Skip to main content
SpringerLink
Log in

Public perceptions and bond markets during the Great War: the case of a neutral country

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

Neutrality during World War I was not assured but depended on the ability of a neutral state to adjust to the major belligerent powers’ interests. How did Switzerland manage to adhere to its neutrality policy under those circumstances? This paper analyzes contemporary perceptions of neutrality by means of a structural break analysis. According to historiography Switzerland was endangered from within rather than by foreign actions. The analysis based on a newly assembled database supports this assessment in parts. In the bondholders’ view, Switzerland’s neutrality was most threatened by the events leading up to the general strike in November 1918.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: Own calculations based on Basler Börse (1919)

Similar content being viewed by others

Notes

  1. Denmark, Norway, Sweden, the Netherlands, Switzerland and Spain in Europe; Argentina, Chile and Mexico in South America.

  2. For the literature on WWI exploring the link between military casualties and exchange rates, see Hall (2004) and Duarte et al. (2018). Both papers rely on Swiss exchange rate data emphasizing the contemporary significance of Switzerland’s currency and the influence of its foreign exchange markets. Foreign exchange traders were concerned with casualties on both fronts and both belligerent blocs until their focus shifted to the Western front (WF) in late 1916. Until the failure of Germany’s final offensive in 1918, the Central Powers held the upper hand according to foreign exchange markets.

  3. Central Powers: German Empire, Austria-Hungary and the Ottoman Empire. Triple Entente or Allied Powers: France, Great Britain and Russia.

  4. See Brown and Burdekin (2002), Oosterlinck (2003) or Waldenström and Frey (2008) for additional studies of WWII.

  5. The public’s reaction somewhat contrasted with the rhetoric prevalent in the years prior to the outbreak during which a future war among the great European powers had repeatedly been conjured up—a paradox that prevailed throughout Europe (Mittler 2003)

  6. The Central Powers attempted to impose similar control mechanisms by establishing the “Treuhandstelle Zürich”. Owing to their geographic position and maritime inferiority, the Central Powers remained unable to match the Entente’s economic pressure.

  7. Under pressure to credibly demonstrate its neutrality, the federal government acted to pursue more trustworthy relations with the Allies, eventually resulting in a secret agreement for military cooperation with France in case of a German attack (e. g. Ehrbar 1976).

  8. Futures trading remained suspended until 1921 (Bauer 1981).

  9. Using the example of the Liberty Loans issued by the United States government to finance military expenditures during WWI, Kang and Rockoff (2015) show how appealing to citizens’ patriotism is not tantamount to economic and financial success. Contrary to conventional wisdom, the yields were kept low thanks to tax exemptions and the largest buyer, the Federal Reserve, thus creating inflation.

  10. Besides an array of domestic government and corporate bonds, throughout the war, roughly 20 sovereign bonds from foreign governments were listed in Basel, including issues from Germany, Austria-Hungary, the Ottoman Empire, Serbia, Bulgaria, the Scandinavian countries and Japan (Basler Börse, 1919).

  11. Thus, the researcher can be confronted with the challenge of distinguishing between the effects of a change in bondholders’ perceptions of default risk and other contributing factors, such as international macroeconomic activity or issuer activity.

  12. Bai and Perron (2003) suggest that the parameter be set at \(\epsilon =0.20\) for a sample of \(T=120\)—a value that is easily exceeded in this analysis.

  13. Developments on the battlefield remained locally concentrated in Flanders, with the Third Battle of Ypres yielding no breakthrough for the attacking Entente, largely reinforcing the status quo along the Western Front.

  14. Hall (2004) presents complementary evidence that Germany was the main beneficiary of the October Revolution and subsequent events in foreign exchange traders’ assessments.

  15. The extent to which the investors’ reactions also may have been affected by domestic effects of the Bolshevik revolution is difficult to assess. On November 15th, the celebration of the Russian revolution in Zurich had turned into a riot lasting for two more days and leaving four protesters killed by military troops. Though locally concentrated, historians consider this incident to be the peak in objections by socialists in the build-up to the general strike one year later (Koller 2015).

  16. Basler Nachrichten, December 18th, 1917 73(629), Militärischer Bericht.

  17. Der Bund, December 16th, 1917, 68(588), Zur Kriegslage.

  18. The outcome of the vote could have been expected. The abolition of the majority principle in previous years in many cantons had barely been disputed. As a result, the radical democrats opposed the initiative halfheartedly as opposed to the previous two attempts (Rielle 2014).

