Financing the Great War: A Class Tax for the Wealthy, Liberty Bonds for All

Richard Sutch University of California Riverside and Berkeley

National Bureau of Economic Research

[email protected] Z.P. Nikolaki 1918

Library of Congress Prints and Photographs Division

Prepared for presentation at the Development of the American Economy sessions of the 2014 National Bureau of Economic Research Summer Institute Cambridge Massachusetts, July 7-10, 2014

Thanks are due to Susan Carter, Daniel Fetter, Caroline Fohlin, Martha Olney, and Hugh Rockoff. Each read and commented on an earlier draft [Sutch 2014]. Their suggestions were welcome, thought provoking, constructive, and often followed.

Financing the Great War: A Class Tax for the Wealthy, Liberty Bonds for All

Abstract

William Gibbs McAdoo, President Woodrow Wilson’s Secretary of the Treasury and ex officio Chairman of the Federal Reserve Board formulated the national plan to finance World War I. Against the advice of most economists of his time, he chose a mix of taxation (about one-third) and the sale of war bonds (two thirds). He introduced a sharply progressive income tax schedule that taxed the wealthy class but left average Americans untaxed. To raise the balance needed McAdoo conceived of the Liberty Loan. This mechanism for borrowing from the public had three elements. (1) The public would be educated about bonds, the causes and objectives of the war, and led to appreciate the financial power of the country. (2) The government would appeal to patriotism and ask everyone – businessmen, workmen, farmers, bankers, millionaires, school-teachers, immigrants, housewives and children – to do their part by reducing consumption and purchasing bonds. (3) The entire effort would rely upon volunteer labor. The men and women who could not go into military service would constitute a “financial front … the economic equivalent of the military front.” I argue that the combination of the class tax and the Liberty Loan Campaign was a great success. It temporarily increased the national saving rate above the long-run level observed before and after the war and moderated the war-time price inflation.

Liberty Calling Page 2 Any great war must necessarily be a popular movement. It is a kind of crusade; and like all crusades, it sweeps along on a powerful stream of romanticism.

William Gibbs McAdoo

On October 25, 1917 a large three-engine biplane, a Caproni Bomber, piloted by a lieutenant in the Royal Italian Flying Corps, flew over New York’s 59th Street Bridge at 4,000 feet, continued on to Fifth Avenue, reduced altitude and proceeded downtown where it circled Washington Square Park three times before returning up Fifth Avenue to Central Park. It flew so low those on the top reaches of the Woolworth Building (792 feet) could look down on the aircraft [Air Service Journal 1917: 531]. The point of this stunt was to attract a crowd and attract the crowd’s attention (few Americans had yet seen an airplane in flight); and, incidentally, to remind New Yorkers of Italian descent that Italy had switched sides and was now an ally in the war against Germany. The United States had entered the war in April.

As the Caproni flew she dropped paper “bombs” inscribed “A Liberty Bond in your home will keep German bombs out of your home.” It was Liberty Day and the goal was to promote the sale of war bonds in the drive for the Second Liberty Loan. According to the New York Times 20,000 or more marched in the parade. The Liberty Loan Committee walked in “double rank, with Benjamin Strong, Governor of the Federal Reserve Bank, and J. P. Morgan among them. They were followed by the staff of the Liberty Loan Committee offices, including 250 girls in white aprons.” Later in the day a captured German U-boat was rechristened “U-Buy-a-Bond.”1

Responsibility for formulating the financial war plan fell to William Gibbs McAdoo, President Woodrow Wilson’s Secretary of the Treasury. He was not a financier; but a prominent New York attorney, a visionary entrepreneur, and a successful railroad executive. As an entrepreneur he designed, directed, and drove the “McAdoo Tunnels” under the Hudson River. The project took six years, from 1902 to 1908. These arteries connecting Manhattan with New

1 The Liberty Day celebrations in New York are described in the Air Service Journal [1917: 531], the Aerial Age Weekly [1917: 325], and the New York Times [26 October 1917: 2].

