The Nazis and the Stock Markets
Bryan Taylor, Chief Economist, Global Financial Data
The reaction of financial markets to World War II was dramatically different from the reaction to World War I, or the “Great War” as it was called before World War II began. . As we discussed in “World War I and Global Stock Markets,” in 1914, global financial markets were integrated, and money flowed freely from one market to the other. Exchange rates were often arbitraged by buying and selling securities on different exchanges rather than shipping gold from one country to the other. World War I broke out suddenly and unexpectedly.Stock market officials feared that billions of dollars would be repatriated between the Allies and Germany. This would lead to massive selling. Brokers would be unable to sustain the outflow and capital markets might collapse. A chain reaction of stock market closures set in to prevent the massive selling of securities. By August 1, 1914, almost every stock market in the world, with the exception of Spain, Japan and several other marginal countries, were closed. New York, London and Paris didn’t open back up for several months, and when they did, there were restrictions on the sale of securities. Germany, Austria and Russia didn’t reopen until 1917.
By 1939, security markets existed in a different world than in 1914. Securities were more likely to be owned domestically, and the number of foreign-listed and foreign-owned securities was much smaller than in 1914. There were restrictions on capital outflows, no country was on the gold standard, and securities were more likely to be dealt in cash requiring immediate settlement. Consequently, when war came, the mass closure of stock markets that had occurred in 1914 never occurred in 1939. The New York Stock Exchange never closed, and the London Stock Exchange closed for only one week. Not only did stock markets not close in Germany, but stocks rose in price as Germany’s blitzkrieg scored one success after the other. Since Germany had seized Austria in Munich, by 1939 the Vienna Stock Exchange was a regional German stock exchange that traded both German and Austrian stocks. The Warsaw Stock Exchange closed after Germany invaded Poland, and the St. Petersburg Stock Exchange had been closed since 1918.
Major Stock Markets During World War II
Figure 1. The British Stock Market 1938 to 1946
The closure of each country’s stock exchange during World War II depended upon the path of the war. Initially, the stock markets in England, the United States and France declined as Germany rolled over Poland, the Netherlands, Belgium, Denmark, Norway and France. As is illustrated in Figure 1, the English stock market bottomed on June 26, 1940, three weeks after the last British troops left Dunkirk. France’s stock market had bottomed out in August 1936 after the victory of the Popular Front in France. The French stock market struggled until early October 1939 when it finally hit bottom and began its climb through the rest of World War II.
Figure 2. The American Stock Market, 1938 to 1946
The most pessimistic stock market was that of the United States, as is illustrated in Figure 2. As Germany and Japan went from one victory to the next, the U.S. market continued to slide. The American stock market didn’t hit its bottom until April 1942 which was close to the maximum extent of the control of territory of both Germany and Japan. The Canadian stock market also bottomed out in April 1942. The U.S. began assisting England in North Africa in May 1942, the battle of Midway occurred in June 1942, and the battle for Stalingrad began in August 1942. All of these ended up being Allied victories that turned the tide in World War II. The French, English and American stock markets all moved upward from then until the end of the war.
The German stock market climbed in value through September 1941, then took a dip. The German government put a price freeze on stocks in January 1943 to keep stocks from declining in price. This order stayed in effect until the end of the war. This action basically froze trading of stocks because no one was willing to buy stocks at more than they were worth. The price of German stocks stayed at that level, despite inflation and the destruction of the German economy, until Germany converted to the Deutschemark in 1948 when securities were reduced in value by 90%.
Figure 3. Germany’s Stock Market 1938 to 1949
Stock Market Closures During World War II
During World War I, virtually all stock markets were closed by August 1, 1914, and gradually reopened over time. During World War II, closures depended upon when the country was invaded by Germany or by the Allies. Many countries never closed because they were not directly involved in the fighting in World War II. Countries that did not close their stock exchanges included Australia, Canada, Ireland, Portugal, Romania, Spain, Sweden, Switzerland, and the United States. The Spanish stock market was closed during the Spanish Civil War between August 1936 and February 1940, but remained open during World War II. Table 1 shows the closures that occurred during World War II.
|
Country |
First Closure |
Second Closure |
|
Austria |
04/1945-03/1946 |
|
|
Belgium |
06/1940-09/1940 |
08/1944-05/1945 |
|
Czechoslovakia |
10/1938-12/1939 |
04/1943-12/1943 |
|
Denmark |
05/1940- |
|
|
Finland |
12/1939-03/1940 |
|
|
France |
06/1940-02/1941 |
|
|
Germany |
01/1943 (08/1944)-06/1948 |
Price Limits |
|
Great Britain |
09/01/1939-09/06/1939 |
|
|
Hungary |
07/1944-06/1946 |
04/1948- |
|
Italy |
05/1945- |
|
|
Japan |
09/1945-05/1949 |
|
|
Netherlands |
05/1940-08/1940 |
09/1944-04/1946 |
|
Norway |
04/1940-06/1940 |
|
|
Poland |
07/1939- |
|
|
Romania |
07/1947- |
Table 1. Stock Market Closures During World War II
There were several stock exchange closures even before World War II began on September 1, 1939. The Prague Stock Exchange in Czechoslovakia closed between October 1938 and December 1939. The Munich Agreement on September 30, 1938, which allowed Germany to annex Czechoslovakia, also led to the closure of the exchange until the end of 1939. The Prague exchange was closed in April 1945 and after the Communists took over the country in a coup d’etat in February 1948, the stock exchange was closed and officially abolished in 1952.
