Max Harris, “Full Faith and Credit: The United States’ Response to the Panic of 1914,”
Tempus, 12.2 (2011), 1-22.
1
Full Faith and Credit:
The United States’ Response to the Panic of 1914
Max Harris
J. W. Abercrombie, safe in the comforts of his Alabama home, fretted over the agricultural
ramifications of the European war. Cotton was king in Alabama, but the hostilities on
that distant continent threatened the fibrous monarch’s rule at home. With the first roar
of artillery, international trade had effectively halted, leaving American farmers with
too much cotton and too few buyers. In an August 28, 1914, “Letter to the Editor” in
The Montgomery Advertiser, Abercrombie estimated that there were “about five million
bales of surplus or disused cotton.” “We see the price of cotton steadily declining,” he
wrote. “We are in a deplorable, helpless condition.”1 The situation was indeed perilous,
as the price was less than eight cents per pound; the previous year, farmers had received
around thirteen cents.2 Charities, churches, and businesses sought to alleviate the regional
hardship. Hundreds of miles from Montgomery, the Sumter Clothing Company in South
Carolina advertised, “Until October 15th, We Will Buy from Each of our Customers That
Raise Cotton, ONE BALE AT TEN CENTS PER POUND.”3 The offer was enticing.
Unfortunately, the company could help only so much; the human suffering from the shock
to the market was too great and the communities affected were too many.
Abercrombie’s story of economic distress was one among a countless number from
that summer. From the fields of Alabama to the trading desks of New York, the business of
the nation was in turmoil. For the cotton problem was but one manifestation of a financial
crisis that endangered the entire economy and financial system: the Panic of 1914. Stock
exchanges were closed, foreign exchange markets frozen, overseas obligations due. Just
as Alabama farmers faced an uncompassionate market, New York traders confronted the
“Letters to the Editor,” The Montgomery Advertiser, 30 August 1914.
Ibid. and “Situation of Cotton Market in the Southern States,” Wall Street Journal, 14 September 1914.
In fact, many considered eight cents the lower bound on the cost of production; thus, the farmers were not
even breaking even.
3
Advertisement placed by the Sumter Clothing Company, The Watchman and Southron, 19 September
1914.
1
2
2
Harris
unapologetic arithmetic of the gold standard. On the same day as the Sumter company’s
advertisement, the New York Times reported that bankers were creating an unprecedented
$100,000,000 gold fund, an “emergency action to provide for a transfer of credits and the
payment of obligations abroad promptly in gold.”4 The hope was that this measure, along
with others, would return the financial system to health. The fear was that the war-induced
panic would plunge the economy into depression. The question was whether Americans
would insist on restructuring the international financial complex that brought the nation to
the precipice.
The Panic of 1914 stands alone among pre-Federal Reserve financial crises for the
swift, unprecedented steps taken by the government, bankers, and brokers.5 The New York
Stock Exchange (NYSE) shut its doors for four and one-half months, the Treasury injected
hundreds of millions of dollars of emergency currency into the economy, the government
entered the business of war insurance, and bankers pooled their resources together to refund
New York City’s enormous debt. In large part due to these actions, the Panic of 1914 did
not join the ignominious ranks of the Crisis of 1873 and the Great Contraction of 1929. Yet
the myriad responses are noteworthy for more than the end result: they reveal a peculiar
aspect of America’s conception of international commerce. Because the United States was
so heavily indebted to Europe, financial tremors from abroad came ashore and threatened
the foundation of the nation’s financial system. Columnists, bankers, and officials did not
hesitate to blame European warmongering for the crisis. At the same time, when evaluating
steps to be taken, the calculus was one of ensuring the nation’s credit with respect to the
Old World. Preventing the outright suspension of payments, securing the transportation of
crops, shipping as much gold as need be: the policies pursued sought to staunch the bleeding
and preserve the longstanding seasonality of credit. Tracing the narrative of the panic, it
becomes clear that the United States did not seek to upend the structure of dependency that
threatened economic ruin but rather sought to solidify its role in the status quo.
The literature on the Panic of 1914 is rather limited, largely confined by the crisis’
role in relation to other events. Barry Eichengreen covers the panic in Golden Fetters, but
the larger purpose of investigating the gold standard during the Great Depression subsumes
the Panic.6 Similarly, Milton Friedman and Anna Schwartz study the technical aspects of
4
“Banks’ Gold Fund to be $100,000,000,” New York Times, 19 September 1914.
In fact, the Panic of 1914 is best understood as the last crisis without the Federal Reserve and the first
with it. The central Board came into existence during the summer, but the district banks did not form until
late in the year. The nuances of the Federal Reserve’s involvement are not of present concern; for more
information, see Federal Reserve Board, First Annual Report of the Federal Reserve Board For the Period
Ending December 31, 1914 (Washington: Government Printing Office, 1915).
6
Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (New
York: Oxford University Press, 1992), 68-71.
5
Full Faith and Credit
3
the financial trouble, though their goal is to understand its part in the larger monetary
history of the nation.7 Precisely because 1914 did not become 1873 or 1929, the panic does
not receive as much scholarly attention. Nonetheless, some historians have studied the
harrowing months on their own merit. Most important, William Silber’s When Washington
Shut Down Wall Street recounts the events, the economics, and the responses in the summer
and fall of 1914. He argues that Treasury Secretary William Gibbs McAdoo’s bold actions
not only stemmed the crisis but also brought about the “birth of America as a financial
superpower.”8 The United States, in his opinion, transformed the crisis into the proverbial
opportunity, emerging all the more wealthy and powerful.
