Thursday, March 20, 2014

Deceived by a Mirage

The Second Crimean War has brought forth wonder, at least among some, at the stock market's indifference. Some would say stock market "exuberance," but with daily, government interference, stocks will rise - until they don't. What follows is a look at market indifference in 1914, right up until the guns were rolling.

            Hindsight can be a handicap. We know what happened in August 1914. No one in Europe foresaw four years of trench warfare. The British periodicals quoted below were caught up in the "Ulster Crisis," which seemed far more important than an assassination in Sarajevo.

            Aside from the markets, the views quoted below show how quickly the media can about face, in a complete dismissal of formerly held opinions. Many will look at this as evidence the government controlled the press, but it should be remembered that Gustave Le Bon preceded Joseph Goebbels. It may also be noted how disagreements between Russia and its underbelly, among different ethnicities and alliances, are ancient, modern and do not lend themselves to sweeping solutions.

Of the periodicals quoted below, The Spectator and The Economist were weeklies, the Manchester Guardian and Daily News were daily newspapers.

The Spectator - 6 June 1914 - page 3:

Bank Rate 3 per cent, changed from 4 per cent.

The Spectator - 20 June 1914 - page 1:

"IN THE BALKANS, ALSO, THINGS ARE GETTING WORSE RATHER THAN better. Throughout the week a confused battle has been proceeding round Durazzo, the Albanian capital. It is true, the latest news is more reassuring, but.... How will it be possible to prevent Austria-Hungary and Italy quarreling over the disposition of Albania? Neither will let the other intervene. Partition between the two seems impracticable...."

"MR. CHURCHILL EXPLAINED AND DEFENDED THE GOVERNMENT'S AGREEMENT WITH THE Anglo-Persian Oil Company in the Commons on Wednesday. His speech, which lasted an hour and a half, was in great measure an expansion of the Admiralty Memorandum; but Mr. Churchill was careful to explain that we were not depending exclusively or primarily on the Persian oilfields.... and explained that the £2,200,000 invested by the Government would not be used in buying out existing shareholders, nor in payment for goodwill and commissions, but would be employed for the actual development of the oil supply, and would bring in new properties and new assets."

"SIR EDWARD GREY, REPLYING TO CRITICISMS OF THE SCHEME... maintained that the good relations between Russia and Great Britain would be unaffected by the deal. The Anglo-Persian Company's concession antedated the Anglo-Russian Agreement.... Mr. Lloyd George asked how the government proposed to defend the property "surrounded by material far more inflammable than oil" and Sir Edward Grey suggested that two brigades of British troops could defend the pipeline if the worst came to worst.... [H]e held there was no place outside the British Empire where the risks were less."

On June 28, 1914, Gavrilo Princep, a Serb, assassinated Archduke Franz Ferdinand, heir presumptive to the Austrio-Hungarian Empire, and his wife Sophie, Duchess of Hohenberg, in Sarajevo, Bosnia.

In England, interest was muted, but not everywhere. When the Austrian ultimatum to Serbia was published, the foreign secretary, Sir Edward Grey, described it as "the most formidable" ever sent "by one State to another." Winston Churchill described it as 'the most insolent document of its kind ever devised." Christopher Clark, author of The Sleepwalkers: How Europe Went to War in 1914, is wary of these judgments. Clark interposes the 1999 Rambouillet agreement, the ultimatum presented by NATO to Serbia-Yugoslavia, which Belgrade rejected, as much more aggressive than the Serbian document. (In part: "NATO personnel shall enjoy, together with their vehicles, vessels, aircraft, and equipment free and unrestricted passage and unimpeded access through the Former Republic of Yugoslavia, including associated airspace and territorial waters....") Clark quotes Henry Kissinger's appraisal of the Rambouillet agreement: "an excuse to start bombing." Clark describes Grey's and Churchill's summaries as "misleading... to think of the Austrian note as an anomalous regression into a barbaric and bygone era before the rise of sovereign states."

Although Clark does not make the comparison directly, the Rambouillet agreement (1999) is to a future "regression into a barbaric and bygone era [during the unfurling] of sovereign states." It is no surprise that as savagery captures the culture, international provocations grow more savage. The vast bureaucratization of such decisions, whether a central bank coaxing the bottom 50% into sub-prime mortgages or NATO's bombing memorandum, are part of modern unaccountability and detachment from the people they supposedly serve. 