Liberty Calling Page 3 Jersey by rail are still in use and are now known as the PATH tunnels (Port Authority Trans- Hudson).2

McAdoo was chosen for the cabinet because he had Wilson’s confidence. In 1912 he had taken direction of Wilson’s campaign for the presidency. He was, like Wilson, a progressive Democrat and despite friendships and business dealings with New York bankers and other Wall Streeters, he considered himself “an outsider in the community of interest known as Big Business” [McAdoo 1931: 110, 178]. In office he proved to be an excellent politician, perhaps because he was personable, energetic, and ambitious, but also because he was unencumbered by rigid theories [Johnson 2010: 34]. The president of one of the railroads once said: “If you ever let McAdoo talk to you for fifteen minutes, you won’t protest against anything. He’ll get you, body and breeches, and all you’ll be thinking about when you come away will be what a nice call you have had and what a fine fellow McAdoo is” [New York Times 23 November 1918: 2]. {Figure 1}

One of his immediate jobs as Treasury Secretary was to bring the Federal Reserve System into being. The Fed was to be America’s central bank, a “lender of last resort.” It was established in response to the frightening banking panic of 1907 and designed to prevent a similar financial collapse in the future. Wilson signed the Federal Reserve Act in December of 1913. McAdoo had played a major role in drafting the Fed bill, outmaneuvering its critics, and steering it through Congress.3 The legislation had been strongly opposed by the big-city banks. They wanted a powerful centralized system, directed from New York, and governed entirely by bankers. Perhaps because of this opposition and the pre-Christmas rush to finalize the bill, many

2 For a detailed discussion of the construction of the McAdoo tunnels consult Joseph Brennan [2005: Chapter 22].

3 McAdoo’s account of the beginnings of the Federal Reserve is related in Chapter 15 of his memoir [1931: 219- 236]. The banker Paul Warburg and Senator Nelson Aldrich (R, Rhode Island) are generally given credit for defining and promoting the idea of an American central bank. Senator Robert Owen (D, Oklahoma), a Cherokee citizen, and Representative Carter Glass (D, Virginia) were the bill’s congressional sponsors. McAdoo, however, declared the view that Warburg played a central role “completely erroneous” and the idea that Aldrich should be regarded as the “Father of the Federal Reserve” “an amusing specimen of ignorance.” He implicitly gives Glass and Owen, and explicitly Wilson, the credit [pp. 281-283, 515]. Whatever claims each of these men might legitimately have, it was McAdoo who proved to be the ace in this deck [Craig 2013: 102, Wilkerson 2013]. After the President signed the bill with three gold pens he had purchased, one was given to Glass, one to Owen, and one to McAdoo. It was December 23; a Christmas spirit prevailed [New York Times 24 December 1913: 1-2].

Liberty Calling Page 4 of the specifics were not spelled out in the legislation. The task of hammering out those details was delegated to McAdoo and the Secretary of Agriculture, David F. Houston, an economic historian. The law required that the nation be divided into districts, each with its own Federal Reserve Bank. But, the boundaries of the districts, the location of the banks, and even the number of districts (between eight and twelve) were left to McAdoo and Houston. New York made its argument for an enormous district centered in New York with seven lesser districts as subordinates. McAdoo and Houston snubbed Wall Street and created a less-centralized and more-balanced system of twelve districts controlled by a presidentially-appointed Federal Reserve Board located in Washington DC, not by the New York bank operating independently. New York was furious.4

McAdoo’s role in the creation of the Federal Reserve would seem “providential” once the U.S. entered the war [Washington Post 1 May 1917]. The Secretary of Treasury was by statute ex officio Chairman of the Federal Reserve Board (that provision was ended in 1936). The Board’s offices and staff were initially housed in the Treasury Building. With this proximity and his intimate connection with the other members of the Board, McAdoo was able to turn the Fed into a tool of the war-time Treasury and involve it directly in his plan for war finance [Strong 1921: 503]. He would need that help.

McAdoo, as Treasury Secretary, quickly established a reputation for bold and decisive action executed with great audacity. When World War broke out in late July of 1914 it precipitated a financial panic in Europe and a Treasury crisis in the United States. The U.S. did not enter the war for three more years but the Treasury could not ignore the situation in Europe. Europeans immediately began to dump American stocks they owned and to redeem the proceeds

4 Robert Johnson offers a brief reliable account of the founding and early days of the Federal Reserve System [2010]. A more technical policy history of the period is offered by Michael Bordo and David Wheelock [2011]. Kris Mitchener provides a description of the process of drawing the Federal Reserve District boundaries [2011]. Sarah Binder and Mark Spindel describe the politics of the Reserve Bank Organization Committee [2011]. Also see the committee’s report [1914]. McAdoo wrote a detailed but highly readable and engaging memoir, published in 1931. He was helped by an able ghostwriter, the biographer and novelist William E. Woodward. Douglas Craig is McAdoo’s biographer [2013]. The Panic of 1907 is the subject of a centennial history written by Robert F. Bruner and Sean D. Carr [2007].