Given Silber’s characterization, it is beneficial to address his interpretation
before proceeding. The crux of his argument revolves around America’s transition from
international debtor to creditor as well as Wall Street’s rise to financial supremacy with
the end of the war.9 These two rather incontrovertible facts appear to belie any notion of
preserving the existing system. Yet to understand the motivation and reasoning behind the
forceful responses, one must avoid falling into that most devious of logical traps, post hoc
ergo propter hoc. Just because the war marked the transformation of America’s financial
role does not mean that the actions of 1914 were responsible. More important, even granting
such a causal relationship, the underlying motivations need not have been, and in fact
were not, aimed at effecting this financial revolution. Backward induction is a dangerous
technique in historical analysis, and what matters most in understanding contemporary
rationales are the voices of contemporaries, not the interpretations of posterity.
Time to Shut It Down
On Thursday, July 30, 1914, the NYSE experienced a six percent loss, following
a decline of three and a half percent two days earlier.10 According to the New York Times,
Wall Street remained surprisingly calm, absorbing the losses and refusing to enact any
emergency measures.11 Yet the next morning, minutes before the 10 a.m. bell was to signal
the opening of the market, the NYSE’s Board of Governors voted to suspend trading. At
once, the financial capital of the nation erupted, not in anger but in ecstasy. As the New York
Times reported, “the announcement that the Governors had voted to close provoked a wild
outburst of cheering. Men who had feared that the next hour would bring disaster to their
Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960
(Princeton: Princeton University Press, 1963), 172.
8
William Silber, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the
Origins of America’s Monetary Supremacy (Princeton: Princeton University Press, 2007), 172.
9
Ibid., 172.
10
Ibid., 11.
11
“Financial Markets,” New York Times, 31 July 1914.
7
4
Harris
firms ran about embracing one another, and the general feeling was one of great relief.”12
The decision to shut the doors, having as precedent actions taken only in 1873 and 1901,
reflected the severity of the situation.13 The same day, most of the exchanges around the
country followed New York’s lead.14 But why had the NYSE closed?
Newspaper accounts declared that brokers throughout the city received enormous
sell orders from overseas investors on July 30, often with the instructions to dispose of
securities at any price.15 Uncertainty exists, however, with respect to who precisely made
the decision. Henry Noble, President of the NYSE, wrote an account of the panic in
1915. Not only does the work not mention the intrusion of the government in the Board’s
deliberations, but Noble also positively asserted the Board’s independence: “It is a fact
of profound importance, and one that never should be forgotten by stock brokers or by
the public, that the Exchange closed itself on its own responsibility and without either
assistance or compulsion from any outside influence.”16 On the other hand, Silber portrays
the closing of the exchange as the first of McAdoo’s many bold actions, the manifestation
of decisiveness.17 In truth, McAdoo’s memoirs, which Silber adduces as his only concrete
proof, paint a more nuanced, deliberative picture. The secretary “hesitated,” eschewed “any
part of the responsibility,” and gave his opinion reluctantly.18 The doubt thus engendered
challenges the master narrative of McAdoo as brilliant reformer of the financial system,
and more important, questions the nation’s desire to reform at all.
While the historical record is hazy on the persons behind the decision, the rationale
is clearer. At its base, the vote on the morning of July 31 was one of expediency. As Noble
concluded, the stock exchange “was closed to gain time.”19 W. C. Van Antwerp, Noble’s
colleague, agreed, if in slightly more grim terms: “Literally standing to be shot at, with the
certainty of a panic unparalleled in its consequences to American business and industry, the
“Governors Close Stock Exchange,” New York Times, 1 August 1914.
“Editorial Comment Approves Closing of Stock Exchange,” Wall Street Journal, 3 August 1914. The
former occasion, in the midst of a devastating panic, lasted ten days in late September; the latter, after a
brief speculative bubble, was a one-day holiday in May to allow clerical workers to catch up on paperwork.
14
“Governors Close Stock Exchange,” New York Times, 1 August 1914.
15
Ibid.
16
H. G. S. Noble, The New York Stock Exchange in the Crisis of 1914 (Garden City, NY: The Country Life
Press, 1915), 12.
17
And the basis for Silber’s catchy title. Silber, 12.
18
William G. McAdoo, Crowded Years (Boston: Houghton Mifflin Company, 1931), 290. According to
the memoirs, J. P. Morgan, Jr. solicited McAdoo and relayed the secretary’s opinion. McAdoo may have
downplayed his role when writing his memoirs. Nonetheless, the fact that the memoirs are Silber’s only
direct evidence of McAdoo’s role casts doubt on Silber’s characterization of this decision in particular and
McAdoo’s visionary role in general.
19
Noble, 65.
12
13
Full Faith and Credit
5
Governors decided, at fifteen minutes before ten, to close the Exchange.”20 This decision
is at first glance ambiguous: was it an unprecedented move to realign the international
financial system or just an attempt to survive the crisis? On the one hand, freezing assets
for an indefinite period of time would not have a positive impact on the nation’s credit, the
defining attribute of a debtor. On the other hand, New York was simply following the rest
of the world when it closed its exchange, joining cities from Berlin to London to Toronto.
Moreover, if the Exchange did not close, the shock to the nation’s credit if more drastic
action became necessary could have been insuperable. In short, as A. Barton Hepburn,
President of Chase National Bank, declared in a statement, “With exchanges closed all over
the world, there was no course open to the New York Stock Exchange but to follow suit.”21
The criticism against shutting the doors, moreover, suggests that the measure was
more about expediency than a master scheme to overturn the international financial system.
Noble relayed the disapproval of some bankers in the aftermath, who felt that the situation
“was an opportunity thrown away to make New York the financial center of the world.”22
It seems reasonable to conclude that if any action aimed toward reshaping the international
financial construct, it would have been to proceed with trading as a show of the financial
system’s strength. The less provocative, more pragmatic approach won in the end. Despite
the disagreement, what proponents and opponents alike did not and could not know was
that four and one-half months would pass before the doors reopened.23 The first chapter of
the panic complete, the nagging question was where to pin the blame.
