When Washington SHUT DOWN Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy By William L. Silber could demand the precious metal in exchange for the proceeds of their stock sales. The When Washington Shut Down Wall biggest gold outflow in a generation imper- Street (Princeton University Press, 2007) iled America’s ability to repay its debts unfolds like a mystery story. It describes how abroad. Fear that the United States would Treasury Secretary William G. McAdoo turned abandon the gold standard pushed the the financial crisis threatening America at the value of the dollar to unprecedented outbreak of the First World War into a monetary depths on world markets. triumph. It also provides a blueprint for crisis The European assault on American control that merits attention today. This excerpt finance brought danger and opportunity. summarizes McAdoo’s battle for American In 1914 the United States was a debtor financial credibility during four months in nation with a history of financial 1914, from the end of July through the middle crises. Failure to meet its foreign of November, and explains how this brief period obligations could sink American changed the course of U.S. monetary history. dreams of world monetary leader- ship. If it passed the test, however, The Background the United States could jump to the head of the class. The Great War threatened the United States Less than three weeks after with financial disaster. Europeans began to the outbreak of the European liquidate their Wall Street investments during conflict, Woodrow Wilson the last week of July 1914 and transfer gold to reviewed a roadmap for Europe to pay for the war. Foreign investors America’s march to world owned more than 20 percent of American financial supremacy. Henry railroad securities, the largest category of Lee Higginson, an invest- securities traded on the New York Stock ment banker in Boston, Exchange.1 Under the gold standard, they wrote to the president on Financial History ~ Winter 200726 www.financialhistory.org response to the gold exports signaled an unprecedented problem. On July 30, McAdoo rushed tons of gold to Treasury offices around the country to trumpet America’s commitment to redeem dollars in the precious metal.5 The following day, July 31, 1914, McAdoo shut the New York Stock Exchange for an unprecedented four months to hamper British sales of American securities. The British could not drain American gold without the S I B dollar proceeds from sales of U.S. stocks R O and bonds. On August 3 he flooded C / n n the country with paper currency to a m t prevent a repetition of the bank runs t e B that had embarrassed America only a © Wall Street after the suspension of trading on the New York Stock Exchange, July 31, 1914. few years earlier, during the Panic of 1907.6 Banks avoided suspending their obligations in 1914 by offering August 20, 1914, that “England has central bank since 1836, after Andrew depositors the emergency currency been the exchange place of the Jackson scuttled the Second Bank of dispensed under McAdoo’s orders.7 world, because of living up to every the United States, resembled a head- William McAdoo knew, however, engagement, and because the power less financial giant. The Federal that these finger-in-the-dike measures grew with the business. Today we Reserve System, authorized by Con- could not remain in place forever. can take this place if we choose; but gress on December 23, 1913, remained Shutting the stock exchange immobi- courage, willingness to part with on the drawing board. It could have lized the capital market and unlimited what we don’t need at once, real been a classic power vacuum, espe- supplies of emergency currency character, and the living up to all cially with President Woodrow Wilson tempted inflation. McAdoo recog- our debts promptly will give us this distracted by his wife’s fatal illness. nized that he needed an exit strategy power; and nothing else will. I McAdoo seized the opportunity to to replace these powerful weapons repeat that it is our chance to take confront the panic. He tried to get the before they disrupted the economy. first place.”2 Federal Reserve System up and run- He understood that the gold drain Wilson sent Higginson’s letter to ning to combat the danger. Benjamin could be reversed by promoting Treasury Secretary William G. McAdoo Strong, governor-elect of the powerful American exports of agricultural with the following covering message: Federal Reserve Bank of New York goods to offset European sales of U.S. “Here is a letter which is no doubt and a leading figure during the forma- securities. On August 14, 1914, worth your reading whether you think tive years of the central bank, wanted McAdoo met with businessmen at the the suggestions are practicable or to protect the new currency system Treasury to arrange for “sufficient not.”3 McAdoo had, in fact, launched from the crisis. He blocked McAdoo’s ships to move our grain and cotton a plan to defend American financial push for an early opening of the Fed- crops to European markets.”8 The honor before he received Higginson’s eral Reserve Banks. The reversal set conference created the Bureau of letter from Wilson. the stage for McAdoo’s improvisa- War Risk Insurance which supported tional skills. Failure to respond the dollar’s redemption in the foreign The Crisis promptly would have spelled disaster. exchange market. McAdoo also sub- In 1914, most developed countries – The sale of dollars for pounds ster- sidized a rescue of New York City including Austria, Belgium, Britain, ling in the foreign exchange market, from the brink of bankruptcy. America’s France, Germany, Italy, Japan, and and the jump in the exchange rate to largest city had to repay maturing Spain – could rely on central banks to four cents above the gold export point debts in London denominated in fight their financial battles.4 Even Czar on July 27, 1914, provoked record British pounds. McAdoo’s assistance Nicholas II had the Imperial Bank of gold shipments to Europe. The failure introduced the ‘Too Big to Fail’ doc- Russia. The United States, without a of the price of sterling to decline in trine in American finance.9 www.financialhistory.org27 Financial History ~ Winter 2007 As 1914 drew to a close, the flood of emergency currency receded and the New York Stock Exchange reopened. McAdoo had tamed the crisis without inflicting collateral damage. The Battle for Financial Supremacy Britain ruled world finance in 1914. Two characteristics–the pound sterling as international money and London as global money lender – qualified Britain for the world financial crown. The pound served as the currency of choice for international transactions, just as the dollar does today, and borrowers throughout the world visited London, rather than Wall Street, to raise capital. The war would force London, at least temporarily, to stop supplying capital S I B abroad but, according to British econo- R O C mist John Maynard Keynes, it could / n n continue as king of international a m t t finance by insuring that sterling remained e B as good as gold. Britain signaled its © intention in August 1914 to continue Crowd gathers outside the offices of The New-York Tribune as the world’s financial superpower by after the suspension of trading on the New York Stock Exchange. following Keynes’ advice. Treasury Secretary McAdoo recog- mitment to the gold standard while the dollar’s discount disappeared on nized America’s opportunity to shine every other country of the world, save world markets, and four years to the by remaining true to gold, just like for Britain, abandoned it because of day before the Armistice, marks the the world’s monetary superpower. A the war. How important was the gold turning point in America’s battle for suspension of the gold standard in standard at the outbreak of the Great international financial leadership. In 1914 would have been a setback to War? Keynes said that London’s posi- January 1915 the New York capital American dreams of international tion as the world’s leading financial market replaced London as money financial leadership. The Panic of 1907 center would surely be jeopardized if lender to the world. Argentina, had already damaged U.S. credibility. Britain suspended gold payments. He Canada, and China, traditional British A panic in 1914 would have been the advised the British government that clients, visited Wall Street to raise cap- second act in an American financial “we should not repudiate our external ital.14 It would take more than decade tragedy. Alexander Noyes, the con- obligations to pay gold until it is to complete the transfer of financial temporary business editor of The New physically impossible for us to fulfill power, but a tectonic shift in monetary York Times, highlighted the drama them.”11 Keynes knew that capital supremacy had begun.15 when he said:10 “It is not too much to markets forgive a country that sus- say that as a matter of financial history, pends specie payments during wartime The Man behind the Victory: the United States stood during those as long as it resumes its obligation William G. McAdoo two or three weeks of August at the after the emergency has passed.12 But a William Gibbs McAdoo was born in parting of the ways.” Suspending the financial superpower must meet a Marietta, Georgia, in 1863. He moved gold standard would have relegated higher standard.13 to Knoxville, Tennessee in 1877, when the dollar to second class status.