The War of the World: History's Age of Hatred (21 page)

The closure of the Stock Exchange could only disguise the crisis that had been unleashed; it could not prevent it. The isolated bond prices recorded for the period when the market was closed (based on significant transactions conducted outside the usual channels) make this clear. The price quoted for Austrian bonds on December 19 was 23 per cent below the pre-crisis level on July 22. For French rentes the differential was 13 per cent, for British consols and for Russian bonds (surprisingly) just 9 per cent. This was merely the end of the beginning, however. In the course of the war, large new issues of bonds as well as money creation through the discounting of treasury bills led – just as the experts had predicted – to sustained rises in the yields of all the combatants’ bonds. These movements would have been significantly larger had it not been for the various controls imposed on the capital markets of the combatant countries, which made it difficult for investors to reduce their exposure to pre-war great-power bonds, as well as by systematic central bank interventions to maintain bond prices. Even so, they were substantial. From peak
to trough, consol prices declined 44 per cent between 1914 and 1920. The figures for French rentes were similar (a 40 per cent price drop). Moreover, Britain and France were the two great powers that emerged on the winning side of the war. The other three all suffered defeat and revolution. The Bolshevik government defaulted outright on the Russian debt, while the post-revolutionary governments in Germany and Austria reduced their real debt burdens drastically through hyperinflation. For all save the holders of consols, who could reasonably hope that their government would restore the value of their investments when the war was over (as had happened after all Britain’s wars since the reign of George I), these outcomes were even worse than the most pessimistic pre-war commentators had foreseen. The impact of war on the Rothschilds was devastating. In 1914 alone their losses – close to £1.5 million – were the largest in the firm’s history. Between 1913 and 1918 the London partners’ capital was reduced by more than half. The fact that the financial markets do not seem to have considered such a scenario until the last days of July 1914 surely tells us something important about the origins of the First World War. It seems as if, in the words of
The Economist
, the City only saw ‘the meaning of war’ on July 31 – ‘in a flash’.

The story on Wall Street was the same – the
New York Times
spoke of a ‘conflagration’ – though the crisis took a different form. There it was the desire of hard-pressed Europeans to liquidate their holdings of American railroad securities (20 per cent of which were in foreign hands) that threatened to unleash a financial crisis even more severe than the last great ‘panic’ of 1907. Interestingly, there had in fact been significant outflows of gold from New York throughout the summer of 1914, apparently caused by Russian efforts to build up reserves in St Petersburg. But the withdrawals reached a peak after the news of the Austrian ultimatum to Serbia. Sterling soared against the dollar as investors sought desperately to remit funds back to Europe; those who would normally have engaged in arbitrage to exploit this weakening of the dollar were deterred by the wartime leap in insurance premiums for gold shipments. Naturally, European sales dented US stock prices, which fell by 3.5 per cent on the news of the Austrian declaration of war five days later. As in London – indeed, on the same day – the decision was taken, with the strong encouragement of the
Treasury Secretary William McAdoo, to close the Stock Exchange. It is true that unofficial quotations on the outdoor New Street market indicate that the market might not have collapsed completely (by the end of October they were down a further 9 per cent). But that was only because the unofficial market was too small to allow Europeans to realize all that they wanted to sell and because McAdoo was simultaneously working to inject emergency banknotes into the US banking system to avoid a default by the City of New York on its sizeable foreign debt, and to encourage, through the creation of a Bureau of War Risk Insurance, the shipment of American exports to Europe to get gold flowing back across the Atlantic. In the absence of these emergency measures, Wall Street would surely have witnessed a wave of bank failures even bigger than had been seen seven years before.

Why were the financial markets caught napping? Did investors in the pre-war period simply come to underestimate the potential impact of a war on their bond portfolios, as the memory of the last great-power war faded? One possibility is, of course, that the financiers were the first victims of what has come to be known as short-war illusion. They had read their Ivan Bloch and Norman Angell, both of whom had argued that the unprecedented costs of a major war would render such a war if not impossible, then at least brief. On November 1, 1914, the French Finance Minister Ribot argued that the war would be over by July 1915, a view shared by the English statistician Edgar Crammond. Almost as optimistic, it is worth adding, was the much cleverer John Maynard Keynes, who excitedly explained to Beatrice Webb on August 10, 1914 that,

he was quite certain that the war could not last more than a year… The world, he explained, was enormously rich, but its wealth was, fortunately, of a kind which could not be rapidly realized for war purposes: it was in the form of capital equipment for making things which were useless for making war. When all the available wealth was used up – which he thought would take about a year – the Powers would have to make peace.

Yet the young don’s jejune optimism was not widely shared in the City – which perhaps helps to explain why he clashed so violently with the bankers when he swept down from Cambridge to offer the
Treasury his wartime services. The Rothschilds understood full well the scale of the crisis they were facing. ‘The result of a war… is doubtful,’ Lord Rothschild observed on July 31, ‘but whatever the result may be, the sacrifices and misery attendant upon it are stupendous & untold. In this case the calamity would be greater than anything ever seen or known before.’ On August 1,
The Economist
’s editors foresaw with trepidation ‘a great war on a scale of unprecedented magnitude, involving loss of life and a destruction of all that we associate with modern civilisation too vast to be counted or calculated, and portending horrors so appalling that the imagination shrinks from the task’. There is little evidence that the City expected it to be ‘all over by Christmas’.