It’s All Europe’s Fault
The first six months of 1914 were in essence a march toward war, hindered but
never blocked by bouts of denial. As late as July 28, the New York Times declared, “[i]t
is almost inconceivable that all Europe should deliberately go to war … To suggest a war
involving all Europe is enough to chill the markets, even though opinion on all of them, as
certainly as here, is that general warfare will be averted.”24 Austria had just declared war on
Serbia; three days later, Germany declared war on Russia, followed by the chain reaction
that engulfed Europe in four years of conflagration. All the while that “chill,” first a breeze
W. C. Van Antwerp, “The War and Wall Street: An Address Delivered before the City Club at Rochester,
N.Y., Nov. 14, 1914,” 14. Accessed via http://openlibrary.org/works/OL145627W/The_war_and_Wall_
street.
21
Quoted in “Hepburn on Situation,” Wall Street Journal, 1 August 1914.
22
Noble, 13.
23
The history of the closure of the stock exchange is fascinating, as rogue brokers sought to create an exchange on New Street and the Committee of Five in charge of overseeing the closure slowly and carefully
relaxed restrictions. Unfortunately, this study cannot delve into the details. See Noble for an account of the
closure.
24
“Financial Markets,” New York Times, 28 July 1914.
20
6
Harris
that brought with it declining prices, turned frigid and froze stock exchanges the world over,
with one after another shutting its doors. According to the financial press, all the pressure
then concentrated and headed toward the United States. “Very naturally conditions such as
these [closing of stock exchanges] led to heavy selling of American stocks by Europe,” the
New York Times reported. “The fact is that Europe found here a better market in which to
liquidate securities than it could find anywhere else.”25
The reason European investors were able to liquidate at all was America’s
indebtedness to the continent, as reflected by the sheer amount of securities owned by
Europeans. Data for early twentieth-century financial markets are orders of magnitude less
precise than today, but the best estimates, according to Silber, are that “[f]oreign investors
owned more than 20 percent of American railroad securities, the largest group of securities
traded on the New York Stock Exchange.”26 As John J. Arnold of First National Bank in
Chicago later explained, the flipside of such indebtedness was that, “if at any time the
European investors are in immediate need of funds, vast quantities of American securities
are likely to be thrown upon the open market.”27 Such a “need of funds” arose, for of the
many events a society experiences, few require more resources than imminent war. The
industrial powers of Europe had been building their military strength for years, portending
massive fighting costs, and the dreadful uncertainty associated with hostilities increased
the preference for hard money. Thus, the spark of mass liquidation ignited into a fire sale,
as investors sold securities, thereby lowering the prices of those securities and instigating
further sales. As a man involved in financial affairs declared at the time, “[t]he sheriff, with
a writ, is on the door-step.”28
Yet America’s indebtedness to Europe was much more complicated and acute than
mere foreign holdings of railroad securities. The borrowing had both a secular and seasonal
aspect. With respect to the secular characteristic, the United States was a net debtor,
meaning it borrowed more than it lent. Most estimates put America about $6,000,000,000
in the red at the outbreak of war.29 This vast sum did not accumulate quickly; it took years.
America had gone on a spending spree after the Civil War in its relentless drive toward
industrialization. To finance the railroads and factories, businesses availed themselves of
the lower rates abroad. After all, America was a developing nation, replete with profitable
opportunities that attracted European investors. And this attribute was to be embraced. In
Ibid.
Silber, 1.
27
John J. Arnold, “The American Gold Fund of 1914,” The Journal of Political Economy, 23, no. 7
(1915): 697.
28
Antwerp, 7.
29
Arnold, 697.
25
26
Full Faith and Credit
7
1866, Walter Bagehot, famed editor of The Economist and explicator of markets, wrote,
“America ought to be the greatest borrower in the world. She ought not to fear foreign debt,
but covet it.”30 Clearly, America heeded Bagehot’s advice, to the tune of $6,000,000,000.
Notwithstanding this aggregate situation, the indebtedness also fluctuated
seasonally, a result of the still heavily agricultural make-up of the country. America as a
whole would borrow during the winter and summer seasons to finance imports and then
export their harvests during the spring and fall. The cruel caprice of history led to the panic
erupting in the late summer, just as seasonal borrowing was at its peak; such timing would
make the foreign exchange situation exceptionally hazardous. As Barry Eichengreen, an
economic historian of the gold standard, summarizes,
“[t]he shock to the dollar exchange rate was powerful not only because the United
States was a net foreign debtor but also because the crisis occurred in summer. The
American trade balance typically was in heavy surplus following the harvest and in
deficit other times of the year. Ordinarily Britain extended credit over the summer in
anticipation of autumnal surpluses. But with the scramble for liquidity, trade credit
evaporated, creating a massive excess demand for foreign currency.”31
In short, America’s debt connected the nation inextricably to Europe, and its pattern of
exports and imports made the panic’s date of utmost importance.
Understanding the mechanisms of propagation, the question remained as to who
was at fault. If the impending war and resultant liquidation led to the panic, the blame,
according to Americans, lay with Europe. Article after article, report after report: the
unanimous opinion was that but for Europe, the markets were fine. In an almost ritualistic
chant, men of importance cited the “demoralization” of markets due to European saberrattling as well as the “sound” conditions of the American economy. On August 1, the New
York Times noted “the great weight of the war scare which has completely demoralized
the stock markets and money markets of Europe with its reflex action on our own.”32
Treasury Secretary McAdoo similarly wrote in his Annual Report that “[t]he outbreak of
the European war precipitated many grave problems,” among them, “[t]he demoralization
of foreign exchanges and credits.”33
In contrast, financiers viewed the domestic economy as steady, growing controllably
and bubble free. The New York Times commented on August 3 that “nothing for which
Quoted in Don C. Barrett, The Greenbacks and Resumption of Specie Payments, 1862-1879 (Cambridge, MA: Harvard University Press, 1931), 158.
31
Eichengreen, 69.
32
“Financial Markets,” New York Times, 1 August 1914.
33
United States Treasury, Annual Report of the Secretary of the Treasury on the State of the Finances for
the Fiscal Year Ended June 30 1914 (Washington: Government Printing Office, 1914), 1 and 4.