  19. According to Jopp (2014), German bondholders acknowledged defeat around seven weeks prior to the Armistice of Compiègne, i. e., the third week of September.

References

  • Adams, D. S. (2015). Contemporary perceptions of the First World War reflected in the capital markets. Scandinavian Economic History Review, 63(1), 1–23.

    Article  Google Scholar 

  • Bai, J., & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66(1), 47–78.

    Article  Google Scholar 

  • Bai, J., & Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18(1), 1–22.

    Article  Google Scholar 

  • Bauer, H. (1976). Die Basler Börse 1876–1976. Basel: Börsenkammer des Kantons Basel-Stadt.

    Book  Google Scholar 

  • Bauer, H. (1981). Basel–gestern–heute–morgen: Hundert Jahre Basler Wirtschaftsgeschichte. Basel: Birkhäuser Verlag.

    Book  Google Scholar 

  • Bernholz, P. (2005). Die Bedeutung der Geschichte für die Wirtschaftswissenschaften und der ökonomischen Theorie für die Geschichtsforschung (The importance of history for economics and of economic theory for historical research). Perspektiven der Wirtschaftspolitik, 6(2), 131–150.

    Article  Google Scholar 

  • Börse, B. (1915–1919). Öffentliches Kursblatt der Basler Effektenbörse. Basel.

  • Brown, W. O., & Burdekin, R. C. (2002). German debt traded in London during the Second World War: A British perspective on Hitler. Economica, 69(276), 655–669.

    Article  Google Scholar 

  • Christodoulaki, O., Cho, H., & Fryzlewicz, P. (2012). A reflection of history: Fluctuations in Greek sovereign risk between 1914 and 1929. European Review of Economic History, 16(4), 550–571.

    Article  Google Scholar 

  • Duarte, P., Freidinger, M., & Hoffmann, A. (2018). Military casualties and exchange rates during World War I: Did the Eastern front matter? The Economic History Review,. https://doi.org/10.1111/ehr.12774. (Advance online publication).

    Article  Google Scholar 

  • Ehrbar, H.-R. (1976). Schweizerische Militärpolitik im Ersten Weltkrieg: Die militärischen Beziehungen zu Frankreich vor dem Hintergrund der schweizerischen Aussen- und Wirtschaftspolitik 1914–1918. Bern: Stämpfli and Cie.

    Google Scholar 

  • Frey, B. S., & Kucher, M. (2000a). History as reflected in capital markets: The case of World War II. The Journal of Economic History, 60(2), 468–496.

    Article  Google Scholar 

  • Frey, B. S., & Kucher, M. (2000b). World War II as reflected on capital markets. Economics Letters, 69(2), 187–191.

    Article  Google Scholar 

  • Frey, B., & Kucher, M. (2001). Wars and markets: How bond values reflect the second world war. Economica, 68(271), 317–333.

    Article  Google Scholar 

  • Frey, B. S., & Waldenström, D. (2004). Markets work in war: World War II reflected in the Zurich and Stockholm bond markets. Financial History Review, 11(1), 51–67.

    Article  Google Scholar 

  • Fuhrer, H. R. (2003). Die Schweizer Armee im Ersten Weltkrieg: Bedrohung, Landesverteidigung und Landesbefestigung. Zürich: NZZ Verlag.

    Google Scholar 

  • Gautschi, W. (1988). Der Landesstreik 1918. Zürich: Chronos.

    Google Scholar 

  • Hall, G. J. (2004). Exchange rates and casualties during the First World War. Journal of Monetary Economics, 51(8), 1711–1742.

    Article  Google Scholar 

  • Jopp, T. A. (2014). How did the capital market evaluate Germany’s prospects for winning World War I? Evidence from the Amsterdam market for government bonds. Jahrbuch für Wirtschaftsgeschichte/Economic History Yearbook, 55(2), 159–184.

    Article  Google Scholar 

  • Jopp, T. A. (2016). Contemporaries’ opinions of the allied and central powers’ performance during the First World War: Measuring turning points in perception with sovereign debt prices. European Review of Economic History, 20(2), 242–273.

    Article  Google Scholar 

  • Kang, S. W., & Rockoff, H. (2015). Capitalizing patriotism: The liberty loans of World War I. Financial History Review, 22(1), 45–78.

    Article  Google Scholar 

  • Koller, C. (2015). Labour, labour movements, trade unions and strikes. In U. Daniel, P. Gatrell, O. Janz, H. Jones, J. Keene, A. Kramer, & B. Nasson (Eds.), 1914–1918-online. International Encyclopedia of the First World War. Issued by Freie Universität Berlin.

