In the years before World War I, global financial markets experienced rapid growth, thanks to the lack of restrictions on cross-border investment flows and the invention of the telegraph. As a result, foreign-owned assets grew from 7% of world GDP in 1870 to 18% in 1914.
British investors were especially enthusiastic about international opportunities. One asset class that they particularly liked was American railway company securities. By the summer of 1914 they owned $3bn worth of railway shares and bonds ($348bn in 2019 prices).
When war broke out, the US authorities were worried that these investors would sell their shares and then convert the dollars into gold, draining America's reserves and forcing it off the gold standard. So they suspended the national stock exchanges on 30 July 1914, and also introduced restrictions on capital movements out of the country.
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While some brokers got around this by trading shares privately, this effectively prevented capital flight. Once it became clear that the threat had passed, the exchanges reopened, with the NYSE recommencing bond trading on 28 November and stock trading on 12 December. But the lack of liquidity and general uncertainty meant that prices fell by nearly a quarter during this period.
America was not the only country to do this: most major stockmarkets suspended operations as a result of the war. Even after they reopened, there were restrictions on trading.
After the end of the war, the interwar era would also see a sharp rise in both financial and trade protectionism. The share of foreign-owned assets relative to world GDP would not reach pre-war levels until the early 1980s.
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