When the war began on September 1, 1939, the London stock exchange closed, but only for a week. London had learned from its experiences in World War I. There were fewer foreign stocks traded in London, so there was less fear of capital flight. The Warsaw stock exchange closed when World War II began in September 1939 and never reopened.
The Vienna Stock Exchange became a German stock exchange after the Anschluss on March 12, 1938 incorporated Austria into Germany. No index was calculated for Austrian shares between July 1939 and December 1942 because Austria no longer existed as an independent country. German and Austrian shares traded on the Vienna Stock Exchange during World War II, but trading on the exchange was limited. The exchange closed between April 1945 and March 1946 after the Allies defeated Germany and reopened in April 1946.
The Berlin Stock Exchange did not officially close during World War II. German victories at the beginning of World War II caused the stock market to rise. As conditions in the war worsened, Germany imposed stock price limits on trading in January 1943. Since the value of the shares was less than the stock price floor, few people were willing to buy shares and trading on the exchange froze. There was virtually no change in stock prices after August 1944. Once Germany was defeated, Berlin and other stock exchanges closed in April 1945. The Frankfurt Stock Exchange reopened under the protectorate of the US military in September 1945. When the currency was revalued at one-tenth of its former level in July 1948, stock markets reopened, and Frankfurt regained its prominence among German stock exchanges.
You can see that there were closures in different countries as Germany invaded western Europe. The Helsinki Stock Exchange closed between December 1939 and March 1940 after the Soviet Union invaded Finland in November 1939. A peace treaty was signed between Finland and the Soviet Union on March 13, 1940, and the Helsinki Stock Exchange reopened.
The Amsterdam Stock Exchange closed between May 1940 and August 1940. The Copenhagen Stock Exchange also closed in May 1940, but quickly reopened after the Nazis took control of Denmark. The Belgian stock exchange closed between June 1940 and September 1940. The Paris Stock Exchange closed between June 1940 and February 1941. As Germany invaded the Netherlands, Denmark, Belgium and France, each country was forced to close their stock exchanges until German occupation brought enough stability that shares could once again trade. The Oslo stock exchange closed when Germany invaded Norway in April 1940, but reopened in July 1940.
Stock exchanges remained open during the war, but when the Allies invaded Belgium and the Netherlands in 1944, there was a second set of stock market closures. The Amsterdam stock exchange closed between September 1944 and April 1946 while the Brussels stock exchange closed between August 1944 and May 1945. The Paris Stock Exchange did not have to close in August 1944 because of the swift recapture of Paris by the Allied troops. The Milan stock exchange closed in May 1945, but quickly reopened.
The Tokyo and other stock exchanges in Japan remained open during World War II but closed when the Allies occupied Japan after World War II. Japanese stock markets remained closed between September 1945 and May 16, 1949, when stock exchanges were allowed to reopen. Japanese shares traded over the counter in the interim.
Eastern European stock exchanges faced permanent closure after the Communists seized power in Eastern Europe. The Warsaw Stock Exchange closed in September 1939. The Prague Stock Exchange closed in May 1945, and the Romanian stock exchange closed in July 1947. The Budapest stock exchange closed between September 1944 and April 1946, both because of the war and the hyperinflation that afflicted Hungary after the war. Once the currency was stabilized in 1946, the stock exchange reopened in May 1946, but closed in March 1948 when the Communists took control of the country.
Conclusion
World War I hit financial markets without warning and stock markets were totally unprepared for the consequences of a pan-European war. Each country was afraid that there would be mass selling of securities and that billions of dollars would flee countries to the homeland of the people who sold the securities. Moreover, brokers would have to settle accounts and there was the fear that many brokers did not have sufficient capital to do this. The only solution was to close stock exchanges to prevent excessive selling and capital outflows.
This was not a problem when World War II began. International stock markets were not integrated to the degree they had been during World War I. Markets favored cash over time transactions, making it easier for brokers to avoid being bankrupted by a sudden demand to sell shares. Stock exchanges closed in response to invasions by the Germans or the Allies and reopened once the political situation had stabilized. But some countries never found it necessary to close. This included not only countries that were not directly involved in the war, such as the United States, Canada, Australia, and New Zealand, but Spain, Portugal, Sweden, Ireland, and Romania.
Since World War II, stock exchange closures have been infrequent. The London stock exchange closed when the market decimalized in February 1971. The Paris Stock Exchange closed twice due to strikes in February 1968 and March 1979 and the New York Stock Exchange closed after the attacks on September 11, 2001. After Russia invaded Ukraine in February 2022, the Moscow stock exchange closed for a month and the Ukrainian stock exchange closed for six months. Both the Tel Aviv and Palestine Al-Quds exchange have remained open since Hamas attacked Israel on October 7.
With electronic trading of securities today, it seems unlikely that trading in securities will be suspended for a long period of time because of war. If people want to sell stocks or bonds, they will do so either through an exchange in another country or over the counter, and with global stock markets, the closure of one exchange simply pushes trading to another exchange.
Of course, let’s hope that war does not engulf the world in the way World War I or World War II did, but if this occurs, stock markets will likely continue to operate.
