WWIandthePostWarReturntothe

GoldStandard
MajorTopicsforToday
FinancingtheWarEort
Revenue/TaxaCon
NewMoney
Debt

CoordinaCngwarCme
producCon
TheGoldStandard

Closingofstockmarketin
1914
Returntothegoldstandard
aNerWWI

Announcements
Debatesignupsheet
availableaNerclass
OpenShopDebatetobe
heldnextThursday(not
Tuesdayasitappearson
thesyllabus)
Ifyousignupforthis
debate,pleaseseeme
aNerclasstodaytosetupa
Cmetomeet

TheFederalGovernmentMobilizesHome
FrontforWar
WWI,thestate,andthe
economy
StaCstliberalsseewarasa
opportunitytoput
progressiveidealsinto
permanentpracCce
AssociaConalliberalsseewar
astemporaryemergency

Whowins?

AWarserviceorganizedby
businessmen,accordingtothe
principlesofacCveprivate
business,mayeasilybe
disconCnueduponthereturnto
peace.
NewRepubliceditorial

TheFederalGovernmentMobilizesHome
FrontforWar
Total(billions) %

Financingthewareort

Theproblem:$31billionto
wagethewar
Morethanfederal
governmenttotal
expendituresbetween
1789and1917

War
Expenditures

$31

100

Taxes

7.6

24.5

Bonds

19.0

61.4

NewMoney

4.4

14.1

AtthebeginningoftheWorld
Warwehadnomajorplan,we
hadnoramicaConsofthatplan.
Everythingwasindeniteand
inchoate[orjustbeginning].
GeneralDouglasMacArthur

TheFederalGovernmentMobilizesHome
FrontforWar

Taxes:TheWarRevenueActs,Social
JusCce,andSecretaryofTreasury
WilliamMcAdoo

CreaConoftheestatetax

Excessprotstaxonprots
beyondnormalrateofreturn

BigDeal?Yes.

Assertedthatthepublic
hadarighttocorporate
protsoveracertainlevel

Responsibleformostof
theincometaxrevenue
raisedduringthewar

Thegoalwastotaxtheprots
accruingtomonopolypower.Asone
Treasurystamemberputit,the
excessprotstaxhadthemanifest
advantage...ofbecominga
permanentpartoftheGovernments
revenuesystem,andcanbeused,if
needbe,asacheckuponmonopolies
ortrustsearningexorbitantprots.
ElliotBrownlee,taxhistorian

TheFederalGovernmentMobilizesHome
FrontforWar

GeneralSignicanceofWWI
eraIncomeTax?

Incometaxbecomesmain
mechanismforfundingfederal
government

Total(billions

War
Expenditures

$31

100

Taxes

7.6

24.5

Bonds

19.0

61.4

NewMoney

4.4

14.1

TaxaConembracedinthis
regime(19161941)asameans
offurtheringsocialjusCceand
redistribuCngincome

Notealsothedoublinginthe
stockofmoney(nextslide)

Share of federal
revenue from
income taxes
1914

11%

1920

69%

Table21.2MoneyandPricesinWorld
WarI

TheFederalGovernmentMobilizesHome
FrontforWar

CapitalizingPatrioCsm:The
MarkeCngofLibertyBonds

Ratherthanhightaxeson
themiddleclass,McAdoo
encouragedaltered
behavior:

reduceconsumpConand
increasesavings

loanmoneytofederal
government

Method:MoCvatethe
publicthrougheecCve
adverCsing

Theworldmustbemadesafefor
democracy.Itspeacemustbe
planteduponthetestedfoundaCons
ofpoliCcalliberty.
PresidentWilsonseekingdeclaraCon
ofwarfromCongress(April2,1917)

TheFederalGovernmentMobilizesHome
FrontforWar
Success?

ofAmericanfamilies
subscribedtothirdLiberty
Bondcampaign

Warbondsnance
approximately61%ofwar
eort(approximately$19
billion)

Federalgovernment
debtasa%ofGDP

1914

3%

1919

32%

TheFederalGovernmentMobilizesHome
FrontforWar

TheCreaConoftheDebt
Ceilingin1917:
Signicance?

AshiNin(some)powerfrom
CongresstotheDepartment
ofTreasury

But,Congressputsacapon
spendingthatithastoraise
whenceilingishit

Whatcouldgowrong?

Federalgovernment
debtasa%ofGDP

1914

3%

1919

32%

TheFederalGovernmentMobilizesHome
FrontforWar
CoordinaCngWarCme
ProducCon:
Nearly5,000new
agenciesestablishedto
managedomesCc
warCmeeconomy.
Examples?
WarIndustriesBoard
NaConalWarLabor
Board
FoodAdministraCon

TheFederalGovernmentMobilizesHome
FrontforWar

WarindustriesBoardand
BernardBaruch
Problem:

SoluCon

NeedtoretoolforwarCme
producCon

Useamixofpowerand
persuasiontoconvince
employers

ProvideimmunityfromanC
trustlegislaConforbusiness
combinaCons

Success?ofeconomyshiNed
fromconsumertowar
producCon

RealGNPGrowth
from1914to1918 22percent

TheFederalGovernmentMobilizesHome
FrontforWar

NaConalWarLaborBoard

Problem:

Strikes:4,450in1917

SoluCon:

Federalgovernment
organizedbodyincluding
representaCvesof
organizedlabor,business,
andthepublic

TheFederalGovernmentMobilizesHome
FrontforWar
ImplementaCon
Case#1:SmithandWesson
Case#2:Bridgeport

Signicance?

