[Global Financial History] War in Europe and Wall Street's Opportunity

1914 Start of World War I
Global Stock Markets Plunge, Gold Prices Surge
Wall Street Grows as Global Financial Capital
European-Owned Asian and South American Companies Sold Off Rapidly... Acquired by US Capital

Following the Russia-Ukraine war, a conflict is ongoing between Israel and the Palestinian armed faction Hamas. Why does a seemingly attritional war continue? Over a century ago, British economist Norman Angell argued in his book The Great Illusion that war had already lost its profitability. He predicted that because of the intertwined economic dependencies between nations forming the foundation of peace and prosperity in Europe, no one would trigger a catastrophic full-scale war. Modern states are financially and economically interdependent, so wars with much to lose have already lost their profitability. However, humans are foolish, and sometimes war is profitable. In the 19th century, European powers competed to expand colonies to gain political and economic benefits.

Even into the 20th century, Europe continued competing and waging wars. The wars of old Europe became opportunities for the emerging industrial nation, the United States. The First Balkan War began in 1912. The market reacted immediately. Global stock markets declined. As the situation in European countries worsened, European investors reduced overseas investments, especially in U.S. securities, and began withdrawing funds to hold them in gold. Normally, from August to December 1912?a period when increased U.S. grain exports led to large gold inflows into the U.S.?only $3,700 flowed into the U.S. in gold. However, in the first half of 1913, the U.S. gold outflow reached a staggering $63 million. Although the assassination in Sarajevo in 1914 occurred, it did not cause a major shock to the financial sector.

However, amid mounting tensions, Austria declared war on Serbia on July 28, marking the start of World War I. Global stock markets plummeted, gold prices soared, and major stock exchanges worldwide suspended trading and closed. Despite this, Wall Street grew into the financial capital of the world. Gold that had fled like an ebb tide at the war’s outset returned to the U.S. as a stable refuge. The gold that flowed in at this time is said to still be stored in the underground vaults of the Federal Reserve Bank of New York. Initially, it was expected that if Europe sold off all its U.S. securities to procure war materials, the U.S. stock market would collapse. However, a black market for stocks opened on New York streets, and cash transactions began. Unable to resist market forces, the New York Stock Exchange had no choice but to reopen. There were also predictions that the sharp decline in agricultural exports would collapse U.S. agriculture, the foundation of American industry. Indeed, U.S. foreign trade suffered severe damage early in the war. Germany did not import a single grain after the war began, and cotton exports were blocked. President Wilson had to establish multifaceted measures to prevent the bankruptcy of cotton farms. However, once the British Navy gained control of the North Atlantic’s sea lanes, the situation reversed rapidly. Demand for American agricultural products recovered sharply. Due to war and weather, European crop yields were at their worst. Moreover, as casualties increased in the prolonged trench warfare, most farmers were conscripted, leaving insufficient hands to harvest fully grown crops. Russia, the largest wheat exporter, was unable to export grain after Germany blocked the entrances to the Baltic and Black Seas, which also helped boost demand for U.S. agricultural products. In fact, between 1914 and 1915, U.S. exports were more than five times higher than the same period the previous year. Asian and South American companies owned by European capital were put up for quick sale after the war broke out, allowing U.S. capital to acquire them at low prices.

Using these facilities, American capital produced steel, automobiles, communication devices, railroad equipment, and warships, selling them to war-ravaged Europe and making substantial profits. This was the largest war boom since the American Civil War. Bethlehem Steel, which built warships, and DuPont, which manufactured explosives, were representative beneficiaries of the war boom. Bethlehem Steel received orders exceeding $100 million from the British Navy for guns and submarines, while DuPont produced 40% of the Allied military supplies during World War I and developed into a comprehensive chemical company. DuPont received orders for war materials 276 times greater than its pre-war military supply record and earned 26 times its pre-war annual sales. Other companies also profited handsomely from the war boom, though not as much as these two. JP Morgan Bank signed procurement contracts worth $3 billion for Britain during the war. This was a massive contract exceeding four times the federal government’s tax revenue in 1916, a year before the U.S. entered the war. Morgan Bank received a 1% commission on the order amount. Moreover, to manage procurement contracts, 175 employees traveled across the U.S. handling material contracts, publicity, and insurance, reorganizing American companies under Morgan Bank’s direction. This effectively restructured the industry into a military-industrial complex. By the end of World War I, the scale of the U.S. military industry was larger than that of Britain and France combined. Additionally, Wall Street provided $1.5 billion in loans to the Allies to import war materials. Morgan Bank formed syndicates by bringing in financial companies to underwrite and sell bonds issued by the British government. After the U.S. entered the war in 1917, the federal government also had to raise enormous funds from Wall Street.

However, the federal government’s method of raising war funds was through marketing federal government bonds to general investors, a method used by Jay Cooke during the Civil War. The market for U.S. government bonds, known as T-bonds, was newly created. When World War I ended, the U.S. emerged as the true victor. The U.S. developed from a great power into a superpower. In contrast, European countries were burdened with debts exceeding $10 billion. Wall Street bankers created the industrialized America of today. In the 19th century, they built dense railroad infrastructure. They also facilitated the initial public offerings of companies like General Electric and International Harvester, attracting capital. Charles Schwab, chairman of Carnegie Steel, was appointed at the age of 35. He was bold and aggressive. The American myth of success based solely on ability was created. One notable point is that Wall Street in the 1920s began with a massive explosion. On September 16, 1920, a horse-drawn carriage raced down Wall Street beside JP Morgan Bank and exploded. Ten people died, and 130 were injured. The leaflet from this bomb attack bore the signature “American Anarchist Warrior.”

Baek Young-ran, Head of History Journal