Small Wars Journal

THE ONCE AND FUTURE RUIN: A Historical Spotlight on the Financial Risk of PRC Escalation

Mon, 01/02/2023 - 12:11pm


A Historical Spotlight on the Financial Risk of PRC Escalation

By Chris Telley

Novermber 17, 2002


When discussing the potential for a war over Taiwan, it is difficult for many pundits to escape the metaphorical traps of Graham Allison’s book Destined for War. However, Allison’s 1914 case study of the escalation toward the First World War, and most of anyone else’s discussion of the outbreak of that conflict, misses a fairly large risk that should move Beijing’s contemporary partners to push for calm. The economic crisis of July 1914 offers a parable, even for those far removed from the familiar flashpoints, through which to examine various market consequences that might be expected after a People’s Republic of China (PRC) escalation in the Straits of Taiwan. Those risks should be on the mind of every corporate or government leader as they decide on what to say, or not say, to Beijing about its so-called “internal matter.”[1]


The Chinese Communist Party (CCP) is selling the China brand while creating risk. Official outlets appeal to foreigners’ self-interest in order that leaders put ‘economics before geopolitics,’ amplifying local advocacy and emphasizing collaboration as well as positive "bottom-up" effects.[2]  These appeals paper over risks that the PRC increases with each escalatory missile fired over Taiwan.  A given capital may be many thousands of miles from any Thucydides traps in East Asia, but the economic ramifications of PRC aggression would have dire impacts in homes and businesses across the globe.[3]  There is significant dissonance between PRC narratives of “mutual understanding, mutual benefit, and win-win outcomes” and the People’s Liberation Army (PLA) rocket fire or territorial incursions.[4]


Many foreign audiences are unwilling to address the risk of an aggressive PRC. As an example, Europeans most often view their relations with China as firmly centered on trade.[5]  Though the last few years have shown some European countries moving away from China policies organized purely around economic engagement, the European Union still tries to keep economics separate from broader diplomatic efforts.[6] Their own history offers reason to reconsider. The Financial Crisis of July 1914 was the first major systemic failure of a globalized economy and stands as one of the sharpest global declines.[7]  Dozens of countries around the world, including all the financial centers of Europe, US, Latin America, and Asia, had financial crises with bank runs and stock crashes.[8]  According to some, it was the most extensive and acute global financial crisis ever, caused by just the fear of war.[9]


Most notably, the 1914 crisis came weeks before the “Guns of August,” perhaps even before the German Chancellor’s “blank check” message to Austria-Hungary.[10]  Germany declared war on France and invaded Belgium on August 3, 1914; the financial explosions started in late July.  The speed of the collapse surprised even the most pessimistic experts.[11]  There were bank runs, distorted currency flows, maritime insurance was essentially unavailable, and bond markets failed as traders across the continent attempted to turn their securities into cash at whatever price possible.[12] In London, Winston Churchill wrote “The world’s credit system is virtually suspended. You cannot sell stocks and shares.  You cannot borrow. Quite soon it will not perhaps be possible to cash a check.  Prices of goods are rising at panic levels.”[13]  The lesson for modern leaders is that the panic was not limited to one side of the Atlantic.


The crisis quickly crossed an ocean.  The first “shivers” hit American markets on 23 July, transmitted through a recently globalized financial system connected by undersea cables.[14]  By 30 July, securities in the United States had been “slaughtered.”[15]  Even though foreign trade accounted for a remarkably low portion of contemporary U.S. economic growth, the crisis incurred a twin problem for the United States, an internal banking and securities panic as well as a torrent of external currency outflows.[16]  Also, maritime insurance risks were deemed so grave that insurers in New York simply refused to offer policies to German ships, and policies on British liners were rising precipitously.[17]  On 31 July, New York exchanges closed in an attempt to prevent a sweeping exit of cash from U.S. banks.[18] A halt in the flow of money, combined with the drop in asset prices, threatened to create a chain reaction of insolvency.[19]  Though the most painful parts of the U.S. banking crisis lasted about four months, a global selloff led to global layoffs and many sectors recovered quite slowly. [20]  For example, cotton exporters in the Southern United States lost nearly two-thirds of their market from the start of the European war until the uptick of war mobilization in England and France in 1915.[21]


