Cairo. By Friday, the only two major exchanges left open, New York and London, were closed too. (Smaller holdouts – Johannesburg, Sydney and Melbourne – followed suit the following Monday.) Fears of financial collapse led to bank runs in Argentina, Peru, the Dutch East Indies and Hong Kong. None of the countries that had tied their fates to the newly emergent global financial system escaped unscathed.
The City of London was at the heart of this system, having overtaken Amsterdam as the world’s chief financial centre in the early decades of the 19th century. This had been made possible by Britain’s growing commercial and industrial strength and by the reach of its empire, and London’s position grew even stronger later in the century as innovations in transport and communications, particularly telegraphy, allowed for the rapid worldwide transmission of prices and orders. As the world became smaller, London grew in importance as the hub of its commercial network; payments for much of the world’s trade were funnelled through financial institutions in the City. By the eve of the First World War, London boasted the largest market in securities, capitalised at more than £11 billion in government bonds and shares in railway, mining and infrastructure companies from around the world.
The full text of this book review is only available to subscribers of the London Review of Books.