30
8
Harris
America is responsible has brought about the situation with which our bankers, our
security holders, and our business men have to deal,” and “very seldom, if ever, in the
past have underlying conditions been sounder in this country than they have lately been.”34
Likewise, the Committee of the New York Clearing House declared that “the business and
financial condition of New York and the entire country was sound, but that the situation in
Europe justified extreme prudence and self-control on the part of the United States.”35 In
yet another expression of self-congratulation, the eminent economist O. M. W. Sprague of
Harvard observed, in his 1915 article, “the essential soundness of business conditions” as
the panic unfolded.36
No doubt a good portion of this characterization was defensive in nature, as the
nation had experienced a somewhat humiliating financial crisis in 1907. America had been
a speculator’s paradise, and, by extension, a risky place to hold assets during the periodic
puncturing of bubbles. With liquidity nowhere to be found, many banks simply suspended
withdrawals in 1907, forbidding depositors from receiving cash for accounts that were
supposed to be retrievable on demand. Businesses across the country resorted to a variety
of means for payroll, including a streetcar company in St. Louis that paid its employees
with fare tickets.37 Important steps were taken in response to the 1907 panic, especially the
enactment of the Aldrich-Vreeland Act, which created the National Monetary Commission
to investigate the establishment of a central bank and allowed for emergency currency to be
used when banks needed liquidity. In fact, five hundred million dollars of currency quickly
appeared in 1908, freshly printed and ready to support the banking system when necessary.
Yet memory of the panic and the engendered humiliation remained vivid. The New York
Times conceded in late July 1914, “Europe’s impatience with our embarrassment [Panic of
1907] was excusable, our currency crises being so unnecessary.”38 Nonetheless, the New
York Times was clear in pinpointing the new guilty party, as “the shoe” was now “on the
other foot.” Thus, the widespread belief in America was that Europe and Europe alone bore
responsibility for the financial distress.
One should not infer from this blame game, however, that Americans were not
cognizant of the role of their indebtedness. W. C. Van Antwerp of the NYSE understood
the role of the “stupendous debt.”39 As he told the Rochester Club in November 1914,
“The Financial Situation in America and Europe,” New York Times, 3 August 1914.
Quoted in “Bankers Arrange for More Currency,” New York Times, 1 August 1914.
36
O. M. W. Sprague, “The Crisis of 1914 in the United States,” The American Economic Review, 5(3),
(1915): 499.
37
Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect
Storm (Hoboken, NJ: John Wiley & Sons), 136.
38
“Searching the Foundations,” New York Times, 31 July 1914.
39
Antwerp, 6.
34
35
Full Faith and Credit
9
“[w]e had always known that we owed it [the debt], but Europe had never exercised its
power to collect it, finding it more profitable to buy our good securities than to withdraw
our gold. Like spendthrifts, we as a nation had thus continued to pile up our obligations
with careless indifference to consequences.”40 But even then, several months removed
from the worst of the panic, Antwerp noted the “long-smouldering [sic] jealousies, race
hatreds, and distrust among nations” that riddled Europe, erupted in war, and precipitated
the panic.41 Antwerp’s superior and President of the NYSE, Henry Noble, also understood
that America’s debt was a crucial variable in the equation. America “was in debt to Europe,”
and “Europe was sure to enforce the immediate payment of that debt in order to put herself
in funds to prosecute this greatest of all wars … there was to be an unexpected run on Uncle
Sam’s Bank and the Stock Exchange was the paying teller’s window through which the
money was to be drawn out.”42 The root cause, however, was still Europe, which instigated
the panic with its thirst for bloodshed.43
In this way, the interconnected economy per se was not to blame. Both continents on
either side of the Atlantic were on equal footing, in Americans’ minds; it just so happened
that the western one was in debt to the eastern one. As the New York Times equitably
observed, “the world is united financially, commercially, and industrially as it never was
united before. The closeness of the relations existing among nations makes the concern
of one more than it has ever been in the past the concern of all.”44 But the London-based
The Economist viewed the circumstances as a bit more one-sided. The August 15th edition
detailed “the dependence of the United States upon Europe”:
“…the events of the past two weeks have demonstrated that the United States, as
never before, is being closely involved in European concerns, and is assimilating
its economic system to that of Europe, a situation which did not exist as long as this
country was a self-sufficing economic unit, exporting little except raw products and
importing little except luxuries.”45
Whatever the precise relationship between America and Europe, Wall Street financiers and
government officials felt that the ultimate culpability lay with the Europeans for disrupting
international commerce, not with Americans for contracting foreign debt. Having agreed
upon Europe’s guilt, the nation braced for the worst of the crisis.
40
41
42
43
44
45
Ibid., 6-7.
Ibid., 2-3.
Noble, 65.
Ibid., 88.
“The Financial Situation in America and Europe,” New York Times, 3 August 1914.
“How the European Panic Came to New York,” The Economist, 15 August 1914.
10
Harris
Gold, Sterling, Dollars: Which Backs What Again?
In order to understand the impending turn for the worse in the crisis and America’s
perception of the international financial structure, it is helpful to review the sometimes
brilliant, sometimes absurd system of the classical gold standard. Up to the outbreak of
war, the world operated more or less in a gold standard system. Most Western countries
tied their currencies to the metal, and in this way, connected their currencies to one another.
