All About Money: Banks' Role Britain's WW I Success

Despite a minor crisis in 1907, Britain's banks were riding high in summer 1914. The market was buoyant and interest was flowing into London from loans granted in almost every country of the world. The financial services sector was booming, interest rates stood at three per cent and, as in 2008, nobody foresaw the disastrous collapse that lay just around the corner.

The assassination of Franz Ferdinand in Sarajevo on June 28th had caused scarcely a ripple in the financial markets anywhere in Europe, let alone London. However, Austria's ultimatum to Serbia on July 23rd changed everything. European stock markets experienced a flood of selling, with investors, as always in uncertain times, seeking refuge in gold. By July 27th the panic had gripped London and the Bank of England was besieged by people seeking to change their paper money for gold. The discount market and the foreign exchange market collapsed on the same day. The unthinkable, a total collapse of the British financial system, was happening as the bankers looked on powerlessly.

On July 30th the Bank of England reacted with the only weapon in its armoury: it raised the bank rate from three to four per cent and from four to eight per cent the following day. On July 31st the London Stock Exchange closed for the first time in its 113-year history and on August 1st the Bank again raised the bank rate to a record high of 10 per cent. There had been no planning for such a scenario and neither the Treasury nor the Bank of England had any other contingency plans. Further rate rises were now considered unfeasible.

 

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