August 1914: When Global Stock Markets Closed

Tyler Durden's picture

Submitted by Bryan Taylor, Chief Economist of Global Financial Data

August 1914: When Global Stock Markets Closed

This week marks the hundredth anniversary of the beginning of World War I. On June 28, 1914, Austrian Archduke Franz Ferdinand was assassinated in Sarajevo. This event led to a month of failed diplomatic maneuvering between Austria-Hungary, Germany, France, Russia, and Britain which ended with the onset of the Great War, as it was originally called.
Austria-Hungary declared war on Serbia on July 28, causing Germany and Russia to mobilize their armies on July 30. When Russia offered to negotiate rather than demobilize their army, Germany declared war on Russia on August 1. Germany declared war on France on August 3, and when Germany attacked Belgium on August 4, England declared war on Germany.  Europe was at war, and millions would die in the battles that followed.

The impact on global stock markets was immediate: the closure of every major European exchange and many of the exchanges outside of Europe. Although no one would have predicted this result at the beginning of July 1914, by the end of the month, European stock exchanges were making preparations for the inevitable war and its impact.

Never before had all of Europe’s major exchanges closed simultaneously, but then again, never had such a global cataclysm struck the world.  There had been crises before when the stock market in the United States or other countries had closed, such as the 1848 Revolution in France, or the Panic of 1873 in New York, but never had all the world’s major stock markets closed simultaneously.

Open Financial Markets Led to Closed Exchanges

Ironically, it was because of the openness of global financial markets before the war that the global closure of stock markets occurred.  At the beginning of 1914, capital was free to flow from one country to another without hindrance.  All the major countries of the world were on the Gold Standard, and differences in exchange rates were arbitraged through the buying and selling of international bonds listed on the world’s stock exchanges.  A country such as Russia would issue a bond that was listed on the stock exchanges in London, New York, Paris, Berlin, Amsterdam and St. Petersburg.  Differences in exchange rates between countries could be arbitraged by buying and selling bonds in different markets. In effect, this made European stock exchanges a single, integrated market.

In 1914, currency flowed between countries with lightning speed.  During the Napoleonic wars, money could only move as quickly as a ship could venture from one country to another.  By 1914, cables stretched across the oceans of the world, and money as well as stock orders could be wired telegraphically from one corner of the world to another in minutes.

Traders throughout the world could sell bonds and shares instantly, and it was the fear of massive selling, and the impact this would have on global markets that led to the shutdown of European exchanges.  There was a concern that investors would try to repatriate their money leading to massive selling, a sharp fall in prices, and large amounts of capital flowing out of one country and into another.

The impact of selling on brokers and jobbers was exacerbated by the way shares were traded on the London Stock Exchange.  Individual trades were made on a daily basis, then carried until Settlement Day when trades were matched and crossed.  Brokers would make up the surplus or deficit on their accounts by settling outstanding trades with cash.  As long as there were no significant swings in stock or bond prices, brokers had sufficient capital to settle their accounts.  However, since traders relied on credit, large swings in prices could and would bankrupt many of the brokers, worsening the financial panic. To avoid this problem, stock markets were closed until a solution could be found.

The War Drives Stock Prices Down

Of course, to investors not being able to buy or sell shares is even worse than selling them at a loss.  Although stocks could not be traded on the main exchanges, over-the-counter markets replaced exchanges for those who were desperate enough to sell. 

Although the NYSE was closed between July 30 and December 12 of 1914, stocks were quoted by brokers and traded off the exchange.  Global Financial Data has gone back and collected stock prices during the closure of the NYSE to recreate the Dow Jones Industrial Average while the NYSE was closed.  We collected the data for the 20 stocks in the new DJIA 20 Industrials and calculated the average of the bid and ask prices from August 24, 1914 to December 12, 1914.  This enabled us to discover that the 1914 bottom for stocks actually occurred on November 2, 1914 when the DJIA hit 49.07, over a month before the NYSE reopened.  Few people realize that stocks in the US had already bottomed out and were heading into a new bull market when the NYSE reopened on December 12, 1914. The DJIA did not revisit this level until the Great Depression in 1932. 

The graph below shows how the Dow Jones Industrial Average behaved during 1914, including the period of the NYSE’s closure.  Although the market declined with the onset of war, investors eventually realized that war in Europe would bring opportunities to American companies to sell industrial goods and war materiel. Once this fact settled in, the stock market rose steadily for the next year.

The NYSE reopened trading for bonds under restrictions on November 28th; the San Francisco Stock and Bond Exchange reopened on December 1st; and the NYSE resumed trading at pegged prices on December 12th, though the prospect of war profits soon made these restrictions irrelevant.

As the graph below shows, the Dow Jones Industrial Average almost doubled in price in the year following its bottom in November 1914. The market paused, then had another rally into 1916 before falling back once investors realized the strong profits they had predicted from the war would not be realized.

