WI: A Financial Panic in 1914?

[Sirius]

Economist William L. Silber argues in When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy (2008) that the United States came very close to having a major financial panic in 1914, as a consequence of the outbreak of World War I. To quote William McAdoo's wikipedia page (which paraphrases Silber- this is how I discovered him):

As head of the Department of the Treasury, McAdoo confronted a major financial crisis on the eve and at the outbreak of World War I, July - August 1914. During the last week of July, 1914, British and French investors began to liquidate their American securities holdings into U.S. currency. Many of these foreign investors then converted their dollars into gold, as was common practice in international monetary transactions at the time, in order to repatriate their holdings back to Europe. If they had done this, they would have depleted the gold backing for the dollar, possibly inducing a depression in American financial markets and in the American economy as a whole. They might then have been able to buy American goods and raw materials (for their war effort) at greatly depressed prices, which the Americans would have had to accept in order to restart the economy from a consciously (albeit inadvertently) caused depression.

McAdoo avoided this outcome by closing the New York Stock Exchange for four months, thereby preventing European creditors from liquidating their dollar-denominated assets into gold. Silber contends that the effects of McAdoo's bold actions were far reaching. Again from the wikipedia page:

McAdoo’s bold stroke, Silber writes, as a first consequence averted an immediate panic and collapse of the American financial and stock markets. But also, it laid the groundwork for an historic and decisive shift in the global balance of economic power, from Europe to the United States; a shift which occurred exactly at that time. More than this, McAdoo's actions both saved the American economy and its future allies from economic defeat in the early stages of the war.

Let's imagine that the NYSE had not been closed. How might the Panic of 1914 have played out? What specifically would the effects have been on World War One? Might this be a potential POD for a quick German victory on the western front?

 

[John Fredrick Parker]

Well, McAdoo himself gives one possible answer -- the US enters a recession, which they get out of by selling war supplies to Europe at reduced prices; at war's end, the US may or may not have fully recovered economically, but they are not dominant.

 

[Sabot Cat]

I can't discern whether this would make us get involved sooner (because we're involved to a greater extent) or later (because our economy is on less stable footing and we're less eager to disrupt it again.) Wondering if there'll be any implications for our post-colonial outlook? Maybe we let the Philippines be independent sooner?

Also: Wow, excellent work, McAdoo. We need a Good Guy McAdoo meme.

 

[sloreck]

If there is a panic like this in the USA in 1914, this does not bode well for the Entente. A significant amount of the war supplies that the Entente purchased from the USA were purchased with loans extended to Britain and France by US financial institutions. This became a larger and larger percentage of the purchases as the war went on. If the US financial system is contracting, as in this POD, then the amount of money available for loans will be limited, and furthermore loans to combatants are somewhat shaky. In a recession/depression, banks etc are going to be more picky about the level of risk they are willing to accept in making loans.

While those countries that liquidated assets to get gold would have some advantages short term, long term it will be a negative. It might do Germany some good, as they got fewer loans from the USA than the Entente, but getting gold rather than keeping their stocks etc may not make a difference.

 

[Penny for The Guy]

Germans Invest in America

If there is a panic like this in the USA in 1914, this does not bode well for the Entente. A significant amount of the war supplies that the Entente purchased from the USA were purchased with loans extended to Britain and France by US financial institutions. This became a larger and larger percentage of the purchases as the war went on. If the US financial system is contracting, as in this POD, then the amount of money available for loans will be limited, and furthermore loans to combatants are somewhat shaky. In a recession/depression, banks etc are going to be more picky about the level of risk they are willing to accept in making loans.

While those countries that liquidated assets to get gold would have some advantages short term, long term it will be a negative. It might do Germany some good, as they got fewer loans from the USA than the Entente, but getting gold rather than keeping their stocks etc may not make a difference.

OTOH, if Germany invests in the US stocks while the Brits and French demand gold, this might move the US closer to Germany. (I read somewhere that German was the next choice in US high schools after Latin before WW1.) If the US smiles on Germany, and the Brits get punitive towards us, the Yanks might have entered the war on the side of Germany.
Now, THAT would be an "interesting time".

(War propaganda, instead of going to take a slap at the Hun, we would ride off to lasso the Lion?)

 

[Sirius]

Still interested in this idea. Anyone have anything else to add?

 

[Maniakes]

Also: Wow, excellent work, McAdoo. We need a Good Guy McAdoo meme.

Don't get carried away with that. This is the same McAdoo whose 1924 run for the Presidency is remembered mostly for the enthusiastic support he received from the KKK.

 

[Deleted member 9338]

Don't get carried away with that. This is the same McAdoo whose 1924 run for the Presidency is remembered mostly for the enthusiastic support he received from the KKK.

Which was not unusual for the time. Not saying it is right, just not unusual.

There is a third way, the U.S. sits out the war as the recession pulls the country to the left. Would make for an interesting election in 1916. I wonder if Wilson would run for a second term?

 

[Simon]

If there is a panic like this in the USA in 1914, this does not bode well for the Entente. A significant amount of the war supplies that the Entente purchased from the USA were purchased with loans extended to Britain and France by US financial institutions.

At what point did this begin though? Granted I've never really studied the issue in-depth but I was under the impression that the progression, at least for the British, was that for the first several years the loans were backed by assets in the US in case of default and only became unsecured loans in the final year or so?

 

[Grey Wolf]

Wasn't it late August 1914 when Lloyd George got all he needed as Chancellor to keep the British economy functioning? I really need to read all this again.

I haven't checked when McAdoo closed the NYSE? If it somewhat before the end of August, it is possible that a butterfly ball will already be rolling and derail Lloyd George's attempts, which could have dire consequences for Britain

As a note this book appears to be a good British corollary to the one you are reading

https://books.google.co.uk/books?id...orge chancellor of the exchequer 1914&f=false

Saving the City: The Great Financial Crisis of 1914 by Richard Roberts

Best Regards
Grey Wolf

 

[Starkad]

At what point did this begin though? Granted I've never really studied the issue in-depth but I was under the impression that the progression, at least for the British, was that for the first several years the loans were backed by assets in the US in case of default and only became unsecured loans in the final year or so?

Perfectly true (Britain ran out of collateral at the end of '16 OTL), but in the middle of a major financial meltdown would US banks have the resources for war loans at all ?
Regardless of the collateral - and anyhow, how much would those assets be worth during a major crash ? If there are only sellers in the market the value is VERY low...

The UK (and more so France) may have the choice between no supplies from the US, or mortgaging their assets at very low valuations, which will burn through them much earlier than OTL

 

[CthulhuFhtagn]

McAdoo lived in New York, right? I wonder if he ever came close to being run over, because that would be one hell of a PoD.

 

[mcdo]

Oh, I actually started a thread abouy this PoD once, but then forgot the idea. Thanks for reminding me. (^^)d

It is interesting, I think, to remember that before the war the US was a net debtor nation, and quite dependent on outside financing for capital investment and business expansion. Others are right to talk about the effect on thr Entente war effort if the US is less able to provide loans, but I wonder too about the effect on public sentiment. If Britain and France sell huge chunks of their US holdings, even below market value, and then withdraw huge amounts of gold from the country, it could cause a real credit crunch that tanks the economy. How will the US public react if the common man's understanding is that Britain and France looted the US and tanked the economy in order to pay for a war that does not concern the US? Might neutrality become more poplar, or, at least, sympathy for the Entente weaken?