Liberty Calling Page 5 in gold. Stock prices on the New York market took the largest one-day dive since 1907. That was not the problem. What worried McAdoo was the gold pouring out of the country as anxious Europeans repatriated their investments. America was still on the gold standard with dollars backed at the fixed exchange of $20.67 per fine ounce of gold. Anyone holding dollars could convert them into gold at the U.S. Treasury at that price. With a fractional reserve system, however, the Treasury’s gold stock could have been rapidly depleted. One solution would be to suspend the ability to exchange dollars for gold, that is, for the U.S. to leave the gold standard. Ironically, it was precisely the fear that the dollar would soon prove inconvertible, that fed the rush to liquidate stocks. However, McAdoo believed that leaving gold would weaken America’s financial credibility at a time just before the Federal Reserve System with its new currency, Federal Reserve Notes, was up and running.

To save the day, McAdoo asked banker J. P. Morgan, son and successor of J. Pierpont Morgan, to close the stock market. It was an unprecedented, courageous, and audacious request. Morgan, perhaps more worried about a collapse of stock prices than McAdoo, acceded and closed the exchange that very day, July 31, 1914. The market remained closed until December and then only opened on a restricted basis. Unable to sell stocks Europeans could not obtain claims on the Treasury’s gold. Yet, by adhering to the gold standard when the rest of the world suspended convertibility on account of war, the American dollar became the most secure currency in the world. Consequently, the gold outflow soon reversed and became a strong inflow (that would also complicate things, as we will see). This sequence of events was transformative. After the war, the world would shift from a monetary standard based on the English pound to one based on the American dollar.5 The dollar has remained the world’s standard ever since.

5 On the closing of Wall Street consult William Silber [2007]. The New York Times reported on July 31 [page 1] that the bankers meeting in New York were opposed to closure and on the next day [1 August 1914: 1] that the bankers had closed the stock exchange, the cotton exchange, and the coffee exchange. Morgan’s actions are discussed by Ron Chernow [1990: chapter 10]. McAdoo did not reveal his role in the crisis until 1931 [1931: 290]. Barry Eichengreen explains the war-time disintegration of the gold standard and the reversal from an outflow of gold from the U.S. to an inflow [1992: chapter 3]. The shutdown of the exchange exposed the financial system to the risk of a liquidity shortage. Margaret Jacobson and Ellis Tallman describe how the demand for bank liquidly was met [2013]. McAdoo also played a prominent part in that story. Four days after the European war began he asked and obtained special powers to issue one-half billion dollars of emergency currency.

Liberty Calling Page 6 In his personal life, McAdoo had demonstrated a similar capacity for audacity. He courted the President’s 24-year-old daughter Eleanor, who was engaged to another man. McAdoo was twice her age, widowed with six children, and in office less than year. The New York Times coyly described the courtship: Both Miss Wilson and Mr. McAdoo are fond of dancing, and they were constant partners at dances that they were attending. In spite of his half century, Mr. McAdoo is as trim and agile as a youngster of 25 and dances with all the enthusiasm and enjoyment of a youth. … Mr. McAdooo [sic] was told by his physician that he must have more exercise and diversion, and dancing was suggested as a means to that end. Mr. McAdoo has been a scrupulous observer of his physician’s orders. [14 March 1914: 1]

The couple married in the Blue Room of the White House in May [McAdoo 1931: 276].

McAdoo had a reputation for audacious self-confidence bordering on recklessness that preceded his appointment as Secretary. He once inspected a New York skyscraper he had commissioned when the building was still a steel skeleton. It was to be the largest office building in the world. He ascended to the twenty-second story standing on a girder clasping only the chain which hoisted him upward. An enormous crowd collected below to watch the spectacle. It was also reported that he had escaped death three times in automobile mishaps and was once arrested for racing with a railroad train “to see which would have the right-of-way over a crossing” [Hendrick 1913: 628].