In July 1914, markets yawned. Within a month, investors in some countries would lose everything. The historian Niall Ferguson published a study of sovereign bond yields: "Political Risk and the International Bond Market Between the 1848 Revolution and the Outbreak of the First World War," in the Economic History Review (available on, 2006.) His source was weekly issues of the Economist between 1848 and 1914.

Over that period, the British consol was the benchmark for all Great-Power, sovereign bonds (Austria, Britain, Germany, France, and Russia.) Three-percent consols were perpetual issues with covenants that authorized the government to redeem if the price reached par. Yields rarely rose above 5% during the entire 1848-1914 period. The exception was Austria; the imperial credit traded at around 6% or 7% during good times and soared into double-digits during crises. By the 1890s, the four other sovereign issuers traded at yields of 3% or below. The trend for the following 20 years was of higher yields, rising by 0.5%% to 1.0 %.

The 2-1/2% British consols rose from a 3.30% yield on July 7 to 3.31% on July 22 - a single basis point of fear. Tensions rose on the exchanges and grew acute on July 27 when the Vienna and Budapest exchanges closed. The Sarajevo incident could still be interpreted as a local affair, but trading slowed on the other European exchanges. Now consols rose to 3.45%. The St. Petersburg exchange closed on the 29th and the Economist considered the "Berlin and Paris bourses closed in all but name."

It was by no means clear who would fight or even if there would be a war. Nevertheless, British exchanges suffered a two-fold crisis. In Ferguson's words: "First, foreigners who had drawn bills on London found it much harder to make remittances; those British banks that had accepted foreign bills suddenly faced a general default as bills fell due. At the same time, there were large withdrawals of continental funds on deposit with London banks and sales of foreign-held securities. London became, as The Economist put it, 'a dumping ground for liquidation for the whole Continent of Europe'."

A wholly unanticipated domino effect now engulfed London. The bond market did not seem to acknowledge this vaporization of liquidity: "Even these developments had a remarkably limited impact on great-power bond yields. Between 22 July and 30 July (the last day when quotations were published), yields on consols rose by 26 basis points; yields on French rentes by 22 basis points; and yields on German bonds by 17 basis points. The rises were twice as large for Austrian and Russian bonds, yields on which rose by nearly half a percentage point... The Economist was especially struck by the widening of the bid-ask spread for consols (the gap between buyers' offers and sellers' asking prices) to a full percentage point, compared with a historic average of one-eighth of 1 per cent... "

The London market started to close on July 29. London clearing banks concentrated on funding their stock-exchange clients, eight of which failed by the end of the day. On July 30, the Bank of England raised its discount rate from 3% to 5%. On July 31, the Stock Exchange was closed and the Bank of England raised its discount rate from 5% to 8%.

The Spectator - 25 July 1914 - Page 1:

NEWS OF THE WEEK. The event of the week which eclipses all others in interest and importance is the meeting of the Conference of political leaders which assembled at Buckingham Palace on Tuesday.... The fact that the proposal was the King's proposal... undoubtedly rendered it easier for the four Unionist members to take part in the proceedings.

The Conference at Buckingham Palace addressed the Ulster Crisis.

The Spectator - 25 July 1914 - Page 5:

AUSTRIA-HUNGARY AND SERVIA. THE NATION'S DEEP ANXIETIES CONCERNING HOME POLITICS [Northern Ireland - FJS] have to a very great extent obscured for them the European prospect. Yet, if we judge by the telegrams in the Press and by the agitated condition of many of the Continental Stock Exchanges, it is hardly too much to say that the public mind of Europe is greatly moved by the question whether the peace of the world can be maintained. We are alluding, of course, to the diplomatic friction between Austria-Hungary and Servia.... Austria-Hungary is attempting to fasten some part of the responsibility for the infamous murder of the heir to the Austrian throne and his wife upon Servia as a nation.... If this is the kind of pressure that is being put upon Servia, one can well imagine that the Chancelleries of Europe are anxious about peace. The tone is altogether too like that of the ultimatum addressed by the wolf to the lamb about the drinking water. The injury done to the Dual Monarchy and to the Imperial House by the murder at Serajevo was terrible, but such demands as we have summarized would be tantamount to the provocation of war. It is hard to see how Servia could acquiesce in them without in effect making an admission of guiltiness which she must naturally feel it impossible to make.