  • Kreis, G. (2014). Insel der unsicheren Geborgenheit: Die Schweiz in den Kriegsjahren 1914–1918. Zürich: Verlag NZZ.

    Google Scholar 

  • Kruizinga, S. (2014). Neutrality. In J. Winter (Ed.), The Cambridge history of the First World War (Vol. II, pp. 542–575). Cambridge: Cambridge University Press.

    Chapter  Google Scholar 

  • Kuhn, K. J., & Ziegler, B. (2014). Der vergessene Krieg: Spuren und Traditionen zur Schweiz im Ersten Weltkrieg. Baden: Hier und jetzt.

    Google Scholar 

  • Maissen, T. (2012). Geschichte der Schweiz (4th ed.). Baden: Hier und Jetzt.

    Google Scholar 

  • Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17(1), 59–82.

    Article  Google Scholar 

  • Meier, R. T., & Sigrist, T. (2006). Der helvetische Big Bang: Die Geschichte der SWX Swiss Exchange. Zürich: NZZ Verlag.

    Google Scholar 

  • Mittler, M. (2003). Der Weg zum Ersten Weltkrieg: Wie neutral war die Schweiz. Zürich: NZZ Verlag.

    Google Scholar 

  • Moos, C. (2014). Schweizer Neutralität(en) zur Zeit des Ersten Weltkriegs—von der schwierigen Umsetzung eines umstrittenen Konzepts. In R. Rossfeld, T. Buomberger, & P. Kury (Eds.), 14/18: Die Schweiz und der Grosse Krieg (pp. 48–71). Baden: Hier und Jetzt.

    Google Scholar 

  • Oosterlinck, K. (2003). The bond market and the legitimacy of Vichy France. Explorations in Economic History, 40(3), 326–344.

    Article  Google Scholar 

  • Oosterlinck, K., & Ureche-Rangau, L. (2012). Interwar Romanian sovereign bonds: The impact of diplomacy, politics and the economy. Financial History Review, 19(2), 219–244.

    Article  Google Scholar 

  • Pammer, M. (1998). Austrian private investments in Hungary, 1850–1913. European Review of Economic History, 2(2), 141–169.

    Article  Google Scholar 

  • Pammer, M. (2017). The Hungarian risk: The premium on Hungarian state bonds, 1881–1914. Financial History Review, 24(1), 23–52.

    Article  Google Scholar 

  • Rielle, Y. (2014). Deutliches Ja zum Proporz bricht die Dominanz des Freisinns. In W. Linder, C. Bolliger, & Y. Rielle (Eds.), Handbuch der eidgenössischen Volksabstimmungen 1848–2007 (pp. 48–71). Baden: Hier und Jetzt.

    Google Scholar 

  • Rossfeld, R. (2013). 1914–1918: Neue Zugänge zur Geschichte der Schweiz im Ersten Weltkrieg. Schweizerische Zeitschrift für Geschichte, 63(3), 337–342.

    Google Scholar 

  • Ruoss, E. (1992). Die Geldpolitik der Schweizerischen Nationalbank 1907–1929: Grundlagen, Ziele und Instrumente. Zurich: SNB.

    Google Scholar 

  • Schmid, H. R., & Meier, R. T. (1992). Die Geschichte der Zürcher Bürse. Zürich: NZZ Verlag.

    Google Scholar 

  • Schneider, O. (2014). Diktatur der Bürokratie? Das Vollmachtenregime des Bundes im Ersten Weltkrieg. In R. Rossfeld, T. Buomberger, & P. Kury (Eds.), 14/18: Die Schweiz und der Grosse Krieg (pp. 48–71). Baden: Hier und Jetzt.

    Google Scholar 

  • SNB. (1944). Statistisches Handbuch des Schweizerischen Geld- und Kapitalmarktes. Zürich: SNB.

    Google Scholar 

  • Steiner, S. (2017). Oberstenaffäre. In U. Daniel, P. Gatrell, O. Janz, H. Jones, J. Keene, A. Kramer, & B. Nasson (Eds.), 1914–1918-online. International Encyclopedia of the First World War. Issued by Freie Universität Berlin.

  • Straumann, T. (2015). Wartime and post-war economies (Switzerland). In U. Daniel, P. Gatrell, O. Janz, H. Jones, J. Keene, A. Kramer, & B. Nasson (Eds.), 1914–1918-online. International Encyclopedia of the First World War. Issued by Freie Universität Berlin.

  • Stucki, W. (1924). Die schweizerischen Effektenbörsen während und nach dem Weltkrieg 1914–1921. Zürich: Rascher.