Organizedlaborgetsaplaceatthe
table

AmericanFederaConofLabor(AFL)
membershipincreasesfrom2.7to5
million

TheFederalGovernmentMobilizes
HomeFrontforWar
HerbertHooverandtheU.S.Food
AdministraCon
Problem:ScarceFoodsupplies
SoluCon:
MarkeCngandConservaCon:Wheatless
Mondays
Guaranteedminimumpricesforgrain

Success?
WheatproducConincreasedfor637to921
millionbushelsinoneyear!

FoodproducConis
clothedinthepublic
interest.
FromLeverFood
ControlActofAugust
1917

TheFederalGovernmentMobilizes
HomeFrontforWar
Thegoldstandard,theoutbreak
ofthewar,andtheclosingofthe
stockmarket
Problemsandconcerns:
1.

FederalReservebankssCllnot
openandFedleaders
(BenjaminStrong)reluctantto
putFedatrisk

2.

InternaConalConcerns:
EuropeanswouldsellUSstocks
andexchangedollarsforgold

3.

DomesCcConcerns:Runon
banksinUnitedStatessimilarto
1907

Englandhasbeentheexchangeplaceofthe
world,becauseoflivinguptoevery
engagement,andbecausethepowergrewwith
thebusiness.Todaywecantakethisplaceifwe
choose;butcourage,willingnesstopartwith
whatwedontneedatonce,realcharacter,and
thelivinguptoallourdebtspromptlywillgive
usthispower;andnothingelsewill.Irepeat
thatitisourchancetotakerstplace.

InvestmentbankerHenryLeeHigginsonto
PresidentWoodrowWilson,August20,1914

TheFederalGovernmentMobilizes
HomeFrontforWar

Thegoldstandard,theoutbreakof
thewar,andtheclosingofthestock
market(cont.)
SoluCons

RelyonDepartmentofTreasuryunder
WilliamMcAdooratherthanFed
DefendU.S.commitmenttogold
standardw/outsuspendinggold
payments
Closethestockmarketforfourmonths
(starCngJuly31,1914)
MobilizeshippingindustrytosCmulate
USexportstoEurope

Rushgoldandpapercurrencytobanks
acrossUStopreventarepeatofthe
Panicof1907

Itshouldnotbeforgosenthatthenancial
outlookfortheUnitedStatesseemeddesperate,
eventoagreatpartofthebankingcommunity,
attheCmewhenmaintenanceofgoldpayments
wasagreedon....Itisimpossibletobesure
thataadecisioninAugust1914tosuspendgold
payments,evenwiththepurposeof
subsequentlyresumingthem,wouldnothave
giventoatleastourimmediatelysubsequent
nancialhistoryaverydierentturnfromthat
whichitactuallytook.

AlexanderNoyes,TheWarPeriodofAmericanFinance,1926

TheFederalGovernmentMobilizes
HomeFrontforWar
Thegoldstandard,theoutbreak
ofthewar,andtheclosingofthe
stockmarket(cont.)
Signicance?
UScommitmenttogoldstandard
helpsmakethedollarthe
internaConalmediumofexchange
BoldleadershipbyMcAdooturnsa
potenCalnancialdisasterintoa
monetarytriumph
Adecadewouldpass:What
aboutthatdecade?

InJanuaryof1914theNewYorkcapitalmarket
replacedLondonasmoneylendertotheworld.
ArgenCna,Canada,andChina,tradiConalBriCsh
clients,visitedWallStreettoraisecapital.By
theCmeAmericaenteredtheworldconictin
1917,foreigngovernmentsissuedmorethan
$2.5billionofdollardenominatedsecuriCesin
NewYork.Adecadewouldpassbeforethe
transferofnancialpowerwascomplete,buta
tectonicshiNinmonetarysupremacyhad
begun.

Economist,WilliamL.Silber,authorofWhenWashington
shutdownWallStreet

ReturningtotheGoldStandardaNer
WWIanditsconsequences

HowdoesAhamedcharacterizethe
issueofinternaConaldebtand
reparaConsattheendofWWI?Did
anyoneattheCmerecognizethat
therewasaproblemhere?

Whywasthereturntothegold
standardsuchaproblem?Whatisthe
goldstandard,anyway?

Howdoesthecommitmenttothe
goldstandardhelptoexplainthe
comingoftheGreatDepression?

WhydidtheheadoftheBankof
EnglandwantBenjaminStrongand
theFederalReservetoeasecreditin
theU.S.?

Thisdepressionisthe
stupidestandmost
gratuitousinhistory.
LorddAbernon,economistand
BriCshambassador,onwooden
trucks,rubberCres,bullion,and
theGreatDepression

TheFederalGovernmentMobilizes
HomeFrontforWar
SignicanceofWWI
USbecomesacreditornaCon
DramaCcexpansionoffederal
governmentsroleinthe
economy
Warpropagandademonstrated
eecCvenessofmarkeCng
Lookingforward
Legacyinthe1920s:conCnued
expansionofcommand
economy?
WWIasatestrunfortheNew
DealandWWIImobilizaCon?

Atotallyplannedeconomyrunlargelyby
bigbusinessintereststhroughthe
instrumentalityofthecentralgovernment,
whichservedasthemodel,theprecedent,
andtheinspiraConforstatecorporate
capitalismfortheremainderofthe
twenCethcentury.
MurrayRothbard,economistandhistorian