The system did not require Americans to carry around bars of gold to conduct everyday
business; bank notes and gold certificates lowered the cost of transactions, but underlying
their widespread acceptance was the ability to exchange them for gold at banks and the
Treasury.46
Yet with respect to international exchange, gold quite often set sail to balance the
ledgers. And it was not just a couple of bags of bullion, marked with the telltale dollar
sign, stowed somewhere deep in a ship. In June 1914, the United States exported, on net,
$44 million of gold, followed by $30 million the following month.47 The reason for this
enormous physical transfer of gold is that foreign exchange, while theoretically simple,
was exceedingly complex in practice. Given Britain’s role as the preeminent country in
the international economy, the most important exchange rate for the United States was
that between dollars and pounds. An ounce of gold in the United States, as fixed by the
Treasury, was $20.6718, while an ounce of gold in Britain, as determined by the Bank of
England, was £4.247727. Division results in the mint parity exchange rate of $4.8665 per
pound sterling. As Silber explains, “A tourist going to London who needed pounds (sterling)
could take $20.6718, buy an ounce of gold at the U.S. Treasury, and turn it into £4.247727
at the Bank of England. Therefore, it would take $4.8665 (equal to $20.6718 divided by
£4.247727) to buy one British pound.”48 But the effective exchange rate was never quite
equal to the mint exchange rate because a tourist (or for that matter a businessman) rarely
went about converting currencies in such a time consuming and costly manner. Rather,
foreign exchange dealers would provide the service, often receiving pounds from exporters
and selling them to importers, all the while earning a tidy profit. The virtues of competition
usually squeezed profits to the point where the effective exchange rate was very close to
the mint exchange rate: during the first half of 1914, sterling remained between $4.85 and
$4.89.49 The key element propelling the invisible hand was arbitrage. If there was a shortage
of pounds in the United States, perhaps because exports were low, the exchange rate would
46
47
48
49
For an introduction to the classical gold standard, see Eichengreen, 29-66.
Silber, 39.
Ibid., 28.
Ibid., 91.
Full Faith and Credit
11
rise above parity, as it did to $4.8815 on July 23.50 Just as a tourist could theoretically
exchange gold for pounds, so too the arbitrageur could ship gold to England in exchange
for sterling. Of course, shipping was not free; after adding transportation, insurance, and
other costs, the arbitrage would be profitable once a pound cost more than around $4.88, the
gold export point.51 Any price above the export point and dealers would profit by shipping
gold, exchanging for pounds, and then selling pounds at the market price. This economic
check normally kept the exchange rate from deviating wildly from mint parity, but it was
predicated on the ability to ship gold. Yet as war descended, the exchange rate soared to
preposterous levels, reaching $4.98 on July 30 and then $6.00 on July 31.52
With this comprehension of foreign exchange, the problems of American
indebtedness acquire greater meaning. Europeans had liquidated a significant share of
their holdings of American assets, depreciating the dollar as they demanded payment in
sterling (among other currencies). But even after the NYSE closed, the problems did not
disappear. Not only did the proceeds of the liquidated shares still need to find their way
to the continent, but regular debt payments also had to work through the increasingly
erratic exchange mechanism. For example, the city of New York owed British and French
investors approximately $80,000,000 between September and January in short-term notes,
a frightening sum when the foreign exchange markets were malfunctioning.53 It seemed
like gold would have to be shipped, but that path was fraught with hazards as well, the
most important being that there was not enough of the metal to satisfy everybody’s claims
simultaneously. The more gold that crossed the Atlantic, the less gold backing up the system;
bank runs might ensue, suspension of payments might follow, and the United States might
lapse into its old, 1907 ways.
The state of affairs appeared as if it had reached the abyss: large sums of gold would
have to be shipped to live up to the nation’s obligations. Unfortunately, the war insisted
on adding a further degree of complication. Transatlantic shipping nearly stopped. The
principal reasons were the militarization of the sea, the inability to use foreign vessels, the
skyrocketing cost of insurance, and the nonfunctioning foreign exchange markets. Gold
arbitrage screeched to a halt. The New York Times reported as early as July 29 that “[s]o
great was the demoralization abroad that all thoughts of arbitrage trading were given up.
The foreign exchange market soared to a point that almost prohibited the purchase of credit
abroad, and brokers did not dare attempt to realize a profit on the difference between prices
50
51
52
53
Ibid., 29.
Ibid., 31.
Ibid., 36.
Sprague, 529.
12
Harris
here and in London.”54 The situation dramatically came to life through the journey of the
Kronprinzessin Cecilie. The ocean-liner left New York with $10,600,000 of gold in late
July for Europe; on August 4, it inexplicably showed up in Bar Harbor, Maine, with the
gold (and passengers) still on board. Voyage across the Atlantic had been too dangerous, as
warships pursued the ship across the seas.55 Now, even the least worst solution of shipping
gold was no longer feasible. The Wall Street Journal commented several days after the
Kronprinzessin’s surprising return, “[n]ever before has such a chaotic condition existed in
the foreign exchange market. Business is absolutely at a standstill. And the worst aspect of
the situation is that there is no prospect of an early adjustment.”56 No wonder then that the
exchange market literally vanished during the first week of August: without the possibility
for the transport of gold, it could not function.57 As W. C. Van Antwerp observed in his
speech to the Rochester Club, “[t]hat persons could be found, hat in hand, begging for the
privilege of paying $7.00 for $4.86 shows how completely our machinery of exchange had
broken down.”58
Lastly, just as the perilous waters precluded the shipment of metal, so too they
prevented the export of grain, cotton, and all the rest of America’s output. James A. Farrell
of the National Foreign Trade Council summarized (the lack of) trading conditions in the
beginning of August: “our foreign commerce is paralyzed … The congestion of grains,
foodstuffs and manufactures at American seaports, the multiplication of interest, storage
charges and insurance creates a burden which reacts upon all industry, particularly the
agricultural community.”59 America had long relied on foreign vessels to transport its
output; with the outbreak of war, many of the ships returned to their countries of origin.
The full extent of the damage to trade, especially the cotton trade, would become clear
only in September. The Fort Worth Star-Telegram reported grim statistics on the 14th of
the month: exports of cotton in August amounted to 21,210 bales, as compared to 257,172
bales the previous August. The absurdity of the situation was such that “more cotton was
imported during August than was exported by the United States which last year supplied
almost 61 per cent of the world’s cotton.”60 Such were the dire straits within which the
American economy had to navigate.
