"The Forgotten Financial Panic of 1914"

"...As the looming outbreak of World War I became more and more imminent when Austria made an ultimatum to Serbia in the last week of July 1914, the resulting fear in global markets set off a massive financial panic. Investors, fearing unpaid debts, pulled out of stocks and bonds in a scramble for cash, which at this point in history meant gold.

The London Stock Exchange reacted by closing on July 31 and staying closed for five straight months. The U.S. stock exchange, which witnessed a mass dumping of securities by European investors in exchange for gold to finance the war, would also close on the same day, for about four months.

Britain declared war while on a bank holiday.

Over 50 countries experienced some form of asset depletion or bank run.

...“For six weeks during August and early September every stock exchange in the world was closed, with the exception of New Zealand, Tokyo and the Denver Colorado Mining Exchange.”

...Britain and its counterparts in Europe had established central banks, and responded to the war fear with vast infusions of liquidity through the printing press...

...With investor flight causing a rapid dissolution of the country’s gold, the backing for the dollar, Treasury Secretary William McAdoo stopped additional securities sales by closing the stock market, basically a form of capital controls...

Then he ...allowed banks to issue additional bank notes, increasing the money supply.

Ponzi finance units must increase outstanding debt 

in order to meet financial obligations.

... either financing costs rise, or income comes in below expectations,

leading to defaults on payment commitments.

Hyman Minsky

...that the United States emerged with their financial system relatively intact facilitated a shift from London to New York as the seat of global financial power, although the fact that the war never touched American soil probably also had something to do with it.

...The next 30 years saw the end of the gold standard, the collapse of global trade, a marked reduction in migration flows, the rise of protectionism and the biggest depression the world has ever seen...

...We know far less than we think we do.

...Warning signs were ignored, with disastrous consequences.

...The question is what happens next.

Then as now, crisis measures were undertaken to forestall a near-term catastrophe, and the weakness of the overall model never contemplated.

...the Panic of 1914 was a symptom of a greater disease, of a world being dragged into the modern age.

We’re at a similar moment today, so we might want to remember and study the past."

David Dayen