It may be that technical economic factors were behind the pre-war decline in volatility and risk premiums. Perhaps, as more and more countries joined the gold standard, investors ceased to fear international currency crises, though the evidence for this is not compelling. Perhaps global financial integration was reducing financial risk by broadening the international capital market, though the effect may equally well have been to increase the risks of financial contagion. Perhaps the fiscal positions of most countries before the war were genuinely improving, though investors would still have anticipated big deficits in the event of a war. Alternatively, it may have been the liquidity generated by the deepening of national capital markets that reassured investors. Large numbers of new savings institutions had been created all over the developed world in the late nineteenth century, which for the first time allowed smaller savers to have indirect access to the bond market. The ‘home bias’ of such institutions (often, as in Britain, legally enforced) undoubtedly had the effect of driving down domestic bond yields and reducing market volatility. Yet we cannot rule out the possibility that investors genuinely regarded the outbreak of a major European war as a highly unlikely occurrence for most of the period after 1880 – indeed, until the very last week of July 1914.

Even to the financially sophisticated, then, the First World War appears to have come as a real surprise. Like people who live on a fault line, investors knew that an earthquake was a possibility and understood how dire its consequences would be, but its timing
remained impossible to predict and therefore beyond the realm of normal risk assessment. The more time passed since the last great earthquake, the less people thought about the next one. If this view is correct, then much of the traditional historiography on the origins of the war has, quite simply, over-determined the event. Far from a ‘long road to catastrophe’, there was but a short slip. Such a conclusion does not tend to support those who still think of the war as an inevitable consequence of deep-seated great-power rivalries – a predestined cataclysm. But it certainly accords with the notion that the outbreak of war was an avoidable political error.

Why might the war of 1914–18 have been a surprise? One answer is that contemporaries had more confidence than was entirely justified in the post-Victorian
pax Britannica
; in the ability of the world’s biggest empire to limit the global ramifications of a continental crisis. We now know, looking back, that the British Empire was in many ways overstretched. Some contemporaries suspected it, too. Yet the persistence of British naval dominance may have encouraged investors to underestimate the Empire’s vulnerabilities. The
pax Britannica
looked very real to investors; that was why they were willing to lend to emerging markets under British rule at rates that were only a few basis points higher than those on consols. In any case, peace was more than just a function of British military or financial power. It was also based on the success of great-power diplomacy. Concepts like the balance of power and the concert of Europe were in large measure discredited by the war; indeed it became an article of faith among American internationalists that the war itself had been caused by a defective system of secret diplomacy. Yet the international institutions that failed in July 1914 had in fact done a reasonably good job of avoiding a major great-power war throughout the preceding century.

Writing in 1833, the German historian Leopold von Ranke had taken a sanguine view of the century that was unfolding. Pessimists, he said, might think that ‘our age possesses only the tendency, the pressure, towards dissolution. Its significance seems to lie in putting
an end to the unifying, binding institutions which have remained since the Middle Ages.’ Conservatives might be dismayed by ‘the irresistible inclination towards the development of great democratic ideas and institutions, which of necessity causes the great changes which we are witnessing’. Yet Ranke was optimistic:

… far from merely satisfying itself with negations, our century has produced the most positive results. It has completed a great liberation, not in the sense of a dissolution, but in a constructive, unifying sense. Not only has it first of all created the great powers; it has renewed the principle of all states, religion and law; and revitalized the principle of each individual state. In just this fact lies the characteristic of our age… [With states and nations] the union of all depends on the independence of each… A decisive positive dominance of one over the others would lead to the others’ ruin. A merging of them all would destroy the essence of each. Out of separate and independent development will emerge true harmony.

Ranke had faith in the capacity of the great powers to strike a balance with one another, and thereby to avoid that dominance of one continental power over all the others which Napoleon had all but achieved. His faith was not misplaced. Between 1814 and 1907 there were seven congresses (of sovereigns or premiers) and nineteen conferences (of foreign ministers) at which the principal diplomatic issues were discussed and, in large measure, settled. Though lacking all the institutional trappings of the international order of our own time, these regular summits in fact performed a role not so very different from that played today by the permanent members of the United Nations Security Council. The treaties they signed and agreements they brokered did not prevent war, but they limited it, so that no European crisis in the hundred years between the Congress of Vienna and the assassination at Sarajevo escalated into a full-scale conflict involving all the great powers. This was no small achievement.

Those years between 1815 and 1914 were not, of course, truly peaceful; the European empires waged a multitude of wars to impose their authority in Asia, America and Africa. Yet Europe itself saw relatively little war. According to one estimate, there were just twenty-one major wars in the entire period between the Napoleonic Wars and the First World War, and they were nearly all remarkable for
their limited geographical extent, short duration and low casualties. The nineteenth century compared very favourably indeed with the three centuries before it and the one after it. Defining war more broadly, to include smaller colonial conflicts, it can be shown that most wars happened outside Europe. Out of one sample of 270 wars between 1789 and 1917, fewer than a third happened in Europe. Of these, only twenty-eight were between nation states, as opposed to wars for national independence (twenty-eight) or civil wars (nineteen). Out of a total of 184 wars in another dataset, which counts only conflicts that caused more than 1,000 battle fatalities per year, just fifty-one took place in Europe. The nineteenth century was not quite the golden age of peace that it came to seem in retrospect to the generation of 1914. But there was no recurrence of the kind of war that had turned Europe upside down between 1792 and 1815.

Nor, despite all that has been written on the subject, was militarism especially pronounced in either the sums the great powers spent on their armed forces, or the numbers of men they mobilized in them. Between 1870 and 1913, only Russia spent more than 4 per cent of net national product on defence on average; Britain, Germany and Austria all spent just over 3 per cent. Over the same period, only France and Germany employed on average more than 1 per cent of their population in their armed forces; respectively, 1.5 and 1.1 per cent. It was only with hindsight that Europe appeared an armed camp, eagerly anticipating mobilization.