Queues in the City, banks raising cash in a hurry from the authorities and a rush to obtain gold – sounds like September and October 2008?
No, this was late July and early August 1914. Even before a shot had been fired by a British soldier, markets were gripped by fears of the consequences of war.
It is a story which in the 100 years since the outbreak of World War One has not been widely chronicled.
Former Bank of England Governor Mervyn, now Lord, King said at the height of the 2008 banking crisis that it was the worst since August 1914.
The financial cost of World War One
An expert on economic history, King liked to point out that there was nothing comparable in the 1930s which many saw as the obvious parallel to the financial implosion triggered by the collapse of Lehman Brothers.
Markets wake up
King believed there were clear similarities between 2008 and 1914 – a flight to safe assets, a drying up of liquidity and market interest rates soaring.
In the final days of July 1914, financial markets woke up to the alarming reality that a European war was inevitable.
Queues built up at the Bank of England, as investors scrambled to change their paper money for gold (with sterling on the gold standard, the Bank was obliged to provide convertibility for the currency, though the government quickly opted to suspend the link to gold).
“It was the most serious systemic financial crisis that has ever overtaken Britain – or indeed the world”
Prof Richard RobertsKing’s College London
Commercial banks rushed to convert their bonds and bills into cash or use them as collateral for loans from the Bank.
The Bank of England’s official rate for lending operations soared from 3% to 10% in a matter of days. On Friday, 31 July, the stock exchange closed and commercial banks shut their doors for a week.
Bank closures were desperate measures which, however dire the situation might have seemed, never happened during the crisis of 2008. War was declared on Tuesday, 4 August, but by this stage the City had in effect already closed for business.
Exchange crashes and bank runs
Prof Richard Roberts, of King’s College London, and author of Saving the City – the Great Financial Crisis of 1914, argues that the events of July and August were as bad as the City of London has ever seen, either before or since.
The World War One Centenary
“In the week before Britain went to war all the London financial markets collapsed,” he says.
“It was the most serious systemic financial crisis that has ever overtaken Britain – or indeed the world. There were something like 50 countries which had stock exchange crashes and runs on banks.”
The response of the authorities was similar to the dramatic intervention 94 years later. There was an unprecedented lifeline for the markets and Prof Roberts estimates the overall support for the financial system in 1914 was larger as a share of national income than what was deployed in 2008.
The Bank of England opened up every tap to allow liquidity to spread around the City. It bought up financial assets held by banks which had plunged in value because of fears of default by institutions in France, Germany and Italy. The government agreed to provide taxpayer guarantees against any losses incurred by the Bank.
‘A state of funk’
The debates in Parliament and in the City in 1914 bore an uncanny resemblance to those held in the aftermath of the bailouts of RBS and Lloyds/HBOS.
The concern about stigma being attached to those banks which went to the Bank of England to get access to emergency credit lines was voiced in 1914. Accusations that banks bailed out by the authorities were not lending to the wider economy were also heard.
In his book City of London: The History, David Kynaston quotes disapproval of the bankers in Downing Street. The Prime Minister, Herbert Asquith, described the City’s leaders as being in “a state of funk like old women chattering over tea cups in a cathedral town”.
The words were a little different, but the sentiments the same, when Gordon Brown and Alistair Darling gave their verdicts on the bank chiefs in 2008.
One hundred years on, the Bank of England has opened up its archives for 1914 for public viewing. A fascinating episode in economic history is set out in the ledgers kept in the vaults.
The authorities’ massive intervention propped up the financial system and kept it afloat as Britain went to war. Financial history would repeat itself more than nine decades on but without the bloodshed.
Perhaps Mervyn King and his colleagues consulted the archives to see how their predecessors dealt with the banking crisis of 1914.
Find out more from Hugh Pym on how close WW1 came to bankrupting Britain.