------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (June 2007)

William L. Silber, _When Washington Shut down Wall Street: The Great 
Financial Crisis of 1914 and the Origins of America's Monetary 
Supremacy_. Princeton: Princeton University Press, 2007. xi + 217 pp. 
$28 (cloth), ISBN: 978-0-691-12747-7.

Reviewed for EH.Net by Jon Moen, Department of Economics, University 
of Mississippi.


The financial crisis of 1914 occupies an ambiguous position in the 
lineup of American banking and financial crises. It was not one of 
the celebrated National Banking Era panics (1873, 1884, 1890, 1893, 
and 1907 by Wicker's estimation), but it was not then a crisis of the 
Federal Reserve Era either. Because it wasn't a banking panic and 
because it straddled the transition between these two great periods 
in American banking, it is often presented as a coda to the symphony 
of earlier panics. For example, it is mentioned only in passing in 
Friedman and Schwartz' _Monetary History_, and I could find no 
mention of it in Allan Meltzer's recent _History of the Federal 
Reserve, Volume I_. William L. Silber's book, _When Washington Shut 
down Wall Street_, argues persuasively that this crisis helped propel 
the United States and the dollar to international preeminence, thus 
raising its status to that of the Panic of 1907.

Silber presents a detailed (and densely referenced) history of the 
personalities and events in the months leading up to the opening of 
the Federal Reserve System on November 16, 1914. He focuses in 
particular on the actions of the Secretary of the Treasury William 
McAdoo. By Silber's account, McAdoo's decisive action in closing the 
New York Stock Exchange on July 31, 1914 for four months protected 
the stock of gold in the U.S. and gave the young Federal Reserve 
System a chance to get organized. This is in contrast to the popular 
belief that the Governing Board of the NYSE initiated the closure of 
the exchange in the face of a massive sell-off in shares as a means 
to protect share prices. Why did McAdoo order the exchange closed? 
According to Silber he wasn't concerned about a sell-off in shares 
driving down prices, for American bargain hunters (the "Shorts") 
would snap up the shares. Rather, he was concerned that the sellers, 
mainly the British and the French, would then convert the dollar 
proceeds to gold and ship it off to Europe to finance their war 
efforts, effectively wiping out the U.S. gold stock. Without gold, 
the young Federal Reserve would have nothing to back its note issue, 
diminishing its credibility as a central bank. By also insisting that 
the U.S. remain on the gold standard while everybody else but England 
was going off of it, McAdoo signaled that the U.S. was determined to 
honor its foreign debt, preventing a massive devaluation of the 
dollar. Of course, if foreigners couldn't convert stock assets to 
dollars in the first place, staying on the gold standard would be 
much easier for the U.S. Nevertheless, such bold and decisive action 
by McAdoo set the foundation for the shift away from the pound 
sterling to the dollar as the international reserve currency after 
World War I.

The book is written with a general audience in mind, but it is an 
important book for any scholar of financial and banking panics. While 
it contains little theoretical analysis of the crisis, it makes up 
for that by presenting a tremendous amount of historical detail in a 
compelling and fast-moving story. An example of this is his account 
of how gold arbitrage actually worked under the gold standard. We are 
all aware of the gold points and that gold flowed across the Atlantic 
when the dollar/sterling exchange rate reached either point. But 
Silber explains the actual mechanics of gold arbitrage using the 
example of Max May, the vice president at Guaranty Trust Company in 
charge of foreign exchange operations. In chapter two he clearly 
outlines how Max would have to locate a ship going to England, get 
gold coin or bullion packaged in barrels with sawdust to prevent 
abrasion of the gold, and get the barrels insured and safely stowed 
on board. He also provides a numerical demonstration of how much 
profit May and other arbitrageurs could make at certain exchange 
rates. Max reappears in chapter 5 in an extended dialogue explaining 
why the value of sterling was so high in August 1914; as a bonus 
there is also a detailed discussion of the several types of bills of 
exchange. Some might view these examples as a bit simplistic, but 
they are great stuff for a classroom discussion of the gold standard.

Several chapters are worth mentioning in particular, as they 
highlight Silber's thesis that McAdoo was central in transforming the 
U.S. into a financial superpower. Chapter three outlines the events 
of the Panic of 1907 and how they led to the creation of the 
emergency currency authorized in the Aldrich-Vreeland Act. Silber 
makes it clear that the key New York bankers had the horrors of 1907 
in mind as they saw gold beginning to flow out of the U.S. at the 
outbreak of World War I. It was the large gold inflows from Europe 
that eventually damped the 1907 panic; gold leaving the country was 
not a comforting development. This leads into chapter four, which 
describes how the emergency currency was almost unavailable for the 
Crisis of 1914. The Federal Reserve Act extended the life of the 
Aldrich-Vreeland currency through June 30, 1915 -- it was to have 
expired a year earlier. Unfortunately, most of the large banks in New 
York were not eligible to issue the currency, for they had not issued 
national bank notes at least equal to 40 percent of their capital. 
Here McAdoo's decisive action saved the day when he was able to 
convince Congress to amend the Aldrich-Vreeland Act to suspend the 40 
percent requirement, allowing the large New York banks, as well as 
banks in other cities, to meet the withdrawals of cash as Americans 
began hoarding cash in anticipation of war. The Epilogue compares 
McAdoo's behavior to several modern Federal Reserve Board chairmen 
like Arthur Burns, Paul Volcker, and Alan Greenspan. The latter two 
compare favorably to McAdoo in their decisive handling of financial 
crises.

Was McAdoo as vital for America's transformation as Silber would have 
us believe? I think he makes a reasonable case, although it is also 
easy to believe that the combination of the Great Depression, the 
abandonment of the gold standard, and World War II would have left 
the U.S. as the world's financial superpower and the dollar as the 
reserve currency. Be that as it may, this short book contains a vast 
fund of information and history about an oddly neglected event in 
U.S. history.

References:

Milton Friedman and Anna Schwartz, _A Monetary History of the United 
States, 1867 to 1960_. Princeton, 1963.

Allan Meltzer, _A History of the Federal Reserve, Volume I: 
1913-1951_. Chicago, 2003.

Elmus Wicker, _Banking Panics of the Gilded Age_. Cambridge, 2000.


Jon Moen is an Associate Professor in the Department of Economics at 
the University of Mississippi. He has studied retirement in the 
United States in addition to his research on the Panic of 1907. He is 
currently working on a book with Ellis Tallman of the Atlanta Federal 
Reserve Bank on the Panic of 1907.

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