McAdoo’s capacity for decisive action and his independence from Wall Street would serve him well as he formulated a fiscal plan to finance the war. His solution was bold, blatant, brilliant. With it he demonstrated, in the words of a Washington Post editorial, a “remarkable breadth of vision, moral courage, and sound judgment” [May 1, 1917: 6].6

When the United States entered the World War in 1917 it became immediately evident that an unprecedented effort to divert productive capacity toward fulfilling the demands of the military would be required. At the time of the congressional declaration of war, the American

6 Russell Leffingwell, Assistant Secretary of the Treasury, provides a history of financing during World War I [1920]. Also see the treatment by Charles Gilbert [1970].

Liberty Calling Page 7 economy was operating at full capacity. The war-time population would have to pay the bill with taxes or loans since ships, guns, and bullets cannot be magically teleported from the future. As an avowed neutral, Wilson had made no effort to stockpile weapons or amass a war chest. In Paul Samuelson’s famous textbook simplification it came down to a choice between producing guns or butter [1948: 17-20]. McAdoo understood the point.7 Shortly after war had been declared he delivered a speech which he later recorded for posterity: Every man and woman who stays at home, and for whose liberties, property, and sacred institutions our boys will shed their blood, must be moved by a spirit of sacrifice equal to that which animates our gallant troops. We must be willing to give up something of personal convenience, something of personal comfort, something of our treasure – all, if necessary, and our lives in the bargain, to support our noble sons who go out to die for us [McAdoo 1917]. But the question remained: how would the shift in output be arranged? How should the war be paid for? There were three possibilities to consider: taxation, borrowing, and printing money.

Printing money was off the table from the beginning. The experience with printed “greenbacks” during the Civil War suggested that fiat money would produce a general inflation. If there had been any doubt on this matter, it was dispelled with a massive quantitative study by the Berkeley economist Wesley Clair Mitchell. Mitchell not only connected printed money with the inflation, but cataloged inflation’s deleterious consequences [1903, 1908]. Printing money and accepting inflation, however, could have worked – it would have worked – to finance the war had McAdoo taken that route. The government could use newly-printed currency to purchase military goods. Transactions would have to be at prices sufficiently high to induce producers to switch away from consumer goods. The resulting shortage of civilian goods would send up prices of everyday commodities. A general inflation of prices and wages would result.

7 Wilson did not. He apparently thought that borrowing shifted the burden into the future while taxation did not. He sought an “equitable” balance between the present and the future. He also thought that borrowing would produce inflation [Wilson 1917: Sixty-Fifth Congress, 1st Session, Senate Document No. 5].

Liberty Calling Page 8 McAdoo had another objection to printing money. This method hid the costs of war from the public and he wanted the public to be engaged and committed. “Any great war must necessarily be a popular movement,” he thought, “… a kind of crusade” [McAdoo 1931: 374].

McAdoo chose a mix of taxation and the sale of war bonds. The original idea was to finance the war (rather arbitrarily) one half with taxes and one half with borrowing [McAdoo 1931: 384, Seligman 1917]. Taxation would work directly and transparently. Taxes are compulsory and those who must pay are left with less purchasing power. Their expenditures will fall, freeing productive resources (labor, machines and factories, raw materials) to be employed in support of the war. The impact on the price level would be minimal. Another advantage of taxation was Congress could set the schedule of tax rates (and create any exemptions deemed appropriate) to target those they thought should bear the greatest burden. President Wilson and the Democrats in Congress insisted on a sharply progressive schedule. The highest marginal rate eventually reached 77 percent on 1918 incomes over $1 million. Yet even then, because of generous exemptions, only about 12 percent of American households would pay taxes.8 The lowest tax rate, for a married couple with combined incomes less than $2,000, was zero. For incomes between between $2,000 and $5,000 the rate was six percent, between $5,000 and $6,000 the marginal rate on earnings over $5,000 was 13 percent.9 A prominent economist of the time and a leading proponent of progressive taxation, Edwin Seligman of Columbia University, was astonished, calling the rates unprecedented “in the annals of civilization.” Nevertheless, he could brag: In comparing our present income tax with the British … it is to be noted that our rates are much higher on the larger incomes and much smaller on the lower and moderate incomes. The American scale is an eloquent testimony to the fact not only that large fortunes are far more numerous here than abroad, but also that there is greater appreciation of the democratic principles of fiscal justice [Seligman 1918: 18-19].