54
55
56
57
58
59
60
“War Sends Stocks to New Low Levels,” New York Times, 29 July 1914.
“Kronprinzessin Cecilie Returns with $10,600,000 Gold,” Wall Street Journal, 5 August 1914.
“How to Finance Our Export Trade, The Question,” Wall Street Journal, 7 August 1914.
Silber, 37.
Antwerp, 7.
Quoted in “Foreign Trade Council,” Wall Street Journal, 4 August 1914.
“Big Reduction is Shown in Export Cotton,” Fort Worth Star-Telegram, 14 September 1914.
Full Faith and Credit
13
All Hands on Deck
The stock market was closed, the banks were grasping for liquidity, the seas were
off limit to vessels, but within just a few months, McAdoo was able to declare victory. In
his December Annual Report, the secretary triumphantly asserted, “the danger has been
avoided. Confidence has been restored and specie payments have been maintained in the
face of the world… There is every reason why the country should look to the future with
confidence so far as its trade, commerce, and industry are concerned.”61 Look forward
with confidence it did; less than a week after the report, the NYSE reopened. The glaring
question, however, is how the situation changed so abruptly for the better. Numerous
responses effected the recovery, yet while many were unprecedented, investigation reveals
that the end goal was anything but: it was to ensure that the United States could trade
its normal goods at its normal time to maintain its normal credit. The actions were not a
stratagem to zip ahead from borrower to creditor but rather an attempt to remain the honest
debtor. A revolution this was not.
The first problem to tackle was the situation of the banks. Fearful that the closing
of the exchanges would induce a widespread bank run as customers intuited Wall Street’s
demise, William Woodward of Hanover National Bank asked McAdoo for help on Sunday,
August 2. The concern was so grave that Woodward asked the secretary to come to New
York, for, as McAdoo later wrote, the bank executive felt it “necessary for all members of
the [Clearing House] committee to be at their desks in New York on Monday morning.”62
They had to prepare for the worst; the secretary, in the minds of the bankers, apparently
could afford to be away from his office. A meeting on Sunday night at the Vanderbilt Hotel
resolved McAdoo to get Congress to amend the currency provisions of the Aldrich-Vreeland
Act so as to allow all national banks to obtain emergency notes.63 The necessary legislation
obtained within the week, the process of injecting what would become $370,000,000 of
emergency currency into the liquidity-deprived system began.64 Such notes, issued in lieu
of gold and gold certificates to depositors, would lessen the probability of a cash shortage
and put a check on the withdrawal and hoarding of gold.
No doubt the priority was to preclude a run; in this regard, Europe was not of
first-order importance. Given the many motives present, it would be the height of folly
to declare definitively that the action was taken exclusively for one or another reason. So
many felt the measure so necessary that few supporters took the time to articulate their
United States Treasury, 1. Payment in specie refers to gold convertibility.
McAdoo, 290.
63
Ibid., 290-1. There were technical limitations to which banks could receive emergency currency, based
mostly on having issued sufficient notes in the past. Congress removed these restrictions.
64
Ibid., 292.
61
62
14
Harris
rationales. However, there was some dissent. The New York Times editorialized on August
2, when there was suspicion that the secretary would employ the Aldrich-Vreeland Act, that
“[t]he issue of a half billion of emergency notes in order to expel a like amount of
gold for the purposes of a wicked war is grand – or grandiose – but is neither virtue
nor business. It is not the function of the United States to sustain specie payments
throughout the world. It is the function of the United States so far as it disapproves
war in general, and this war in particular, to refuse to allow it to be waged at our cost
and risk.”65
There was therefore a well-defined position opposed to emergency currency precisely
because the issuance would do nothing to alter the relationship between Europe and the
United States but rather ensure the health of the connection. In the absence of concrete
evidence and combined with the looming memory of 1907, it is fair to surmise that the
government invoked the Aldrich-Vreeland Act at least partly to maintain credit and
respectability with its continental creditor and surely not to revamp its relationship.
Yet banks constituted a mere fraction of the problem: the foreign exchange markets
continued to mock any limited solution. To alleviate the situation, the financial community
quite unanimously relied on exporting the country out of the mess. As the season slowly
changed from summer to fall, the usual shipment of produce would result in pounds
chasing dollars rather than dollars aimlessly searching for pounds. Already in late July,
when sterling began appreciating rapidly, the New York Times noted, “the belief prevails
that conditions will soon cause the exchanges to move sharply in favor of this market. The
export of grain is counted on to contribute largely to this end.”66 The newspaper further
declared, on August 4,
“[t]here is no thought of our failing to meet all obligations promptly … We have
large obligations to meet abroad in the shape of maturing finance bills… All of these
must be provided for, but they can only be provided for through the channels of
trade. Europe will need foodstuffs and will undoubtedly take means to obtain them,
and much will be bought in this market.”67
Likewise, McAdoo believed the shipment of output essential to reversing the foreign
exchange situation.68 European warfare had placed America on the precipice of economic
devastation as the continent sought to cash in its innumerable IOUs, yet Americans felt
the solution lay simply in maintaining the normal trade flows. Get the wheat crop, the
cotton crop, and manufactures across the ocean, and the rest would take care of itself.
65
66
67
68
“The Worldwide Suspension,” New York Times, 2 August 1914.
“Financial Markets,” New York Times, 25 July 1914.
“Financial Markets,” New York Times, 4 August 1914.
United States Treasury, 5.
Full Faith and Credit
15
The problem, as already described, was that trade no longer meant anything; the Atlantic
was no longer just large but literally uncrossable. Belligerents threatened to requisition
contraband; barring confiscation, there were not enough ships to transport goods, and a
vessel obtained, insurance premiums were so high as to preclude profitability.69
In order to ensure the traditional trade patterns, the government enacted several
radical measures. On August 14, McAdoo held a conference to address the problems of
foreign shipping. The attendees agreed “that the three pressing questions were the restoration
of the market for foreign bills of exchange, the provision of means for transporting grain,
cotton, and other merchandise abroad, and war-risk insurance.”70 The key was to translate
these broad aims into legislation.