    Google Scholar 

  • Waldenström, D., & Frey, B. S. (2008). Did Nordic countries recognize the gathering storm of World War II? Evidence from the bond markets. Explorations in Economic History, 45(2), 107–126.

    Article  Google Scholar 

  • Weber, F. (2015). Societe suisse de surveillance economique. In U. Daniel, P. Gatrell, O. Janz, H. Jones, J. Keene, A. Kramer, & B. Nasson (Eds.), 1914–1918-online. International Encyclopedia of the First World War. Issued by Freie Universität Berlin.

  • Willard, K. L., Guinnane, T. W., & Rosen, H. S. (1996). Turning points in the Civil War: Views from the greenback market. American Economic Review, 86(4), 1001–1018.

    Google Scholar 

Download references

Acknowledgements

This article was written in honor of Peter Bernholz on the occasion of his 90th birthday. While Prof. Bernholz’s published work combines an array of subjects such as monetary economics, political economy and the economics of power, many of his contributions are characterized by his avid interest in history. His extensive “historical exploration of economic and social relations” is not only driven by his personal curiosity but also the conviction that the “assessment of long-term development” is undermined by the negligence of history in economics (Bernholz 2005). Our article builds on this tradition Professor Bernholz has extensively contributed to throughout his academic career.

Author information

Authors and Affiliations

  1. Faculty of Economics and Management, University of Lucerne, Frohburgstrasse 3, 6002, Lucerne, Switzerland

    Christoph A. Schaltegger & Lukas A. Schmid

  2. University of St. Gallen, Varnbüelstrasse 19, 9000, St. Gallen, Switzerland

    Christoph A. Schaltegger

Authors
  1. Christoph A. Schaltegger
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Lukas A. Schmid
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Lukas A. Schmid.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

1.1 Contemporary press reports

In addition to reports on the war provided mostly by foreign news agencies—as described in Duarte et al. (2018)—newspapers regularly presented detailed explanations and interpretations of the events in columns that often were printed on the front page. As outlined in Sect. 4 we went through the war columns of three contemporary newspapers that had considerable significance beyond their local domain: the Basler Nachrichten (BN), Neue Zürcher Zeitung (NZZ) and Berne based Der Bund (DB). Among the three newspapers, the NZZ’s columns ”Foreign Weekly Report” (Ausländischer Wochenbericht) or ”The World War” (Der Weltkrieg) were more reserved with regard to anticipating subsequent events than both the BN and DB for which we present examples below.

Figure 2 shows DB’s front page from December 16th, 1917 with the column ”On the War” (Zur Kriegslage) whose writer, Heinrich Stegemann, became respected internationally for his factual reports. It mostly covers ”preparations for further belligerent activities and the Central Powers’ newly gained freedom of action” that became apparent during those days. See footnote citation 13.

Fig. 2
figure 2

Source: Newspaper archive, Swiss National Library, Berne

Der Bund, Sunday December 16th, 1917

Full size image

Figure 3 depicts BN’s column ”Military report” (Militärischer Bericht) from midday edition on December 18th, 1917—the day the press reported on the ceasefire between the Central Powers and Russia, the effects of which are discussed at the beginning and in the second paragraph in the second column. The author, Col. Egli, was a former member of the Swiss general staff who had been suspended after the colones affair in early 1916.

Fig. 3
figure 3

Source: Newspaper archive, Swiss National Library, Berne

Basler Nachrichten, midday edition, Tuesday December 18th, 1917

Full size image

Figure 4 shows the front page of the NZZ midday edition from December 22nd, 1917 combining a comment on the effect of the ceasefire and a report on the recent events along the Italian mountain front. The author expects a large offensive at the Western Front in the near future (to be found at the end of the first paragraph).

Fig. 4
figure 4

Source: Newspaper archive, Swiss National Library, Berne

Neue Zürcher Zeitung, midday edition, Saturday December 22nd, 1917

Full size image
Fig. 5
figure 5

Source: Own calculations based on Basler Börse (1919)

Federal government bond (“Eidgenossen”) yields and structural breaks

Full size image
Fig. 6
figure 6

Source: Own calculations based on Basler Börse (1919)

Mobilization bond yields and structural breaks

Full size image

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Schaltegger, C.A., Schmid, L.A. Public perceptions and bond markets during the Great War: the case of a neutral country. Public Choice 186, 537–561 (2021). https://doi.org/10.1007/s11127-019-00709-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-019-00709-0

Keywords

JEL Classification

Search

Navigation