War over Taiwan may have similar consequences as July 1914. Though microchips dominate the discussion of Taiwan’s global economic presence, its geography is also key.  The fundamental risk is a political one, incurred by any PLA lethal action astride the world’s busiest sea lanes; though the range of escalation goes from taking one of Taiwan’s outlying islands to full invasion, a missile strike or blockade in this space would critically impede world markets.  Such military action would invite a compounding progression of financial risks, specifically market risks which would include but not be limited to commodity risks driven by maritime insurance rates, then equity risk linked to operating capital flows as well as securities speculation, all combined with the currency risk from sanctions related to the escalation.[22]  These risks would only add to current financial woes in China as well as economic instability across Europe; and, the potential losses are larger than those associated with Russia’s invasion of Ukraine.[23]


 Illuminating these kinds of risks is a key part of shaping the strategic environment around Beijing, as outlined by Secretary of State Anthony Blinken.[24] Though some consideration of financial risk tied to a Taiwan conflict is slowly creeping into the U.S. banking community, Congress should fund public research on the by-region or by-country economic consequences of a cross-strait military action.[25] There have been a number of reports that touch on the subject of economic damage relevant to the Taiwan straits, especially regarding the US-China relationship; there is even a forecast of total economic damage from a PRC blockade of Taiwan—approximately $2.5 trillion dollars in losses.[26] Nevertheless, there has been scant public coverage of what might specially happen to German manufacturing, Brazilian soy, or Dutch banks if the PLA decides to sink a ship in one of the world’s busiest seaways.


Legislative actions, like the Taiwan Policy Act, provide a perfect venue for ensuring necessary attention. Testimony required by the U.S.-China Economic and Security Review Commission would also be helpful. The Departments of State, Treasury, and Commerce all have equity in such analysis, to function as implementers. The crash of 1914 provides a preface for any such study of an Indopacific war and a novel narrative frame upon which to graft relevant risk assessments. The PRC needs foreign partners as sources of operating finance and as a destination for exports.  The threat of economic decoupling that official PRC outlets warn of, would pale in comparison to the sudden market destruction that would precede a major invasion.[27]  However, the inconvenient truths of PLA-induced risk are being obscured by the best efforts of PRC diplomats and propagandists.[28]  Countering the PRC’s official line enables foreign officials with regulatory authority and private executives with fiduciary responsibility, to make better decisions regarding strategi partnerships. Those actors’ responses may also, ideally, create pressure on Beijing’s efforts to set conditions for future military moves, adding to the guardrails for which the Biden administration strives.


Lieutenant Colonel Chris Telley serves as an Army information operations officer and is detailed to the U.S. State Department. His past writing covers emerging technology, competitive influence, and multi-domain operations. He tweets at @chris_telley.


The views expressed are those of the author and do not reflect the official position of the Department of the Army, Department of Defense, or the Department of State.






[1] The Taiwan Affairs Office of the State Council and The State Council Information Office, “The Taiwan Question and China's Reunification in the New Era,” the Chinese Communist Party, August 2022:

[2] Examples include the following: “EU-China relations should give priority to economy: former Portuguese FM,” Xinhua, August 21, 2022; “Cooperation between EU, China has bigger role to play in today's multilateral world, experts say” Xinhua, April 5, 2022; Viewpoint, “EU should avoid being 'junior partner' of US: former Belgian prime minister,” Global Times, June 27, 2022; “EU, China share complementary strengths, more future opportunities: expert” Xinhua, July 7, 2021; “EU-China cooperation the way forward, experts agree,” Xinhua, October 15, 2020.

[3] The sentence alludes to Graham Allison. ‘The Thucydides trap’ in Richard Rosecrans and Steven E. Miller (eds), The next Great War? Cambridge Mass: Harvard University Press, 2015: 79.

[4] Editor, “Uncertainty-ridden world calls for closer China-France, China-EU cooperation,” The People’s Daily, April 26, 2022.