The Shipping Registry Act, signed in mid August, allowed the government to register
foreign vessels and adorn them with the American flag. In this way, the stranded ships,
most notably from Germany, no longer remained anchored but once again became hulls to
transport goods.71 Related to the Shipping Registry Act was the much more controversial
Shipping Bill, whereby the federal government would obtain control of the stranded ships
in an effort to build a merchant marine. Spearheaded by McAdoo, the bill evoked outrage
as conservatives denounced it as socialistic, and it did not pass Congress until the panic had
long since passed itself.72
Moreover, Congress authorized the War Risk Insurance Bureau in early September.
The bill declared:
“foreign commerce of the United States is now greatly impeded and endangered
through the absence of adequate facilities for the insurance of American vessels and
their cargoes against the risks of war … it is deemed necessary and expedient that the
United States shall temporarily provide for the export shipping trade of the United
States adequate facilities for the insurance of its commerce against the risks of war.”73
Within two weeks, the Bureau had issued $3,220,000 of war risk insurance on ships, with
more than $3,500,000 worth of insurance still pending.74 The government had entered the
insurance business.
The contraband issue was less a problem of finance and more a concern of diplomacy; continued proclamations of neutrality and negotiations slowly eased the situation. See, for example, “Atlantic Clear by
British Fleet,” New York Times, 13 August 1914 and Silber, 146.
70
United States Treasury, 5-6.
71
“New Shipping Law Signed by Wilson,” New York Times, 19 August 1914.
72
McAdoo, 315.
73
United States Treasury, 75.
74
“First Federal War Risk Insurance,” Wall Street Journal, 16 September 1914.
69
Harris
16
Yet none of these acts represented a shift in financial policy toward the continent.
True, there were some editorials and statements urging the United States to transform
the crisis into an opportunity to reestablish the nation’s shipping prestige. The Wall
Street Journal described those in favor of creating a merchant marine as believing that
the war presented “the long-awaited opportunity for restoring the American flag on the
high seas.”75 However, the Shipping Bill foundered in Congress, suggesting that this view
was not widespread. More important, building-up a merchant marine in no way signaled
the transformation of the nation’s relationship with Europe. Many exporters came to the
conclusion that the United States could no longer rely on foreign ships to transport domestic
goods, but this realization entailed no hidden desire to upend the creditor-debtor relation.
The goal was to secure trade flows, not revamp them.
It is worth noting that the federal government also sought to alleviate specifically
the plight of cotton growers and their communities. Some of the actions were truly
astounding. Having already obtained Congressional amendments to the Aldrich-Vreeland
Act, McAdoo used his power as Secretary of the Treasury to accept cotton warehouse
receipts as collateral for note issuance. By allowing banks to obtain currency notes at 75
percent of the receipts’ face values, McAdoo hoped that “banks might be able to extend
necessary credits until normal conditions, or as normal conditions as are possible in the
present circumstances, could be restored.”76 Moreover, the government orchestrated a
private cotton loan fund in November. The press release announcing the fund interestingly
urged southern farmers to diversify: “Not only should the southern farmer plant food crops,
but he can raise cattle and poultry with great benefit to himself and the country at large.
He can not do this, however, unless he reduces cotton acreage and raises food supplies.” In
this way, the European war did engender introspection but merely with respect to the oftrepeated realization that king cotton made the Southern economy too volatile. The South
had long made itself vulnerable to the whims of a single market and would continue to do
so until the next generation’s depression. The objective remained the seasonal export of
goods with no concern for altering the nation’s foreign debt.
Gold Returns
All the while, bankers made several efforts to directly alleviate the foreign exchange
problem. The aforementioned gold fund, established in mid September, sought to pool the
nation’s resources together. One hundred million dollars of gold, from around the country,
came under the direction of a committee led by James B. Forgan of the First National Bank
75
76
“Prospects of Restoring American Mercantile Fleet,” Wall Street Journal, 3 August 1914.
United Treasury, 11.
Full Faith and Credit
17
of Chicago. As his associate, John J. Arnold, explained in an article on the fund in 1915,
the committee ended up shipping over $10,000,000 worth of gold to a recently opened
Bank of England depository in Ottawa. The underlying rationale was to demonstrate that
the United States had ample gold and would ship as much as required, especially given the
new depository on the same side of the Atlantic. Arnold wrote,
“[t]hose who were familiar with financial conditions abroad realized that
England’s demands for gold were based on sentiment rather than upon actual
needs. Mr. Forgan, in proposing the formation of the gold pool, expressed it as
his opinion that when it became known that gold was actually available, little
would be called for. This view was justified by the actual results.”77
Silber concurs, noting that the foreign exchange market settled down appreciably upon the
announcement and actions of the fund.78
The remaining question was whether or not the nation would fulfill its obligations
with a still dysfunctional foreign exchange market. The answer was yes, and the test case
was New York City. Operating expenses for the city were on the order of $190,000,000
per year, and as previously mentioned, the city owed British and French investors around
$80,000,000 by January.79 Usually, such debt would not be a problem; McAdoo noted in
his Annual Report that “[o]rdinarly this debit balance would be paid off by our shipments
of cotton (principally), grain, foodstuffs, and other commodities.”80 Given the skewed price
of sterling, however, New York City would not be able to roll over its debt without help. J.
P. Morgan, Jr. worried over the repercussions of default: “The failure of the greatest city in
America to meet its obligations punctually would … have dealt an almost irreparable blow
to the credit of New York City, as well as cast discredit on the United States.”81 Prodded
by Morgan, McAdoo approved the banker’s plan for a syndicate of banking houses to
provide New York City with the necessary funds to cover its obligations. As the New York
Times rejoiced on September 5 after the plan’s announcement, “[t]his transaction is one of
the most important financial operations ever undertaken, and it is expected to exert a most
beneficial influence. One of the biggest problems which has confronted our bankers since
the beginning of the war has been the payment of our maturing debts to Europe, in the face
of a foreign exchange market utterly demoralized … it is expected that all other payments
will be greatly facilitated.”82 To enable the bailout, McAdoo consented to Morgan’s request
77
78
79
80
81
82
Arnold, 703.