"Though it is difficult to regard Austria-Hungary as politically a wise Power or to look upon the statesmen who control her destinies just now as men of foresight, we cannot think it possible that she is intent upon attacking Servia. Hostilities begun on these terms would be almost certain to involve first the rest of the Balkan peninsula and then Europe as a whole. No doubt nations sometimes go mad, but, distracted as Austria-Hungary no doubt is, both by her home and her foreign policy, there is no reason to think that insanity or anything approaching it has fallen on her."

            "[T]here is no reason to think that insanity or anything approaching it has fallen on her," was a "however" statement. The Spectator then delved into the cross-currents of ethnicities, borders, and alliances across Europe. It concluded if some sort of peace pipe were not arranged between Austria-Hungary and Servia, a continental war would follow.

Daily News - 27 July 1914 - "On the Brink of War":

"...If it should prove impossible at this late hour to prevent the outbreak of war between Austria and Servia, it is at least possible to isolate the struggle. If Great Britain, Germany, France and Italy, acting together in good faith, do not achieve that they will be responsible for the greatest crime in history."
Daily News - 29 July 1914 - "Russia and the War":

"...No one has ever yet dared to claim that Russia is the champion of the freedom of anybody. She has enslaved many, but she has freed none. Her claim to be the protector of the Slav peoples has no historic basis... For ourselves, it is unthinkable that we should be drawn into such a quarrel. We have done much for the advancement of Russian interests in recent years. We have remained silent while the liberties of Finland have been trodden in the dust and while Russia, in defiance of her agreement with us to preserve the independence and integrity of Persia, has made the northern half of that country a Russian province. But the suggestion that we should spend British lives and British treasure to establish Russia in the Balkans would be an inconceivable outrage to a democratic country. Our hands are free in this business and we must take care to keep them free. Let us work zealously to preserve peace; but let us remember that the most effective work for peace that we can do is to make it clear that not a British life shall be sacrificed for the sake of a Russian hegemony of the Slav world."

Manchester Guardian - 30 July 1914 - "England's Danger":

"We wish Servia no ill; we are anxious for the peace of Europe. But Englishmen are not the guardians of Servian well-being, or even of the peace of Europe. Their first duty is to England and to the peace of England. Let us for a moment drop solicitude for the peace of Europe and think of ourselves. We ought to feel ourselves out of danger, for, whichever way the quarrel between Austria and Servia were settled, it would not make a scrap of difference to England. We care as little for Belgrade as Belgrade does for Manchester."

Manchester Guardian - 1 August 1914 - "England's Duty":

"Then is it honour that we must fight for? No; for honours sake we must keep the peace. There are, as Mr. Asquith and Sir Edward Grey have both told us, no engagements with European Powers that would take away our perfect freedom of choice in the event of a general European war. Being free as regards Europe, we are not free as regards our own people, but must decide in favour of neutrality. For if we decide differently, then we violate dozens of promises made to our own people the promises to seek peace, to protect the poor, to husband the resources of the country, to promote peaceful progress. These promises are in honour binding, and if they are broken, then not only are our interests sacrificed but our honour is tarnished."

The Spectator - 1 August 1914 - page 3:

Bank Rate 8 per cent, changed from 3 per cent.

The Spectator
- 1 August 1914 - Page 3:

ON MONDAY IN THE COMMONS SIR EDWARD GREY EXPLAINED THE position of the Government in the Austro-Servian crisis. So long as the dispute was between Austria-Hungary and Servia alone Great Britain had no title to interfere, but if Russia were drawn in, the question would be one of the peace of Europe. He had told the Austrian Ambassador that if this happened the only chance of peace seemed to be that the four Powers-Germany, France, Italy, and Great Britain- should try to induce Austria-Hungary and Russia to suspend military operations while the four Powers tried to arrange a settlement. When he had learnt that Austria-Hungary had actually broken off relations with Servia, he immediately tried to bring about a conference of the four Powers in London. He had been compelled to act rapidly and without the usual precaution of making preliminary inquiries as to whether his proposal was likely to be welcomed.

[Sire Edward Grey] added :-

"It must be obvious to any person who reflects upon the situation that the moment the dispute ceases to be one between Austria-Hungary and Servia and becomes one in which another Great Power is involved, it can but end in the greatest catastrophe that has ever befallen the Continent of Europe at one blow; no one can say what would be the limit of the issues that might be raised by such a conflict; the consequences of it, direct and indirect, would be incalculable."

