Strangely, the outbreak of World War I can teach us a great deal about the coronavirus pandemic and our response to COVID-19.
To explain, World War I was a cataclysmic paradigm shift that few people saw coming. Most people did not believe the European crisis of summer 1914 was leading to war. Similarly, few people in the United States or Europe realized the Chinese coronavirus outbreak could cause a pandemic in their countries.
In fact, most European statesmen were on vacation and stayed away until Austria-Hungary declared war on Serbia on 28 July 1914. By then it was too late for a diplomatic solution to the crisis sparked by the assassination of the Archduke Franz Ferdinand by a Serbian terrorist in June.
Franz Ferdinand was the heir to the Austro-Hungarian throne. A crisis erupted because the Austrians blamed the Serbian government for the assassination.
Few people understood what was happening in Summer 1914 or where the crisis could lead. The war threw stock markets, in particular, into chaos.
Incredibly, the New York Stock Exchange (NYSE) closed on 30 July 1914 and stayed closed until 12 December 1914, Business Insider reports. The London Stock Exchange (LSE) did not reopen until January 1915. Exchanges in Berlin and St. Petersburg did not reopen until 1917.
The war wrecked the economy by shutting down the international flow of capital. Before the war the Russian and Turkish governments financed their empires by issuing bonds in London, New York, and Paris.
“World War I destroyed the global integration of capital markets,” Business Insider’s Bryan Taylor notes. During World War I, most of the bonds issued on the LSE were British government debt.
During the First World War, British stocks lost most of their value, and hit bottom in 1918. Tellingly, 1918 was the last year of the war. In contrast, the market capitalization of the LSE rose by 33% during the war, Taylor claims.
World War I led to international financial market restrictions that lasted until the 1980s. Stock markets did not become globally integrated again until the collapse of the Soviet Union and Communism in 1989-1991.
Can Coronavirus Kill the Stock Market?
Stocks were the greatest financial casualty of World War I. In particular, the London Stock Exchange’s dominance over international equities markets perished in 1914.
Similarly, Coronavirus’s effect on American markets has been dramatic. The Standard & Poor’s (S&P) 500 Index began 2020 with a $3.238 trillion market cap. The S&P 500’s Market Cap fell to $2.817 trillion on 23 April 2020. The S&P 500 hit a $2.237 trillion low market cap on 23 March 2020.
In contrast, the Shanghai Composite Index, one of China’s main stock indices, started 2020 with a $3.085 trillion market cap on 2 January. The Shanghai Composite fell $2.838 trillion on 23 April 2020.
Thus, stock markets in the world’s two greatest economies are weathering the coronavirus storm so far. However, there are stark differences between 1914 and 2020.
1914 vs 2020
The greatest difference between 1914 and 2020 is the willingness of governments to intervene in the economy.
In 1914, no government or central bank will pump cash or debt into the markets to shore up the economy. Today, such stimulus is standard operating practice in any economic crisis.
Notably, the Chinese government is considering an RMB 2.8 trillion ($394 billion) stimulus package, China Briefing reports. China’s stimulus could include spending on data centers, 5G infrastructure and charging stations for electric vehicles.
Dramatically, the US Congress passed and President Donald J. Trump (R-Florida) signed a $2 trillion stimulus package on 26 March 2020. That stimulus will include $1,200 cash payments for most Americans.
One reason markets recovered fast during the coronavirus pandemic is that governments pump up the markets. Governments in the United Kingdom, France, and Canada are offering more generous stimulus package.
Will Coronavirus cause Inflation?
Her Majesty’s Government is guaranteeing 80% of British idled workers’ wages £2,500 ($3,087.97) a month, for example. Meanwhile, the Canadian government is sending $2,000 ($1,422.60 USD) stimulus payments to citizens.
Unfortunately, nobody knows if such mass stimulus programs will work or if such mass stimulus will lead to inflation. However, massive government spending in World War I and World War II caused inflation. For instance, the highest recorded U.S. inflation rate was 19.11% in 1917, during World War I.
Thus, history shows massive government spending necessitated by coronavirus could cause inflation. A difference between World War I today is that central banks; such as the US Federal Reserve, aggressively fight inflation.
Notably, fighting inflation has been a key mission of the Federal Reserve since the 1970s. However, there has been no crisis necessitating sustained government spending and debt creation since World War II.
How World War I created the Modern Economy
In the final analysis, World War I created a new economic order that included rampant protectionism, economic nationalism, and massive government spending.
In particular, World War I killed the gold standard. Before 1914, most governments claimed to back money with gold. In theory, you could take dollars, marks, or pounds down to a government office and exchange them for gold.
In 1914, panicked citizens ended that practice by trying to exchange all their money for gold. Consequently, governments stopped exchanging cash for gold.
