Tuesday, January 04, 2005 Capitalizing Patriotism: The World War I Liberty Bonds Preliminary: Comments are welcome. Hugh Rockoff Department of Economics Rutgers University and NBER New Brunswick NJ 08901
[email protected] Abstract The outbreak of World War I presented the U.S. Treasury with the classic problem of war finance: to what extent should the government rely on taxes, borrowing, or creating new money? Although taxes were raised substantially, tax revenues fell far short of expenditures, and recourse was had to five bond issues, the famous Liberty Bonds, to finance the bulk of the war expenditures. The Secretary of the Treasury, William Gibbs McAdoo, hoped to create a broad market for the Liberty Bonds and to hold down interest rates on them by following an aggressive policy of “capitalizing patriotism.” He called on everyone from Wall Street bankers to the Boy Scouts to volunteer for the campaigns to sell the “Liberty bonds.” He recruited the nation’s best known artists to create posters depicting the contribution to the war effort to be made by buying bonds and he organized giant bond rallies featuring Hollywood stars such as Douglas Fairbanks, Mary Pickford, and Charlie Chaplin. It appears, however, that these efforts enjoyed only limited success. Nominal interest rates were kept down mainly by making the bonds tax exempt and by making sure that a large proportion of the debt was purchased directly or indirectly by the Federal Reserve, turning the Federal Reserve into an engine of inflation. 2 1. The Liberty Bonds1 When World War I began the Secretary of the Treasury, William Gibbs McAdoo, turned to the record of Lincoln’s Secretary of the Treasury, Samuel Chase, for lessons on how to finance a major war.2 McAdoo believed that Chase had made a major error in turning over the marketing of the government’s securities to a private firm, Jay Cooke and Company.