{Figure 2}

8 Carter et al. [2006: Series Ae1 and Ea749], but also see Seltzer [1968: Table 9, p. 62], who put the percentage of the population covered at about 8 percent.

9 For a comprehensive explanation of the Federal tax laws for 1917 and 1918, including the details of exemptions and deductions, consult William KixMiller and Arnold Baar [1917 and 1919].

Liberty Calling Page 9 Accompanying the personal income tax was an increase in the corporate income tax, an entirely new “excess-profits tax,”10 and excise taxes on such “luxuries” as automobiles, motor cycles, pleasure boats, musical instruments, talking machines, picture frames, jewelry, cameras, riding habits, playing cards, perfumes, cosmetics, silk stockings, proprietary medicines, candy, and chewing gum. These ad valorem taxes ranged from 3 percent on chewing gum and toilet soap to 100 percent on brass knuckles and double-edged dirk knives. A graduated estate tax on the transfer of wealth at death exempted the first $50,000 and rose progressively thereafter from 1 percent to 25 percent on amounts over $10,050,000 [KixMiller and Baar 1919: 85-87].11

Most of the prominent economists of the day suggested that the war should be paid for entirely through such taxes [Gilbert 1970: 86-87, Kang and Rockoff 2006: 6-10, Rockoff 2013]. McAdoo disagreed. The chief disadvantage of a full reliance on taxation, in McAdoo’s view, was that the eventual cost of war was unknown at the outset. “There were so many uncertain factors in the problem that a definite conclusion was not possible” [McAdoo 1931: 372]. If the tax generated less money than was required, rates would have to be raised again and perhaps repeatedly. If the original tax was excessive, it would be unnecessarily dispiriting and economically deflationary. If too much were collected, how, when, and to whom to return the surplus would become a contentious political problem. Since changing tax schedules always requires a controversial, complex, and drawn-out political debate, uncertainty about the military requirements was a major concern.12 Moreover, as the estimated cost of the war effort mounted

10 The net income of corporations was subject to two taxes, an income tax and a profits tax. The corporate income tax on income after exemptions and a credit was 12 percent of 1918 net income. The first $2,000 of profits and interest paid on liberty bonds from the first bond drive were exempt. A credit was given for the profits tax liability of the same year. The profits tax was the greater of an “Excess Profits Tax,” on the excess over a fixed return on capital, and a “War Profits Tax,” based on the difference between the income of pre-war years and the current year. However this was not to exceed 30 percent of income between $3,000 and $20,000 and not more than 80 percent of net incomes in excess of $20,000 [KixMiller and Baar 1919: 13 and 17].

11 There were also a variety of miscellaneous war taxes introduced. These included taxes on transportation services; admissions to places of entertainment; social, athletic, and sporting club dues; a stamp tax on legal documents; a tax on the value of outstanding corporate stock; and a tax on the use of yachts. See the Report of the Commissioner of Internal Revenue for 1919, the Report of the Secretary of Treasury for 1919, and KixMiller and Baar [1919] for details. A tax on child labor yielded no revenue [U.S. Treasury 1919: 499-500].

12 For discussions of tax policy and the deliberations in Congress see Ron Blakey [1917], Edwin Seligman [1918], and Robert Haig [1919].

Liberty Calling Page 10 to “appalling” levels, McAdoo came to the conclusion that, despite the high tax rates, tax revenues would not cover anything like one-half the cost. Given the commitment to the progressive structure of rates, taxation had reached its acceptable limit. “If you take the whole of a man’s surplus income through taxes,” McAdoo explained, “you cannot expect him to buy bonds, nor can you expect industry to expand and prosper” [p. 384]. The revised goal was one- third from taxes and two-thirds from borrowing.