The Closure of European Exchanges

In Europe, the problem of preventing catastrophic declines in stock prices was solved by putting a floor on share prices.  Initially, stocks and bonds were not allowed to trade below the price they had been trading at on July 31, 1914.  The government also placed restrictions on capital, limiting or preventing large flows of capital out of the country for the remainder of the war.

With these restrictions in place, markets reopened in Europe.  The London Times began printing stock prices for London and Bordeaux on September 19th and for Paris on December 8, 1914.  In January 1915, all shares were allowed to trade on the London Stock Exchange, though with price restrictions.  The St. Petersburg exchange reopened in 1917 only to close two months later due to the Russian Revolution. The Berlin Stock Exchange did not reopen until December 1917.

Unlike the United States, stocks on the London Stock Exchange declined in price during World War I.  This was due not only to the decline in earnings that occurred and general selling of shares to raise capital, but just as importantly, because of the lack of new buying and the shift of capital to government war debt. British companies were allowed to issue new shares only if the issue was in the national interest, and foreign governments and companies were not allowed to issue any new shares. The British government wanted to insure that all available capital was used to fund the growing war debt.

Most of the new bonds that listed on the London Stock Exchange were British government bonds and their share of the London Stock Exchange’s capitalization rose from 9% to 33% during the war. The performance of the London Stock Exchange between 1913 and 1919 is shown below. As can be seen, stocks lost value continually during the war, hitting their bottom only in 1918, despite the general inflation that occurred in Britain during the war, which normally would have carried prices upwards.

The Long-Term Impact of World War I

World War I destroyed the global integration of capital markets.  The Gold Standard never returned despite attempts after the war to revive it.  The system of issuing bonds and shares internationally failed to recover from the war, and stock exchanges listed fewer international shares. The ownership of stocks and bonds from other countries shrank dramatically. 

Exchanges were subjected to extensive regulation that did not exist prior to the war. Germans were not even allowed to trade on the London Stock Exchange for years after the war was over.  London lost its place as the center of global finance during the war as its role as the center of global finance was passed on to New York.  Nevertheless, New York was never able to take on the pivotal role in capital markets that London held prior to World War I.

After the war was over, financial markets had to deal with the dislocations created by the war: inflation, increased government debt, reparation payments, the Russian Revolution, the creation of new countries, England’s failed attempt to return to the Gold Standard, the stock market crash of 1929, the Great Depression, debt defaults, competitive devaluations, the concentration of gold in France and the United States and a hundred other financial repercussions that resulted from World War I.

Governments and stock exchanges did learn their lessons from World War I.  When World War II began, the London Stock Exchange closed for only a week, and the New York Stock Exchange never closed during World War II, save for August 15th-16th, 1945 when the NYSE closed to recognize V-J Day and the end of WWII.  The Berlin Stock Exchange remained open during World War II, though price floors and capital restrictions kept the prices of shares from falling until the devaluation of 1948.

Although global stock markets reopened between 1914 and 1917, it wasn’t until the 1980s that the restrictions on financial markets that prevented the free flow of capital that had existed before 1914 were removed. Only after the fall of Communism did stock markets become as globally integrated as they had been before 1914.

Though the focus of the hundredth anniversary of World War I will be on the massive destruction of World War I, the deaths of millions, and how World War I laid the foundations for World War II, the impact on stock markets and international finance should never be forgotten.

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Kirk2NCC1701's picture

First we take Berlin and Gaza, then we take Moscow and Tehran.

knukles's picture

Ha ha ha ha ha
The only thing we learn from history is that we don't learn from history




kchrisc's picture

"We" may not have learn, but I have learned more than I wanted.

If more "Is" learned a thing or two, "we" might be better off.

Pure Evil's picture

So far, it looks as if the only thing we've learned from history is how to kill each other better and faster.

moneybots's picture

"The only thing we learn from history is that we don't learn from history"


The insiders know history and use it to their advantage.  Glass Steagall was dismantled so that the the roaring 20's financial fraud could happen again.  The lesson had not been forgotten.

PartysOver's picture

Am I the Crazy Uncle for being somewhat of a Prepper.   You know, the type the NSA likes to spy on.

Stuff gonna get ugly.  Only a matter of time.

kchrisc's picture

A friend of mine is the "Chicken Little" of his extended family, neighborhood and work. He has warned others around him repeatedly about what is coming and the need to get hold of guns, gold (and silver), grub and ground now. He has never pushed his opinions, but offered them up as informative comments to discussions by the sheeple as to propaganda media memes--unemployment down, war good, etc.

His extended family, neighbors and colleagues have consistently chided him or mocked him derisively over being a "prepper." And the propaganda media TV show Doomsday Preppers hasn't helped matters much either, as was probably the propagandists' aim. They really had a field day when he purchased a rundown home on some rural land.

However, now he reports that more and more people are starting to tentatively ask him questions that reveal that they are starting to feel or get it and are concerned with what the future holds for them.

