WWIandthePostWarReturntotheGoldStandard

MajorTopicsforToday

FinancingtheWarEort Revenue/TaxaCon NewMoney Debt

CoordinaCngwarCmeproducCon

TheGoldStandard Closingofstockmarketin

1914 Returntothegoldstandard

aNerWWI

Announcements

DebatesignupsheetavailableaNerclass

OpenShopDebatetobeheldnextThursday(notTuesdayasitappearsonthesyllabus)

Ifyousignupforthisdebate,pleaseseemeaNerclasstodaytosetupaCmetomeet

TheFederalGovernmentMobilizesHomeFrontforWar

WWI,thestate,andtheeconomy

StaCstliberalsseewarasaopportunitytoputprogressiveidealsintopermanentpracCce

AssociaConalliberalsseewarastemporaryemergency

Whowins?

AWarserviceorganizedbybusinessmen,accordingtotheprinciplesofacCveprivatebusiness,mayeasilybedisconCnueduponthereturntopeace.

NewRepubliceditorial

TheFederalGovernmentMobilizesHomeFrontforWar

Financingthewareort

Theproblem:$31billiontowagethewar

Morethanfederalgovernmenttotalexpendituresbetween1789and1917

AtthebeginningoftheWorldWarwehadnomajorplan,wehadnoramicaConsofthatplan.Everythingwasindeniteandinchoate[orjustbeginning].

GeneralDouglasMacArthur

Total(billions) %

WarExpenditures

$31 100

Taxes 7.6 24.5

Bonds 19.0 61.4

NewMoney 4.4 14.1

TheFederalGovernmentMobilizesHomeFrontforWar

Taxes:TheWarRevenueActs,SocialJusCce,andSecretaryofTreasuryWilliamMcAdoo

CreaConoftheestatetax

Excessprotstaxonprotsbeyondnormalrateofreturn

BigDeal?Yes.

Assertedthatthepublichadarighttocorporateprotsoveracertainlevel

Responsibleformostoftheincometaxrevenueraisedduringthewar

Thegoalwastotaxtheprotsaccruingtomonopolypower.AsoneTreasurystamemberputit,theexcessprotstaxhadthemanifestadvantage...ofbecomingapermanentpartoftheGovernmentsrevenuesystem,andcanbeused,ifneedbe,asacheckuponmonopoliesortrustsearningexorbitantprots. ElliotBrownlee,taxhistorian

TheFederalGovernmentMobilizesHomeFrontforWar

GeneralSignicanceofWWIeraIncomeTax?

Incometaxbecomesmainmechanismforfundingfederalgovernment

TaxaConembracedinthisregime(19161941)asameansoffurtheringsocialjusCceandredistribuCngincome

Notealsothedoublinginthestockofmoney(nextslide)

Share of federal revenue from income taxes

1914 11%

1920 69%

Total(billions %

WarExpenditures

$31 100

Taxes 7.6 24.5

Bonds 19.0 61.4

NewMoney 4.4 14.1

Table21.2MoneyandPricesinWorldWarI

TheFederalGovernmentMobilizesHomeFrontforWar

CapitalizingPatrioCsm:TheMarkeCngofLibertyBonds

Ratherthanhightaxesonthemiddleclass,McAdooencouragedalteredbehavior:

reduceconsumpConandincreasesavings

loanmoneytofederalgovernment

Method:MoCvatethepublicthrougheecCveadverCsing

Theworldmustbemadesafefordemocracy.ItspeacemustbeplanteduponthetestedfoundaConsofpoliCcalliberty.

PresidentWilsonseekingdeclaraConofwarfromCongress(April2,1917)

TheFederalGovernmentMobilizesHomeFrontforWar

Success?

ofAmericanfamiliessubscribedtothirdLibertyBondcampaign

Warbondsnanceapproximately61%ofwareort(approximately$19billion)

Federalgovernmentdebtasa%ofGDP

1914 3%

1919 32%

TheFederalGovernmentMobilizesHomeFrontforWar

TheCreaConoftheDebtCeilingin1917:Signicance?

AshiNin(some)powerfromCongresstotheDepartmentofTreasury

But,Congressputsacaponspendingthatithastoraisewhenceilingishit

Whatcouldgowrong?

Federalgovernmentdebtasa%ofGDP

1914 3%

1919 32%

TheFederalGovernmentMobilizesHomeFrontforWar

CoordinaCngWarCmeProducCon:

Nearly5,000newagenciesestablishedtomanagedomesCcwarCmeeconomy.

Examples?

WarIndustriesBoard

NaConalWarLaborBoard

FoodAdministraCon

TheFederalGovernmentMobilizesHomeFrontforWar

WarindustriesBoardandBernardBaruch

Problem: NeedtoretoolforwarCme

producCon

SoluCon

Useamixofpowerandpersuasiontoconvinceemployers

ProvideimmunityfromanCtrustlegislaConforbusinesscombinaCons

Success?ofeconomyshiNedfromconsumertowarproducCon

RealGNPGrowthfrom1914to1918 22percent

TheFederalGovernmentMobilizesHomeFrontforWar

NaConalWarLaborBoard

Problem:

Strikes:4,450in1917

SoluCon:

FederalgovernmentorganizedbodyincludingrepresentaCvesoforganizedlabor,business,andthepublic

TheFederalGovernmentMobilizesHomeFrontforWar

ImplementaCon Case#1:SmithandWesson

Case#2:Bridgeport

Signicance? Organizedlaborgetsaplaceatthe

table

AmericanFederaConofLabor(AFL)membershipincreasesfrom2.7to5million

TheFederalGovernmentMobilizesHomeFrontforWar

HerbertHooverandtheU.S.FoodAdministraCon

Problem:ScarceFoodsupplies

SoluCon: MarkeCngandConservaCon:Wheatless

Mondays

Guaranteedminimumpricesforgrain

Success? WheatproducConincreasedfor637to921

millionbushelsinoneyear!

