When Washington Shut down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy

Published by EH.NET (June 2007)

William L. 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. xi + 217 pp. $28 (cloth), ISBN: 978-0-691-12747-7.

Reviewed for EH.Net by Jon Moen, Department of Economics, University of Mississippi.

The financial crisis of 1914 occupies an ambiguous position in the lineup of American banking and financial crises. It was not one of the celebrated National Banking Era panics (1873, 1884, 1890, 1893, and 1907 by Wicker’s estimation), but it was not then a crisis of the Federal Reserve Era either. Because it wasn’t a banking panic and because it straddled the transition between these two great periods in American banking, it is often presented as a coda to the symphony of earlier panics. For example, it is mentioned only in passing in Friedman and Schwartz’ Monetary History, and I could find no mention of it in Allan Meltzer’s recent History of the Federal Reserve, Volume I. William L. Silber’s book, When Washington Shut down Wall Street, argues persuasively that this crisis helped propel the United States and the dollar to international preeminence, thus raising its status to that of the Panic of 1907.

Silber presents a detailed (and densely referenced) history of the personalities and events in the months leading up to the opening of the Federal Reserve System on November 16, 1914. He focuses in particular on the actions of the Secretary of the Treasury William McAdoo. By Silber’s account, McAdoo’s decisive action in closing the New York Stock Exchange on July 31, 1914 for four months protected the stock of gold in the U.S. and gave the young Federal Reserve System a chance to get organized. This is in contrast to the popular belief that the Governing Board of the NYSE initiated the closure of the exchange in the face of a massive sell-off in shares as a means to protect share prices. Why did McAdoo order the exchange closed? According to Silber he wasn’t concerned about a sell-off in shares driving down prices, for American bargain hunters (the “Shorts”) would snap up the shares. Rather, he was concerned that the sellers, mainly the British and the French, would then convert the dollar proceeds to gold and ship it off to Europe to finance their war efforts, effectively wiping out the U.S. gold stock. Without gold, the young Federal Reserve would have nothing to back its note issue, diminishing its credibility as a central bank. By also insisting that the U.S. remain on the gold standard while everybody else but England was going off of it, McAdoo signaled that the U.S. was determined to honor its foreign debt, preventing a massive devaluation of the dollar. Of course, if foreigners couldn’t convert stock assets to dollars in the first place, staying on the gold standard would be much easier for the U.S. Nevertheless, such bold and decisive action by McAdoo set the foundation for the shift away from the pound sterling to the dollar as the international reserve currency after World War I.

The book is written with a general audience in mind, but it is an important book for any scholar of financial and banking panics. While it contains little theoretical analysis of the crisis, it makes up for that by presenting a tremendous amount of historical detail in a compelling and fast-moving story. An example of this is his account of how gold arbitrage actually worked under the gold standard. We are all aware of the gold points and that gold flowed across the Atlantic when the dollar/sterling exchange rate reached either point. But Silber explains the actual mechanics of gold arbitrage using the example of Max May, the vice president at Guaranty Trust Company in charge of foreign exchange operations. In chapter two he clearly outlines how Max would have to locate a ship going to England, get gold coin or bullion packaged in barrels with sawdust to prevent abrasion of the gold, and get the barrels insured and safely stowed on board. He also provides a numerical demonstration of how much profit May and other arbitrageurs could make at certain exchange rates. Max reappears in chapter 5 in an extended dialogue explaining why the value of sterling was so high in August 1914; as a bonus there is also a detailed discussion of the several types of bills of exchange. Some might view these examples as a bit simplistic, but they are great stuff for a classroom discussion of the gold standard.

Several chapters are worth mentioning in particular, as they highlight Silber’s thesis that McAdoo was central in transforming the U.S. into a financial superpower. Chapter three outlines the events of the Panic of 1907 and how they led to the creation of the emergency currency authorized in the Aldrich-Vreeland Act. Silber makes it clear that the key New York bankers had the horrors of 1907 in mind as they saw gold beginning to flow out of the U.S. at the outbreak of World War I. It was the large gold inflows from Europe that eventually damped the 1907 panic; gold leaving the country was not a comforting development. This leads into chapter four, which describes how the emergency currency was almost unavailable for the Crisis of 1914. The Federal Reserve Act extended the life of the Aldrich-Vreeland currency through June 30, 1915 ? it was to have expired a year earlier. Unfortunately, most of the large banks in New York were not eligible to issue the currency, for they had not issued national bank notes at least equal to 40 percent of their capital. Here McAdoo’s decisive action saved the day when he was able to convince Congress to amend the Aldrich-Vreeland Act to suspend the 40 percent requirement, allowing the large New York banks, as well as banks in other cities, to meet the withdrawals of cash as Americans began hoarding cash in anticipation of war. The Epilogue compares McAdoo’s behavior to several modern Federal Reserve Board chairmen like Arthur Burns, Paul Volcker, and Alan Greenspan. The latter two compare favorably to McAdoo in their decisive handling of financial crises.

Was McAdoo as vital for America’s transformation as Silber would have us believe? I think he makes a reasonable case, although it is also easy to believe that the combination of the Great Depression, the abandonment of the gold standard, and World War II would have left the U.S. as the world’s financial superpower and the dollar as the reserve currency. Be that as it may, this short book contains a vast fund of information and history about an oddly neglected event in U.S. history.

References:

Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867 to 1960. Princeton, 1963.

Allan Meltzer, A History of the Federal Reserve, Volume I: 1913-1951. Chicago, 2003.

Elmus Wicker, Banking Panics of the Gilded Age. Cambridge, 2000.

Jon Moen is an Associate Professor in the Department of Economics at the University of Mississippi. He has studied retirement in the United States in addition to his research on the Panic of 1907. He is currently working on a book with Ellis Tallman of the Atlanta Federal Reserve Bank on the Panic of 1907.