Financial crisis of 1914

The financial crisis of 1914 was a financial crisis resulting from the sell-off of about $3 billion (equivalent to $96 billion in 2025) of foreign portfolio investments, primarily by the British who needed funds for the war effort, during the July Crisis at the start of World War I. It led to the U.S. stock market being closed for four months and the London stock market for five months. It also marked a change in the international economic order whereby the U.S. became a leader in the global financial markets. The financial crisis is relatively unknown since it was overshadowed by the concurrent political crisis.

Events

The assassination of Archduke Franz Ferdinand occurred on June 28, 1914. War appeared unavoidable after the Ultimatum of July 23, 1914. Between that date and July 27, 1914, banks in London called in their loans, hoarded gold, and withdrew funding; shipments of gold from the U.S. to Europe reached a record high as Europeans exchanged dollars for gold and the pound sterling surged in value on increased demand to repay British loans. Austria-Hungary declared war on Serbia on July 28, 1914, starting World War I.

Response in United States

With the Federal Reserve in its infancy, the response to the crisis in the United States was led by United States Secretary of the Treasury William Gibbs McAdoo. Although the values of both the dollar and the pound sterling were both pegged to gold and thus normally did not fluctuate much, as the value of the pound sterling rose from $4.87 to $6.75; some believed that U.S. would be forced to abandon the gold standard. On July 30, 1914, McAdoo distributed gold to Treasury offices to protect the dollar and maintain the gold standard. On July 31, 1914, after several days of sell offs, McAdoo closed the New York Stock Exchange for four months to prevent the sale of American securities by the British.