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The Street Comes Of Age

July 2024
3min read

As the twentieth century dawned, the American economy had become, by far, the largest national economy in the world. And while the country produced and exported vast and growing quantities of agricultural products and raw materials, it was also a thoroughly modern economy in terms of its manufacturing potential and technological abilities. Wall Street was now equal in size to London as a capital market and, once a major capital importer, was now a capital exporter.

The United States in a little more than a century had been transformed from a nearly empty wilderness to the equal of Europe, and the world’s economic center of gravity, long in Europe, was now in the mid-Atlantic.

Then, in 1914, Europe blew up. The politics surrounding a relatively trivial event, the assassination of the little-respected Archduke Franz Ferdinand, heir to the throne of Austria-Hungary, spun out of control, and by August 1st of that year all the Great Powers of Europe were at war.

Politically, the United States, following a century old policy of remaining aloof from European affairs, was determined to stay neutral. But economically, the country, now deeply enmeshed in a global economy, panicked. The New York Stock Exchange, like all the other major exchanges, did not open for business on the morning of August 1st. It would not be fully operational again until the following spring. A broker, sent out to investigate the rumor of an illicit market operating on New Street, just behind the Exchange, reported back that all he could find on New Street were “four men and a dog.”

It was widely believed by both economists and politicians that a general European war would be disastrous for the American economy: Gold owned by foreigners would be withdrawn from American banks and repatriated, causing the American money supply to contract and forcing the banks to call in loans while interest rates soared. Further, investors in Britain, France, and Germany held about $5 billion in American securities, and it was feared that these would be dumped on the market to facilitate weapons purchases, causing the market to crash. American agricultural exports would decline sharply as Britain shut off the sea lanes to Germany and Austria.

Rarely, even by the standards of the famously cloudy crystal balls of economists, have predictions proved so wrong. Instead of gold leaving the country, it flooded in as European nations sent their supplies of the precious metal to the United States for safekeeping. Much of it remains here to this day, now tucked away in the vaults 80 feet below street level at the Federal Reserve Bank of New York, in lower Manhattan. Allied investments in American securities were indeed liquidated, but this was handled slowly and skillfully, mostly by J. P. Morgan and Company, and the markets were not disrupted. As a result, the United States, a net debtor for its entire history, became the greatest creditor nation in the world.

Agricultural exports, instead of declining, soared. Russia had been one of the world’s great grain exporters before World War I. But with its access to world markets through the Black Sea cut off by Turkey, Russian exports slowed to a trickle, and it was mostly American grain exports that replaced them. With millions of young men called up for military service in other countries, agricultural production declined in all of them, spurring still more American exports. Between December 1913 and April 1914, the United States had exported 18 million bushels of wheat. In the same period a year later, it exported 98 million.

DuPONT WOULD PROVIDE THE ALLIES WITH NO LESS THAN 40 PERCENT OF THEIR MUNITIONS.

Horses, needed to haul guns and wagons and slaughtered at the front bv the tens of thousands, were purchased at top-dollar prices by the Allied armies and exported by the shipload. So many horses were shipped overseas that many American farmers switched over to tractors, and draft animals began to disappear from American farms, a fact that would have great consequences in ensuing decades.

But it was American industry that benefited most from the Great War. Stocks had plunged in late July 1914, as war seemed imminent. General Motors had fallen from 587/8 to 39, nearly 34 percent, on the last day of trading before the Exchange closed. Bethlehem Steel, the nation’s second-largest steel company, fell 14 percent. But by the following spring it was clear that, however disastrous the war might be for Europe, it would be a bonanza for U.S. manufacturers.

The biggest contract in Bethlehem’s history had been for $10 million. But in November 1914, the company signed a contract with the British Royal Navy to supply it with a total of $135 million in armor plate, gun barrels, and ships. DuPont, a good-sized powder company before the war, would provide the Allies with no less than 40 percent of their munitions during the conflict. Its annual military business rose by a factor of 276; its total business, by a factor of 26. It would emerge from the war an industrial giant.

 

The result on Wall Street, once the market reopened, was the greatest boom in the Street’s history as measured by the Dow Jones Industrial Average. General Motors rose from its warpanicked 39 to end 1915 at 500. Bethlehem surged from 46 1/8 to 459½.

The United States, whose economic interests had become more and more linked to Britain and France as it made massive loans to the Allies, entered the war in 1917. Although it suffered relatively few casualties compared with the carnage endured by European combatants, the war caused the national debt, which had been hovering around $1 billion since 1890, to rise to $25 billion by 1919. Taxes, especially incomes taxes, were raised sharply. The percentage of the United States GDP that flowed through the federal government increased equally and would never return to pre-war levels.

Even so, in November 1918, when the Central Powers asked for an armistice, the United States was, in a very real sense, the only victor. The economies of Germany, Austria, and Russia were devastated by the war and by subsequent revolution. Even the other nominal victors, Britain, France, and Italy, had been exhausted and nearly bankrupted. But the United States economy had flourished as never before. New York had replaced London as the financial capital of the world, and the dollar had become the most important currency.

The American Century had begun.

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