Financing a war by borrowing need not be inflationary if the public diverts income away from consumption and other expenditures in order to buy bonds. Higher saving out of income would necessarily mean lower consumption. Such a change in saving behavior, however, would be difficult to engineer and far from certain. A high rate of return on the war bonds would be unlikely to work. Higher rates might tempt some to take momentary advantage, save extra vigorously when rates were high, and then less so when rates fell back to normal. Higher rates might even stimulate some to set a higher target for retirement wealth. But there is also an opposite effect. With high interest rates, wealth would accumulate more rapidly. With that mechanism working on behalf of the saver, less saving from current income would be required to ultimately reach a target level of wealth. The two opposite tendencies would cancel each other. Empirical evidence from postwar data indicates that the balance between saving and consumption is insensitive to interest rates. It seems that people decide on a division of their income between consumption and saving and stick to it regardless of the rate of interest.13 Another problem with offering a high interest rate on bonds is that it might divert funding from investments in physical capital when the war effort demanded an increase in productive capacity.

It is unclear if McAdoo understood that high rates would not work. In any case, he was opposed to high rates of return because that would be a sign of weakness and would reward the rich – the very group the income tax was designed to target. He chose to keep the rates competitive with the current return on comparable assets. The trick was to convince people to save more in order to buy the securities:

13 There is a large technical literature on this point. For a sampling see Paul David and John Scadding [1974], Franco Modigliani [1975: 15-16, and 1986: 269], Robert Hall [1988], John Campbell and Gregory Mankiw [1989], and Alberto Giovannini [1985].

Liberty Calling Page 11 The only possible way to restrain inflation, to some extent at least, was by the imposition of heavy taxation and by preaching constantly to the people the necessity of saving their money and investing it in government bonds and of refraining from extravagance and waste in every form [McAdoo 1931: 384].

McAdoo astounded everyone with his request for an authorization to borrow $7 billion on the credit of the United States (as a fraction of the gross domestic product that would be roughly $1,900 billion today). Actually, he had no intention of attempting a sale of that magnitude all at once. But he wanted the flexibility of a very high debt ceiling. The ceiling allowed Congress to avoid setting limits on specific bond issues given the uncertain cost of the war. Moreover, McAdoo argued, the “largest authorization of bond issues ever contained in any bill presented to any legislative body in the history of the world” would prepare “the public mind as soon as possible for a huge expenditure” [McAdoo 1931: 375, paraphrasing the chairman of the Ways and Means Committee]. McAdoo knew that Congress would more easily accept massive borrowing than confiscatory taxation. Congress was persuaded. The $7-billion ceiling rather than an unrestricted authorization was seen by some as insurance that the cost of the war would be contained. Of course, it was a meaningless promise. The limit would have to be raised if expenditures outran revenues since the government, like other entities, must pay its bills. This expedient of war, however, has been continued ever since as the Congressional “debt ceiling,” an unfortunate idea that would come to haunt fiscal policy in the twenty-first century [Austin and Levit 2013: 16-18].

The first offering of bonds was to be for $2 billion promising a 3.5 percent rate of return. That was slightly below the rate paid by savings banks on customer’s deposits (which ranged between 3.5 and 4 percent) or the yield on high-grade municipal bonds (3.9-4.2 percent) [Carter et al. 2006: Cj1193 and Cj1250; Kang and Rockoff 2006: Figure 1]. If the rates had been higher, much of the money used to purchase the government bonds might have simply been drained from individuals’ preexisting accounts. Such a rearrangement of portfolios would not have increased saving or reduced consumption. McAdoo also knew that the financial institutions would resist mightily any competition for their deposits from the government.

The bonds were negotiable, had coupons cashable every six-months, were due in 30 years, and were callable after 15. Both the interest and principal were to be paid in gold (that

Liberty Calling Page 12 provision would turn out to be a problem after gold holdings were made illegal in 1933). To make them more attractive to the rich, the interest would be tax exempt (like the return on municipals). The lowest denomination was $50. This, it seemed to some, would put them out-of- reach for the general public. In 1918 the average compensation of a production worker in manufacturing was about 35 cents per hour about $1,000 a year for full-time work [Officer 2009: Table 7.1, p. 167]. However, to avoid the administrative cost of keeping track of their ownership the Liberty Bonds were negotiable bearer bonds. Had they been issued in small dominations they could be used like currency to purchase goods and that would defeat the reason for refusing to print money. The Treasury accused those who sold their Liberty Bonds when they did not have to as “quitters” and “unpatriotic.” McAdoo condemned merchants who accepted bonds in payment as “reprehensible” [New York Times 23 August 1918]. To make the bonds easier to purchase they were available on installments stretched over several months.14 {Figure 3}

