Libraries of books have been written about the causes and effects of the two worst financial collapses since 1900: The Great Depression of the 1930s and The Great Recession of 2008. Yet it is much harder to find a book about the Financial Crisis of 1914, one in which British bankers tried to suspend capital flows in order to rapidly win World War I. Daniel McEwan explains.
A 1922 US gold certificate. The ‘gold standard’ system was key to the international economy at the outbreak of World War I.
The crisis ranks as “an extraordinary and unique moment in global economic history” that saw over 50 nations experience bank runs and asset crashes. For six nail-biting weeks during August and early September, as Europe’s great powers made their march of folly into war, stock exchanges world-wide were closed until further notice, including the exchange in London - closed for the first time ever! Just down the street, the Bank of England was coping with a run on gold sovereigns. And then, as suddenly as it had started, it was over. Overshadowed by news of the war’s first bloody battles, the crisis made few headlines. “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.” The cause of the crisis remained a banking industry whodunit for nearly a century.
The story of how a roomful of the best and brightest bankers in The City, as London’s cloistered financial district is called, gambled on their own country’s future by purposely crashing the world economic system... “is simply absent not only from general texts but also from most of the specialist literature,” laments Richard Roberts, a Professor of Contemporary History at King’s College London. That these financiers triggered; “one of the top five all-time worst international banking crises makes the silence surrounding this episode all the more mystifying.”
Stopping capital flows
In 2013, Roberts attempted to unravel the mystery of the events of those six weeks in his book Saving The City: The Great Financial Crisis of 1914. The book reveals; “...there was no downfall of a major financial institution [in Britain]. The reason was massive and unprecedented state intervention that looked like wartime controls rather than financial crisis resolution.” In other words, a government bailout.
Nicholas Lambert at the Foreign Policy Research Institute in Philadelphia picked through the entrails of the crisis and divined a more sinister interpretation of its events. Like Roberts, he claims the true story of the 1914 crisis has been “airbrushed out of the official history.” In his book, Planning Armageddon, Lambert exposes a conspiracy of such breathtakingly scope that critics would later denounce it as “an act of madness” and “economic suicide”. Call it “Britzkrieg”.
In 1914, The City was the beating heart of the global economy. British financiers controlled sixty to eighty per cent of every war-critical sector of the global economy, giving it “an ability to manipulate the economic system to a degree unparalleled even today,” says Lambert. Beguiled by this power, the bankers decided to break Germany’s economic ability to prosecute the war militarily, hopefully before the shooting even started!
There is no question that everyone around the table clearly understood what they were planning would cause catastrophic collateral damage to their own domestic economy! Even worse, it would hurt the economies of neutral countries; countries Britain would need as allies in the event of war -especially America. Yet still they did it, based solely on their collective assumption that as the world’s leading export nation, Germany would break first and in just a few months! All Britain had to do was endure the pain until then and presto, the war would be won! So confident were these moneymen of their plan’s success, they single-handedly touted the “home-by-Christmas” myth that would lure throngs of their fellow citizens into army recruiting stations, many never to be home by any Christmas.
Admiralty
Perhaps the bankers’ confidence was bolstered by their accomplice in this secret endeavor, the British admiralty. Theirs was the largest and most powerful blue water fleet in the world and it had practically invented the naval blockade. During its conflict with France from 1754-63, British warships had sealed off their major ports, slowly strangling the French economy. They had done it again with equal effect against Napoleon’s own attempts to blockade Britain with his Continental System. Inspired by this track record, the admirals were only too keen to do their bit to hasten Germany’s downfall, which explains why the Royal Navy moved so quickly once the shooting did start, blockading Germany and seizing/sinking a quarter of its merchant shipping in just three months!
At first, the bankers’ ruthless plan worked brilliantly. By stopping the flow of capital, they effectively locked down the world economic system. Factories and mines closed. Shipping lanes emptied but Germany did not break. It had its own plan and the Kaiser’s legions rolled across over Belgium into France, only narrowly halted just eighty miles from Paris. The war the bankers’ thought they were preventing was on. By then, their plan had made them new and powerful enemies at home and abroad. The political blowback was thunderous. Exactly as they had anticipated, the first and loudest complaints were lodged by English industrialists being hammered by the crisis just as much as Germany. And they made their displeasure known to their friends in high places who were equally appalled by what the bankers were doing.
End of the scheme
“It turned out that while the Admiralty was perfectly willing to countenance ending the economic world as they knew it, other parts of the British government were far less enthusiastic about that prospect,” observes Mark Stout, Senior Editor at War on the Rocks.
They weren’t alone. American manufacturers quickly joined the chorus of protests. Their factories were producing over a quarter of the consumer goods purchased by Europeans and the lockdown was crimping their style – and profits. After some dark warnings from the White House, the British government demanded the financiers abandon their ruinous program, no questions asked.
The war consumed the crisis but it remains an example of economic brinkmanship no nation has ever been foolish enough to repeat.
What do you think of the scheme? Let us know below.
Now read Daniel’s article on Russia’s 4 great resets here.
