by Pablo Duarte and Andreas Hoffmann (Leipzig University)
An article expanding on this blog has been published in the Economic History Review.
In 1918 the Entente forces defeated the Central Powers on the Western Front. The First World War, with countless brutal battles and over 40 million casualties, had finally ended.
During the war, all governments substantially increased their national debt and promised to hand the bill to the losers. They also promised to return to the pre-war gold parity rather than inflating and devaluing their currency. Since the outcome of the war was expected to severely affect currency values, particularly for the losers, foreign exchange traders had an incentive to closely follow war events to update their beliefs on who was more likely to win.
According to Ferguson’s (1998) The Pity of War, the lost morale of the German troops — reflected in higher numbers of prisoners of war and of soldiers surrendering on the Western Front — was the ultimate reason for their defeat. Complementing this argument, Hall (2004) provided evidence that military casualties on the Western Front — the key front to finally winning the war — can help explain contemporary fluctuations in the exchange rates between belligerents’ currencies.
Although finally decided in the West, historians have emphasized the relevance of the global dimension of the First World War and the importance of the Eastern Front in understanding its complex evolution. Imagine it is 1914. Russia has just entered the war (earlier than expected), upsetting the plans of the Central Powers to circumvent a two-front war. Events on one front affected those on the other. But did contemporary traders, like historians today, consider the Eastern Front to be of relevance?
In our forthcoming article, we provide the first empirical insights into the relative importance of the Eastern Front during the First World War from the perspective of contemporary foreign exchange traders. Building on Hall’s study, the article indicates when and to what extent military casualties from both the Western and Eastern Fronts were linked to exchange rate fluctuations during the First World War, and suggest that traders used this information as an indicator as to which side was more likely to win.
To analyze the link between exchange rates and casualties we have introduced a novel dataset: the German Reichsarchiv and the Austrian War Office. Merging our dataset with that for the Western Front employed by Hall (2004), we have been able to construct a rich dataset on war casualties for France, Britain, and Russia as well as Germany and Austria-Hungary, for both Fronts.
Figure 1. 15,000 Russian Prisoners of war in Germany.
Using the digital archives of the Neue Zürcher Zeitung (a Swiss newspaper), we have further documented information on casualties, specifically the number of prisoners of war (Figure 1). The following quote from December 1914 makes this finding explicit:
Berlin, Dec. 31  (Wolff. Authorized) The overall number of prisoners of war (no civilian prisoners) in Germany at the end of the year is 8,138 officers and 577,875 men. This number does not include a portion of those captured on the run in Russian Poland nor any of those still in transit. The overall number is comprised of the following: French 3,159 officers and 215,905 men, including 7 generals; Russians 3,575 officers and 306,294 men, including 3 generals; British 492 officers and 18,824 men (Neue Zürcher Zeitung, 1 Jan. 1915, p. A1.).
In summary, our forthcoming article provides evidence that foreign exchange traders recognized the global dimension of the war, especially the Eastern and Western Fronts. Casualties on both Fronts were associated with exchange rate fluctuations. The number of soldiers captured on the Eastern Front affected exchange rates in the early war years. Foreign exchange traders gave additional weight to the Eastern Front during the first year of the war because Russia’s attack came as a surprise and the number of casualties was substantially higher than on the Western Front.
From autumn 1916 onwards, even though Russia had not yet left the war, our findings indicate that traders believed that the key to winning the war was in the west. The Brusilov offensive, a massive Russian attack (from June to September 1916), had proven that the Central Powers would face substantial opposition in the East. Moreover, the Allied forces on the Western Front had started to coordinate joint offenses.
To contact the authors:
firstname.lastname@example.org Twitter: @economusiker
email@example.com Twitter: @Andhoflei
Ferguson, N. (1998). The Pity of War. Basic Books.
Hall, G. J., ‘Exchange rates and casualties during the First World War’, Journal of Monetary Economics, 51 (2004), pp. 1711–42.