[5] Beijing, “The war makes China uncomfortable. European leaders don’t care,” The Economist, April 2, 2022:

[6] Thomas Wright, “Europe changes its mind on China,” The Brookings Institute, July 2020; Philippe Le Corre, "Europe’s Tightrope Diplomacy on China," Carnegie Endowment for International Peace, March 24, 2021:

[7] Smita Roy Trivedi, “Book Review: Saving the City: The Great Financial Crisis of 1914,” Prajnan; Pune Vol. 44, Iss. 3, Oct-Dec 2015: 279; Michael D Bordo, “Book Review When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy by William L Silber,” Journal of Economic Literature; Nashville Vol. 47, Iss. 1, March, 2009: 214.

[8]Richard Roberts, “The Great Financial Crisis of 1914” London Bullion Market Association, Issue 73; Smita Roy Trivedi, “Book Review: Saving the City: The Great Financial Crisis of 1914,” Prajnan; Pune Vol. 44, Iss. 3, Oct-December, 2015: 279.

[9] Richard Roberts, “The Great Financial Crisis of 1914,” The Alchemist, Issue 73. London Bullion Market Association,

[10] The ‘guns of August,’ is a reference to Barbara Tuchman’s 1962 book of the same name.

[11] Nicholas A. Lambert, Planning Armageddon: British Economic Warfare and the First World War, Harvard University, Cambridge MA, 2012: 185.

[12] Stocks Shrink by The Million: Slaughter In Values to Date In American Securities Totals $696,967,261.

Chicago Daily Tribune, Chicago, Ill. 31 July 1914: 1; J. M. Keynes, "War and the Financial System,” August 1914," The Economic Journal Vol. 24, No. 95, 1914: 461.

[13] Lambert, 2012: 193.

[14]Chicago Daily Tribune, 31 July 1914: 1.

[15] Ibid.

[16] Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, Vintage Books, 1989: 244; Michael D Bordo, “Book Review When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy by William L Silber,” Journal of Economic Literature; Nashville Vol. 47, Iss. 1, March, 2009: 214.

[17] Ships Sailing Now Face War Risks: Could Be Seized if Declaration of ... New York Times (1857-1922); Jul 31, 1914; ProQuest Historical Newspapers: The New York Times pg. 4; Chicago Daily Tribune, 31 July 1914: 1.

[18] William L. Silber, “The Great Financial Crisis of 1914: What Can We Learn from Aldrich-Vreeland Emergency Currency?,” The American Economic Review, Vol. 97, No. 2 (May, 2007), 285

[19] Keynes, 1914: 463.

[20] Keynes, 1914: 463; Lambert, 2012: 187.

[21] James L. McCorkle, Jr., "Louisiana and the Cotton Crisis, 1914," Louisiana History: The Journal of the Louisiana Historical Association, Vol. 18, No. 3, Summer, 1977: 303.

[22] Market risks are a category of macro, systemic financial risks which are able to be mitigated but are not fundamentally controllable by a firm. The subsets of this category are interest rate risk, equity price risk, foreign exchange risk, and commodity risk.

[23] Hal Brands, “Economic Chaos of a Taiwan War Would Go Well Past Semiconductors,” Bloomberg, June 23, 2022.

[24] Anthony J. Blinken, The Administration’s Approach to the People’s Republic of China,” Speech given at the George Washington University, May 26, 2022:

[25] Ambereen Choudhury, Natasha White and Denise Wee, “Wall Street Banks Prep for Grim China Scenarios Over Taiwan,” Bloomberg, September 26, 2022,

[26] Kathrin Hille and Demetri Sevastopulo, “US warns Europe a conflict over Taiwan could cause global economic shock,” Financial Times, November 10, 2022,

[27] Hu Weijia, “EU should never fall into 'decoupling China' trap dug by US,” Global Times, August 09, 2022.

[28] “Inconvenient Truth” alludes to the book of the same name, by former Vice President Al Gore, in that the data shows a real danger but corporate behaviors are difficult change; everyone understands the risks of doing business with China are high, but they are ill-defined and not presented in context of a war.

About the Author(s)

Lieutenant Colonel Chris Telley serves as an Army information operations officer and is detailed to the U.S. State Department. His past writing covers emerging technology, competitive influence, and multi-domain operations. He tweets at @chris_telley.