War News and Exchange Rates during World War I: the Eastern versus the Western Front∗

Using a newly compiled dataset on prisoners of war and on soldiers killed and wounded on the Eastern and Western Fronts of World War I, this paper shows that changes in the exchange rate among the currencies of the belligerent countries were associated with good or bad news from the battlefield. Prospects of losing the war depreciated a country’s currency because a defeat would increase the likelihood of inflationary policies to pay off war debts. The paper further provides evidence that exchange rate fluctuations were less associated with news from the Eastern Front than with news from the Western Front, suggesting that foreign exchange traders followed the military news from the Western Front more closely to forecast the outcome of the war.