securities, readily salable in dependable stock markets, and on governmental securities, usually moderate in volume, buttressed by balanced budgets.
Not all the great countries had safely balanced budgets. France, though enormously strong financially, in 1914 had had chronically unbalanced budgets for many years. The balance in Russia and in Italy was precarious.
But always the statesmen of these countries winced under criticism, and none of them boasted of their achievements in unbalancing the budgets or termed the deficit “investments.”
There were protective tariffs in the United States, France, Germany, and many other weaker countries. England held to a free trade policy, as did Holland, the Scandinavian countries, and Switzerland. But the tariffs of those days were moderate in comparison with postwar tariffs. They were subject to infrequent change, and trade lines were sufficiently open so that countries under pressure to pay debts could do so by shipping out an increased volume of commodities.
The head of the Austro-Hungarian National Bank, Popovich, later the head of the Hungarian National Bank, said in 1929 that in a prewar crisis Austria-Hungary had paid her adverse foreign balance of indebtedness by shipping out an increase of timber down the Danube, through the Black Sea, into the Mediterranean, and up the Atlantic Coast to the Netherlands, at prices which made it effectively competitive with timber from the Scandinavian countries. All that it was necessary for him to do, as head of the Austro-Hungarian Bank, was to hold his discount rate high, compel a moderate liquidation of credit, and rely upon the merchants to find markets for Austro-Hungarian goods, which, sold abroad, would produce foreign cash and turn an adverse balance of payments into a favorable balance.
London was the financial center, but there were independent gold standard centers in New York, Berlin, Vienna, Paris, Amsterdam, Switzerland, Japan, and the Scandinavian countries. There were many other countries on the gold standard, with some tendency for the weaker countries to
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substitute holdings of sterling or other foreign bills for part of their gold, primarily as a means of getting increased earnings. For their purpose the sterling bill was quite as good as gold. They trusted it. They could turn it into gold. The gold exchange standard was the primary standard of India. But, in general, the great countries held their own gold. They relied upon themselves to meet their international obligations in gold. At times of great crisis a country under very heavy pressure would seek international cooperation and international assistance, and would get it—at a steep rate of interest.
In 1907, for example, we eased off our own money panic by importing approximately $100 million of gold from London. At times London leaned on Paris. The Bank of France had a much larger gold reserve than the Bank of England, and Paris was always ready to accommodate London—at a price—in an emergency. But these incidents were infrequent. In general each country went its own way and made its own financial policies and money market policies, subject always to the limitation that if it over-extended itself the other great money markets would drain away its gold and force it to reverse its policies. There was no such thing in prewar days as the kind of international cooperation which we saw in the 1920s, under which a dangerous boom was prolonged and turned into an almost uncontrollable inflation through the cooperation of the Bank of England and the Federal Reserve System of the United States.
In the United States, with our inelastic currency system, we had several unnecessary money panics. The panics of 1873 and 1893 were complicated by many factors, but the panic of 1907 was almost purely a money panic. Our Federal Reserve legislation of 1913 was designed to prevent phenomena of this kind and, wisely handled, could have been wholly beneficent. It is noteworthy, however, that the money panic of 1907 had nothing like the grave consequences of the collapse of 1929. The money stringency of 1907 pulled us up before the boom had gone too far. There was no such qualitative deterioration of credit preceding the panic of 1907 as there was preceding the panic of 1929. The very inelasticity of our prewar system made it safer than the extreme ductility of mismanaged credit under the Federal Reserve System in the period since early 1924.
The whole world was, moreover, far safer financially when each of the main countries stood on its own feet and carried its own gold. In the 1920s gold in New York was made the basis of deposits in American banks which served as the gold exchange reserve of great European banks, and over-expansion in New York did not lead to the prompt withdrawal of gold by foreign monetary centers.
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The Outbreak of the War in 1914
The War Came as a Surprise to Most Informed Men. The war came as a great shock, not only to the masses of the American people, but also to most well-informed Americans—and, for that matter, to most Europeans. There had been no first-rate war since the Franco-Prussian War of 1870. Wars of limited objectives there had been, as the Spanish-American War of 1898 and the Russo-Japanese War of 1904-05. Colonial wars there had been, as the very important Boer War of 1899-1902. Intermittent fighting in the Balkans had existed, but the Balkans were looked upon as a special case. But a great war involving the major nations of Europe was looked upon as something so terrible, so catastrophic, and so dangerous to everybody involved that few expected it.
The present writer can recall only two men among those of his acquaintance for whose views he had high respect, who really anticipated that Germany would force the pace and precipitate world conflict. One of these was Dean David Kinley of the University of Illinois (later president of the university) who, in the winter of 1909-10, analyzing the tendencies in German thought and policy, expressed the opinion that these tendencies would make inevitably for war in the near future. The other was Franklin Henry Giddings, the great sociologist of Columbia University, who, a year or two later, after conversations with some visiting German professors, expressed himself as aghast at the rapid hardening of the German attitude and as feeling that an inevitable conflict was close at hand. But to most of the informed American public the outbreak of the war in 1914 was a bolt from the blue.
A Surprise to the Financial World—Premonitory Financial Phenomena. To the banking world and to the international bankers it came as a great surprise. There had been, indeed, financial phenomena which foreshadowed it. There had been accumulation of gold by Germany, Russia, and France. The first manifestation came as early as 1912, as German bankers began to take steps to increase their gold supply. In order to take
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gold out of the hands of the people and carry it to the reserves of the Reichsbank, fifty- and twenty-mark banknotes were issued to take the place of the gold in circulation. German agents regularly appeared as bidders for gold in the London auction rooms. Gold was shipped from the United States to Germany, and the famous Spandau Treasure was transferred to the vaults of the Reichsbank. By 1914 Germany ceased to take much gold, having presumably decided that her resources were adequate.
France and Russia made strong efforts to increase their gold reserves during the spring and summer of 1914. In the eighteen months preceding the outbreak of the war the gold holdings of the central banks of Germany, France, and Russia were estimated to have increased by $360 million. The drift of gold to these great central reservoirs led to a tightening of the money markets of the rest of the world and to an unusually large drain on the gold supply of the United States.
Recognized by A. D. Noyes. Few, however, even among informed financiers, saw in this a forecast of war. One notable exception among American observers was A. D. Noyes, then financial editor of the New York Evening Post. In his annual summaries at the end of 1912 and at the end of 1913, he called attention to the pulling in of gold by European central banks under the apprehension of war, and explained the mild recession in business in 1913 in the United States by this phenomenon. Europe had ceased to lend to the United States and had begun withdrawal of funds. We had been accustomed to rely on European capital for part of the funds needed for our own business expansion. We were ceasing to get it and were repaying part of it. Our industrial pace slowed down because of this fact.