FoodproducConisclothedinthepublicinterest. FromLeverFood

ControlActofAugust1917

TheFederalGovernmentMobilizesHomeFrontforWar

Thegoldstandard,theoutbreakofthewar,andtheclosingofthestockmarket

Problemsandconcerns:1. FederalReservebankssCllnot

openandFedleaders(BenjaminStrong)reluctanttoputFedatrisk

2. InternaConalConcerns:EuropeanswouldsellUSstocksandexchangedollarsforgold

3. DomesCcConcerns:RunonbanksinUnitedStatessimilarto1907

Englandhasbeentheexchangeplaceoftheworld,becauseoflivinguptoeveryengagement,andbecausethepowergrewwiththebusiness.Todaywecantakethisplaceifwechoose;butcourage,willingnesstopartwithwhatwedontneedatonce,realcharacter,andthelivinguptoallourdebtspromptlywillgiveusthispower;andnothingelsewill.Irepeatthatitisourchancetotakerstplace.

InvestmentbankerHenryLeeHigginsontoPresidentWoodrowWilson,August20,1914

TheFederalGovernmentMobilizesHomeFrontforWar

Thegoldstandard,theoutbreakofthewar,andtheclosingofthestockmarket(cont.)

SoluCons RelyonDepartmentofTreasuryunder

WilliamMcAdooratherthanFed

DefendU.S.commitmenttogoldstandardw/outsuspendinggoldpayments

Closethestockmarketforfourmonths(starCngJuly31,1914)

MobilizeshippingindustrytosCmulateUSexportstoEurope

RushgoldandpapercurrencytobanksacrossUStopreventarepeatofthePanicof1907

ItshouldnotbeforgosenthatthenancialoutlookfortheUnitedStatesseemeddesperate,eventoagreatpartofthebankingcommunity,attheCmewhenmaintenanceofgoldpaymentswasagreedon....ItisimpossibletobesurethataadecisioninAugust1914tosuspendgoldpayments,evenwiththepurposeofsubsequentlyresumingthem,wouldnothavegiventoatleastourimmediatelysubsequentnancialhistoryaverydierentturnfromthatwhichitactuallytook.

AlexanderNoyes,TheWarPeriodofAmericanFinance,1926

TheFederalGovernmentMobilizesHomeFrontforWar

Thegoldstandard,theoutbreakofthewar,andtheclosingofthestockmarket(cont.)

Signicance? UScommitmenttogoldstandard

helpsmakethedollartheinternaConalmediumofexchange

BoldleadershipbyMcAdooturnsapotenCalnancialdisasterintoamonetarytriumph

Adecadewouldpass:Whataboutthatdecade?

InJanuaryof1914theNewYorkcapitalmarketreplacedLondonasmoneylendertotheworld.ArgenCna,Canada,andChina,tradiConalBriCshclients,visitedWallStreettoraisecapital.BytheCmeAmericaenteredtheworldconictin1917,foreigngovernmentsissuedmorethan$2.5billionofdollardenominatedsecuriCesinNewYork.Adecadewouldpassbeforethetransferofnancialpowerwascomplete,butatectonicshiNinmonetarysupremacyhadbegun.

Economist,WilliamL.Silber,authorofWhenWashingtonshutdownWallStreet

ReturningtotheGoldStandardaNerWWIanditsconsequences

HowdoesAhamedcharacterizetheissueofinternaConaldebtandreparaConsattheendofWWI?DidanyoneattheCmerecognizethattherewasaproblemhere?

Whywasthereturntothegoldstandardsuchaproblem?Whatisthegoldstandard,anyway?

HowdoesthecommitmenttothegoldstandardhelptoexplainthecomingoftheGreatDepression?

WhydidtheheadoftheBankofEnglandwantBenjaminStrongandtheFederalReservetoeasecreditintheU.S.?

Thisdepressionisthestupidestandmostgratuitousinhistory. LorddAbernon,economistand

BriCshambassador,onwoodentrucks,rubberCres,bullion,andtheGreatDepression

TheFederalGovernmentMobilizesHomeFrontforWar

SignicanceofWWI

USbecomesacreditornaCon

DramaCcexpansionoffederalgovernmentsroleintheeconomy

WarpropagandademonstratedeecCvenessofmarkeCng

Lookingforward

Legacyinthe1920s:conCnuedexpansionofcommandeconomy?

WWIasatestrunfortheNewDealandWWIImobilizaCon?

Atotallyplannedeconomyrunlargelybybigbusinessintereststhroughtheinstrumentalityofthecentralgovernment,whichservedasthemodel,theprecedent,andtheinspiraConforstatecorporatecapitalismfortheremainderofthetwenCethcentury.

MurrayRothbard,economistandhistorian