The Economist - 1 August 1914:

"The financial world has been staggering under a series of blows such as the delicate system of international credit has never before witnessed, or even imagined. . . . Nothing so widespread and so world-wide has ever been known before. Nothing . . . could have testified more clearly to the impossibility of running modern civilisation and war together than this closing of the London Stock Exchange owing to a collapse of prices, produced not by the actual outbreak of a small war, but by fear of a war between some of the Great Powers of Europe." [My italics - FJS]

Ferguson writes: "The key phrase here is 'fear of a war'. Although Austria had declared war on Serbia on 28 July, it was still far from certain that the other great powers would join in; it was not until 31 July that Russia, after three days of indecision, began general mobilization, prompting the German government to issue its ultimatums to St Petersburg and Paris. The Germans did not declare war on Russia until 1 August; their declaration of war on France came two days later. Britain entered the fray only on 4 August (an event readers of The Economist had certainly not been led to expect).What happened between 22 July and 30 July was therefore no more than a sharp rise in the perceived probability of a great power war on the continent; it was still not considered a certainty when the markets had to close."

The Spectator - 8 August 1914 - page 3:

Bank Rate 5 per cent, changed from 6 per cent.

Daily News -
11 August 1914 - "Our Business Now":

A Letter from Mr. G.B. Shaw:

".... we shall punch Prussia's head all the more gloriously if we do it for honour and not for malice, meaning to let her up [?-FJS] we have knocked the militarism out of her and taught her to respect us. Prussian militarism has bullied us for 40 years; and a month ago neither Germany nor France believed that we would fight when it came to the point...."

Daily News - 14 August 1914 - "Concerning Mr. Maximillan Craft":

A Letter from Mr. H.G. Wells:

"I find myself enthusiastic for this war against Prussian militarism. We are, I believe, assisting at the end of a vast, intolerable oppression upon civilisation. We are fighting to release Germany and all the world from the superstition that brutality and cynicism are the methods of success, that Imperialism is better than free citizenship and conscripts better soldiers than free men. And I found another writer who is also being, he declares, patriotically British. Indeed, he waves the Union Jack about to an extent from which my natural modesty recoiled. Because you see I am English-cum-Irish, and save for the cross of St. Andrew that flag is mine. To wave it about would, I feel, be just vulgar self-assertion. He, however, is not English. He assumes a variety of names, and some are quite lovely old English names. But his favourite name is Craft, Maximilian Craft-and I understand he was born a Kraft. [In other words, of German ancestry - FJS] In appearance Kraft is by no means anglicised himself. He is a large-faced creature with enormous long features and a wooly head; he is heavy in build and with a back slightly hunched; he lisps slightly and his manner is either insolently contemptuous or aggressively familiar. He thinks all born Englishmen, as distinguished from naturalised Englishmen, are also born fools...." [Mr. H.G. Wells was just warming up at this point; he still had 1,500 words to go. - FJS]

The Spectator - 15 August 1914 - page 1:

NEWS OF THE WEEK: "THE war continues to be as amazing as ever. We have now had actual firing for over ten days, and yet there has been no serious invasion of French soil. What one was always told would happen in the great war, and what undoubtedly the Germans meant should happen, was a steady and rapid advance of the stupendous tide of German soldiers into France. Wave was to succeed wave of men on the frontier, and all of them were to have their faces turned to France and Paris.... Instead of France being invaded, and the first great battle taking place on French soil, it is, Belgium that is being invaded, and the battle which is beginning as we write is not only in Belgium, but one largely against Belgian troops -a battle in which German guns will point west and the Belgian and French guns east."

The Spectator - 15 August 1914 - page 4:

TOPICS OF THE DAY:  THE CALL TO ARMS. "Let us say once more what we said as emphatically as we could last week-that the first thing to do is to get Lord Kitchener the five hundred thousand men whom he must have to make the country safe. Till that is done, till we have got the men for the firing line, all philanthropic schemes, however good, nay, however essential in themselves, must wait."

The Spectator - 15 August 1914 - page 4:

RIFLE CLUB AND VILLAGE GUARDS. "We understand that the High Sheriff of Surrey, Mr. St. Lee Strachey, is this afternoon holding a Conference of the Surrey Rifle Clubs at Brett Reynard's Restaurant, Guildford, at five o'clock, with the object of making proposals for the formation of Town and Village Guards. It must be obvious to every one that it would be an enormous advantage if every small town and village had such Guards...."

The Spectator - 15 August 1914 - page 9:

TERMS OF SERVICE. IN connecxion with our explanation of the conditions required for enlistment in the Regular Army, we are glad to learn that in the latest leaflets issued by the War Office all references to "three years" have been omitted. The conditions are now perfectly clear.... FOR THE DURATION OF THE WAR."