Not too much laughing now.

astoriajoe's picture

I'd say if some guy ever offers you the opportunity to be on a reality show, punch that guy in the nose.

p00k1e's picture

He'll be overrun by those who didn't prepare.  Unless of course he starts pinging them from the roof top.

Here's another one....  Go to the churches right now and ask for a members list.  Tell them you are soliciting to save African Ebola patients, or scrubbing neighborhoods for illegal sanctuaries.

After, when the lights go out, you’ll know where to go with your hammer to beat some skulls in.  

kchrisc's picture

"He'll be overrun by those who didn't prepare.  Unless of course he starts pinging them from the roof top."

Funny you say that. His first improvements to the rural property were to, using a downloaded Army manual, clear possible hiding spots, avenues of approach and create clear "fields-of-fire." He is also very aware of those spots that he cannot clear and how they are configured and what their line-of-sights are.

He also setup alternative firing positions outside the home. Some are raised earth, others are disguised objects like an old car door filled with concrete. When he replaces the dry wall, he plans to add 3 x 3 steel plates below windows and in other strategic places to provide protection to those firing-positions, as bullets can travel through a lot of dry wall.

He is also planning "sneaky-holes." That is, holes in the walls that one can use to snipe or shoot through, but are disguised as something else--a fake spigot, fake AC chassis, etc.

He says that ultimately the benefit of doing what he is doing is that he will soon know every square inch of the property intimately.

Now, writing this make him sound nuts, but he is not preoccupied with this, or does he think that the "zombies" will attack or take over the world. It is just part of the upgrades as he goes along--"Situational awareness and preparedness" as he likes to say.

duo's picture

If the Ebola outbreak causes Martial Law and a countrywide curfew, will the exhanges close then?

astoriajoe's picture

hft machines don't get ebola.

disabledvet's picture

This is a good question.  Hard to answer as well since incredibly we are bringing infected people into the USA.

We did have a massive influenza outbreak in the USA prior to World War I which killed millions.  The stock market was not closed for that.

stant's picture

Just picked up a second Bol, next to a river

NoDebt's picture

They didn't close during WWII.  We'll have to see how it goes with WWIII.

magnetosphere's picture

the stock market will be abolished after ww3.  a stock market serves no purpose in a steady state economy.

Coletrane's picture

i think we dont have long to wait, then

Dr. Engali's picture

They won't need to close the market for WWIII, they'll be vaporized in a matter of nano-seconds........ Like us.

Beam Me Up Scotty's picture

Exactly.  And anyone left after that will die when the worlds nuclear reactors all melt down at once, due to lack of power to keep them cooled.  WW4 might be fought with sticks and stones, but it won't be Homo Sapiens doing the fighting.  Might be the descendents of the cockroach.

financialrealist's picture

Bean me up-  Was it Einstein who said that?  “ I don’t know how WWW III will be fought, but WWW IV will be with sticks and stones? Ive heard or read that somewhere.

financialrealist's picture

it will not matter...its just paper...most financial assets will be worthless with every central bank engaged in some form of sterilization

Dr. Engali's picture

TPTB know they're in trouble and they are doing their best to drag us to war.

Coletrane's picture

this thought has occurred to me time and again as i try to understand why the GOP keeps openly and intentionally shooting itself in the foot. 




The only thing that makes sense is that they do KNOW what is about to happen and dont want to be at the helm  when it does.

Dr. Engali's picture

Why do you think they ran McShitstain and Romney.... could they have put up two worse out of touch candidates?

buzzsaw99's picture

gravity has been repealed. the "laws of economics" now prevail in all cases.

Idaho potato head's picture

Due to the lack of trained trumpeters, the end of the world will be postponed for three months.

Jim Cramer's picture

What no one talks about is that the rulers/leaders of these countries that started WWI were all related to each other.  Go look it up and confirm it.  All realted, family going to war against itself.  Killing millions in between but who cares.

Vampyroteuthis infernalis's picture

Jim, that is correct. The monarchs in Europe were all interrelated between the two main powerful houses, Hapsburg and Bourbon. Really the best way to describe it would be inbreeding.

swass's picture

.. just as long as when the markets close this time, the next time they open, they are much much lower and I am short the market.

bbq on whitehouse lawn's picture

Price floors and closed markets. Shorts don't get to win.

SelfGov's picture

Yes make sure you never mention the fact that UK coal production peaked in 1913.

financialrealist's picture

In The next war, collapsing your enemies economy will be the strategy, the alliances will be created and formed by aligning economic interest, indifferent to political ideologies,

JRobby's picture

Political ideologies are for the hopeful.

Economic domination is for the Banksters. They have no political or national alignments.

Hope & change, new opiate of the masses. The kick is gone. Addicted to debt, the addict begins to see that there is no hope.

JRobby's picture

Shut it down!

AdvancingTime's picture

Over time we tend to forget the path we have taken to reach where we are. I'm amazed at how our day of reckoning is always being kicked out a year or two and never tomorrow. It is as if we can't handle what is coming at us and need more time.

For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.