Silber, 121.
Ibid., 116.
United States Treasury, 17.
Silber, 123.
“Put Up $100,000,000 To Take Up City Debt,” New York Times, 5 September 1914.
Harris
18
that banks be allowed to use the notes obtained from the city as collateral for emergency
currency, and, if need be, allow reserves to dwindle below the accepted minimum. As
Silber concludes, McAdoo assented, for the fallout from letting the city default exceeded
the risks of the plan.83 Maintaining the city’s, and by extension, the nation’s, credit to
Europe took precedence.
Back to Normal
At this point, the narrative enters a bit of a lull. The suspenseful months of August
and September devolved into the calmer months of October and November. No single action
saved the economy, and no single event intimated a repaired financial system. Rather, the
situation gradually improved, each day bringing better news. The November 8 edition of
the The Washington Post brought a multi-part headline exuding confidence: “Gold Export
to End, Big European Purchase has Removed the Necessity, Investment Demand Grows,
Further Buying of Wheat and Other Grain on Sensational Scale for Foreign Nations –
Increased Purchases of Cotton and Termination of British Moratorium Among Week’s
Favorable Influences.”84 Banks were retiring the emergency currency, cotton exports had
increased dramatically, and net exports exceeded imports in October by tens of millions
of dollars. W. C. Van Antwerp noted these developments in his November 14 speech. “…
improvement continues in many directions. There are record-breaking exports of foodstuffs
and of various supplies of manufactured articles; cotton is slowly beginning to find a
market … In the long run imports and exports will bring about offsets, and trade will go on
as before.”85 On December 12, the NYSE reopened.86 As time passed, the financial press
continued to comment on the progress made toward a resumption of healthy commerce
and trading. In February 1915, Bankers’ Magazine maintained the optimism, writing, “[g]
radually business is recovering from the shock it received at the close of July when the
European war cloud burst.”87 Normalcy had returned.
The crucial aspect, of course, is that the economy returned to normal conditions,
for that was the goal. All of the actions taken by the public and private sectors sought
to maintain the international economic structure. Bankers’ Magazine noted Europe’s
continued threat to American prosperity early in 1915: “It would be going too far to say
that the apprehension from this source has been wholly and permanently relieved, for it has
not. The European war might take a sudden turn whereby matters would be immediately
brought to a crucial point for some of the principal combatants, and this might again excite
83
84
85
86
87
Silber, 124.
“Gold Exports to End,” The Washington Post, 8 November 1914.
Antwerp, 19.
“Reopening the Stock Exchange,” New York Times, 13 December 1914.
“Return of More Normal Trade Conditions,” Bankers’ Magazine, February 1915.
Full Faith and Credit
19
fears of a financial crisis.”88 America remained as wedded to Europe as ever, with no change
in credit dynamics and no expectation for any change in the near future.
But perhaps the one glaring action not taken by the United States implicitly reveals
a plan to supersede London and reform the financial structure. After all, the nation did
not follow most of Europe in abandoning the gold standard; rather, it maintained its rigid
connection to the precious metal. Boston banker Henry Lee Higginson hinted at such a
policy when he wrote to President Wilson in August: “We can take [England’s] place if we
choose; but courage, willingness to part with what we don’t need at once, real character,
and the living up to all of our debts promptly will give us this power.” Moreover, “the
government should offer American bankers the gold necessary to pay American debts
maturing in Europe.”89 Thus, men of substance may have focused so intently on maintaining
credit worthiness precisely to move into the position of international creditor. By playing
the minor part of reliable borrower, America would soon gain the lead role. Yet this
argument runs against the tide of evidence. First, few articulated an interpretation similar
to Higginson’s, and Higginson was a minor character uninvolved with the nerve-racking
events of the day.90 Second, international economic practice expected maintenance of the
gold standard except for warring countries.91 As the United States was a neutral power,
the decision to remain on gold was likely a result of the nation’s desire to preserve the
financial status quo. Moreover, the other major country that continued to back its currency
to bullion was in fact Britain, the very nation that had an excuse to abandon and already
led the financial system.92 The motivation to retain the gold standard more easily fits into a
conception of preserving creditability than a circuitous plan to somehow use the status quo
to bring about a revolution.
Confronted with financial devastation in the summer of 1914, business and
government leaders undertook a plethora of innovative steps to prevent depression. The
consensus opinion blamed Europe for the crisis, yet the responses reflected a desire to return
to normal conditions without restructuring the financial system. Few questioned America’s
heavy reliance on Europe for borrowing, which had proved the strongest connection in
transmitting the panic, and nothing was done to alter it. While some historians conflate
the United States’ actions during the panic with the nation’s emergence from the war as
international creditor, the actors on the ground did not strategize for such an end. The
importance of the 1914 crisis lies, therefore, not in a grand attempt to transform the world;
88
89
90
91
92
Ibid.
Silber, 154.
Notably, Higginson’s only appearance in Silber’s comprehensive narrative is his letter to the President.
Silber, 89.
Ibid.
Harris
20
it rests in Americans’ striking reconciliation to the negative aspects of an interdependent
economy. Borrowing entailed not only the cost of interest, but also the cost of connectedness.
Though always present, this latter cost increased with time as the inexorable force of
globalization proceeded. Nonetheless, financial firms often failed to take it into account,
viewing the shrinking world as pure good. But this disregard was to be expected. As Henry
Noble commented in the aftermath of the 1914 panic, “Wall Street, of all places, is the land
of forgetfulness.”93
93
Noble, i.
Full Faith and Credit
21
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