Instead, governments adopted debt-backed currencies. Mr. Market bases the value of a debt-backed currency on a government’s ability to pay its debts. Hence, the US dollar is the world’s reserve currency because traders trust Uncle Sam to pay his bills.
Therefore, World War I created our modern debt-based economy. Efforts to return to the gold standard have failed, because governments love the ability to print and spend unlimited amounts of money.
The Economic Roots of World War II
Beyond debt, many governments began restricting trade and capital flows for political reasons.
For example, the British government tried to turn its Empire into a trading zone that could benefit British industry and workers with low cost raw materials and food. The effort failed because Indians did not appreciate their nation being turned into a dumping for British products.
Meanwhile, the German, Japanese, and Soviet governments experimented with using trades of raw materials and industrial goods as substitutes for capital. These efforts failed because most customers prefer cash to raw materials.
Ultimately, the Nazis, Japanese Imperialists, and Russian Communists had to enforce their trading regimes at the barrel of a gun. That led to World War II.
For instance, the Germans looted Europe to supply their war machine, and the Soviets pillaged Eastern Europe to rebuild their country after World War II. Meanwhile, the Japanese invaded Malaysia and Indonesia in World War II to seize raw materials they could not pay for, oil and rubber.
That led to war between the United States and the Japanese Empire. The Japanese attacked the US military in Hawaii and the Philippines to prevent American forces from interfering in their invasion of the Dutch and British empires.
Thus, we need to fear those who want to return to protectionism and economic nationalism. I think economic nationalism was one cause of both World War II and the Cold War. Ultimately, both conflicts destroyed the practitioners of economic nationalism. One result of Japanese economic nationalism was the atomic bomb attacks on Hiroshima and Nagasaki.
World War I and World War II
Strangely, the United States and the United Kingdom were well-prepared economically for World War II.
One reason why markets were ready for World War II, was that everybody expected war in 1939 and 1941. In 1939, only a few starry-eyed idealists, including British Prime Minister Neville Chamberlain, expected peace in Europe. In 1941, most Americans understood their country’s entry into the war was only a matter of time.
Interestingly, the NYSE only closed once during World War II. In August 1945, the NYSE closed for two days to celebrate American victory. Meanwhile, the LSE closed for a week at the beginning of the war. In contrast, the Berlin Stock Exchange only closed when the Russians overran the German capital. Thus, the Berlin and London exchanges stayed open as enemy bombs fell on their cities.
Markets stayed open during World War II because people understood what was happening. People had lived through an all-out war before. In fact, many of the soldiers who fought in World War II had fought in World War I.
Nobody was Prepared for World War I
In contrast, in 1914 Germany and France had not fought a major war since 1870 (the Franco-Prussian War), and Austria had not fought a big conflict since 1866 (the Austro-Prussian War). The United States had not seen mass mobilization since 1865 (the Civil War).
Interestingly, the British entered World War I with no plans for general mobilization or a large army. Only one man in the United Kingdom, Field Marshal Herbert Kitchener, Britain’s most experienced general, realized that the country needed a large army in 1914.
In 1914, the British government wisely made Kitchener; the victor in the Sudan and the Boer War, Secretary of State for War, (Minister of Defense). Kitchener’s first act as Secretary was to organize a New Army, or Kitchener’s Army of 500,000 volunteers.
Kitchener organized a massive new army because he realized the belief the war would be over by Christmas was a fantasy. Instead, Kitchener correctly predicted the war could last several years and require vast armies.
Fauci is America’s Kitchener
Kitchener’s experience in 1914 reminds me of disease experts; such as Bill Gates and Dr. Anthony Fauci, today. In August 1914, most people expected the war to be over by Christmas, (it lasted until November 1918).
Today, optimists believe herd immunity will end the coronavirus threat in a few months. Meanwhile, Fauci, the Director of NIAID (the National Institute of Allergy and Infectious Diseases) since 1984, predicts America will never get back to normal after the coronavirus pandemic, Today reports.
Fauci thinks the pandemic will continue until we create a coronavirus vaccine. Dr. Fauci estimates it will take us 12 to 18 months to create a COVID-19 vaccine. Thus, Fauci is America’s Kitchener preparing for a long war, while politicians such as President Donald J. Trump (R-Florida) and Joe Biden (D-Delaware) predict a fast victory.
Kitchener understood modern war in 1914, because he had fought one in South Africa, the Second Boer War (1899-1902). Fauci understands pandemics because he has been studying them for decades.
Normal is Over
Based on Britain’s experience in World War I, America needs to prepare for a long pandemic, crises of leadership, and massive economic disruptions over the next few years.
Thus, the world in 2024 will be a different place than the world of 2020. Consequently Those who claim we can return to normal after coronavirus, are as deluded as those who thought World War I could be over by Christmas 1914.
Hopefully, Americans will learn from the British experience of 1914, and listen to the experts rather than the optimists. Remember, the British won World War I.