The Spectator - 15 August 1914 - page 10:

THE GERMAN MILITARY MIND. "ALL Englishmen are now agreed that Germany made the war, and that the moving force within the German nation was and is German militarism...."

The Spectator - 15 August 1914 - page 19:

BOOK REVIEW: Jane's Fighting Ships, 16th edition. "The latest Dreadnoughts, which are not yet completed, will carry at least eight 15-inch guns. At the moment a contrary movement is going on, however, between the sizes of ships and of guns.... On the other hand, to tie up so much capital value in a single vessel is perhaps to put too many eggs in one basket. And there are many experts who believe that the lesson of the victory of the small British ships over the larger vessels of the Spanish Armada is a lesson that may by no means have ceased to be true even for the navies of to-day.... No German Dreadnoughts in commission have guns larger than 12-inch. Our 13-inch guns in the ships in commission give us a distinct superiority in gunpower.... The only other Navy besides the British which is largely employing oil is that of the United States. So far as one can foresee, the ships of the future will burn only oil. While the British Admiralty has secured control of a Persian oilfield, the United States Navy has an oilfield in California."

Manchester Guardian - August 19, 1914 - "A Great Feat":

"The landing of the British Expeditionary Force on the Continent within a fortnight of the declaration of war is one of the most remarkable in the history of war, and the newspapers have not appraised it at its true value... It is, in fact, perhaps the most striking example of the use of naval power that even our history has ever afforded, and it should, if rightly understood, do more for the opening of the seas to commerce than a great victory... The Admiralty is to be heartily congratulated on a most brilliant beginning. There will, we think, be no talk at the end of this war of our "unpreparedness", at any rate..."

In 2014, there are many who believe assets will continue to rise and central banking will wisk away troubles. In 1914 (quoting Ferguson), "the British and Continental financial authorities pulled every trick." The author furnishes a list of clever, arbitrary and confiscatory maneuvers, but, "systematic central bank interventions to maintain bond prices" only worked for a time. Government assistance "could only disguise the crisis that had been unleashed in the bond market; it could not prevent it."

In the end: "For all save the holders of British consols, who could reasonably hope that their government would restore the value of their investments when the war was over, these outcomes [for Continental sovereign bond holders] were even worse than the most pessimistic pre-war commentators had foreseen. The fact that investors do not seem to have considered such a scenario until the last week 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 Spectator - 22 August 1914 - page 10:

UNDER FINANCIAL FIRE. DURING the last fortnight or so most of us have undergone some new experiences. A great many of us have seen a terrible apparition-the apparition of personal financial ruin.... We saw as men see when they are deceived by a mirage, a reflection of something which we had always thought of as very far off-indeed, out of our sight. To the prosperous, in whatever section of the middle or upper classes they may live, real ruin seldom appears as a probability. They think they may have, if things go badly for them, to "do differently "; they do not take into consideration the possibility that they will not know what to do at all.... [W]hen we say 'home,' [w]e do not mean a house; we mean a habit, a way of life, our own social niche. Death is not the only step which leads into the unknown. The step from prosperity to poverty is less terrible, but it is something of the same nature.... It is that which men fear. It is terrible also to pass to the other side of one of those invisible barriers which divide us from those below us. We may call it pride or snobbishness, or an overweening feeling for tradition. Whatever we call it, it marks the frontier of our country, and it is in real truth one of the fences which shut us off from the precipice down which men fall among the seething mass where hunger and squalor are known, and where men are fighting for life. There may be a dozen barriers between us and them, but if we pass one there will be only eleven. Truly there are short ways from wealth to poverty, just as there is a short cut from heaven to hell, according to Bunyan. But the most frequented route is long, and at each stage in the journey we are a little less safe than we were.... Any very great financial blow strikes us everywhere. We cannot do what we would have done for our children. In a horrible moment we see them "going down"-they pass in our imagination over barrier after barrier till they are very near the edge of that horrid precipice.... [T]his is a day of uncertainties, and with the railways taken over by the State, freedom of contract limited by a moratorium, maximum prices fixed by law-all these things done in a few days, and not a gasp on the part of the public, nothing in any man's heart but loyal co-operation-we must come to doubt a great many things that once seemed sure."

The Spectator - 1 January 1916  - page 11:

Bank Rate 5 per cent, changed from 6 per cent, 8 August 1914