Even the poorest could purchase “War Thrift Stamps” which cost 25 cents. The Treasury Department called them “little baby bonds” and like the Liberty Bonds they earned interest compounded quarterly. The stamps would be pasted on a card and when 16 had been collected they were exchanged for a five-dollar stamp by adding 12ȼ in cash prior to February 1918 and 1ȼ additional for each month thereafter. The five-dollar stamps, called “War Savings Stamps,” were affixed to a “War-Savings Certificate.” These were payable at face value in 1923. If and when 10 five-dollar stamps were collected the book could be exchanged for a $50 Liberty Bond [U.S. Treasury, National War Savings Committee 1917]. The key to this scheme was that the Certificate was registered to its owner and could be cashed only by the person whose name was inscribed on the certificate. That made the certificate nonnegotiable. As Neil Wallace [1983] points out, low denomination securities must be nonnegotiable least they be used for currency. School children were urged to purchase and collect the 25ȼ stamps to aid the war effort. Boy Scouts played a key role in marketing the stamps in door-to-door campaigns [McDermott 2002]. Housewives were encouraged to take their change in war stamps.

14 U.S. Treasury Department, Publicity Bureau [1917] spells out the details of the installment plan. An information pamphlet issued by the Denver Liberty Loan Committee also describes the bond offerings and serves as an example of the effort to educate the public about financial securities [1917].

Liberty Calling Page 13 {Figure 4}

To many observers a massive bond sale on these terms seemed to be an imprudent gamble. The worry expressed by bankers and bond dealers at the time was unanimous: the bonds might not sell without the promise of an extra-attractive return. Moreover, the critics pointed out, only a few Americans had any direct knowledge about bonds, fewer still actually owned any.15 Would the public be willing to enter these waters?

It was at this point that McAdoo conceived of the Liberty Loan plan. It had three elements. (1) The public would be educated about bonds, the causes and objectives of the war, and should be led to appreciate the financial power of the country. McAdoo chose to call the securities “Liberty Bonds” as part of this educational effort. That name “would carry more fire and meaning than ‘government 3½ per cents’.” (2) The government would appeal to patriotism and ask everyone – “businessmen, workmen, farmers, bankers, millionaires, school-teachers, laborers,” housewives, and even school children – to do their part by reducing consumption and purchasing bonds. (3) The entire effort would rely upon volunteer labor. The money market would be avoided. No brokerage commissions would be paid. No sales force would be hired. The men and women who could not go into military service would constitute a “financial front … the economic equivalent of the military front” [McAdoo 1931: 378-379, 382-383, 385].16

To the war planners the appeal of borrowing funds from the public was that it would be good for morale. Individuals could demonstrate their support for the war by purchasing bonds. Indeed, during the bond campaigns purchasers were given buttons to wear and window stickers to display thus advertising their patriotism. If bond sales were strong, if the offering was oversubscribed, that would demonstrate American resolve. Yet there was a risk. Poor sales would be a sign of weak support and insufficient patriotism. To avoid a failure to sell the entire bond issue, the government arranged to sell them in a series of brief campaigns by subscription.

15 The estimate was that only 350,000 Americans “or thereabouts” owned bonds of any kind [McAdoo 1931: 382].

16 Other treatments of the Liberty Loans can be found in St. Clair [1919], David Kennedy [1980: Chapter 2] and Sung Kang and Hugh Rockoff [2006]. Charles Gilbert’s dissertation must be used cautiously as it is unreliable in places [1970].

Liberty Calling Page 14 If some of the bids that had to be accepted were below par, that unhappy fact might be neglected in the hoopla that accompanied the effort. The first campaign was announced on April 28, 1917, 22 days after the declaration of war; the Federal Reserve Banks opened the subscription books on May 14 and closed them on June 15. The advertising campaign was concentrated in this brief window and was intense [Mock and Larson 1939].

Fears of inadequate demand were proved unwarranted. The first loan was oversubscribed by fifty percent with more than four million subscribers accepted. Nationally, that would represent about one household in every six. Subscribers for the smallest amounts were given priority. Large subscribers were rationed. John D. Rockefeller, who pledged $15 million, was allotted only “something over $3 million.” Fifty percent of the bonds sold were for the lowest face value, $50, another one third of those sold was for the $100 bond.17 The participation of the small buyers was hailed as an answer to German newspapers that asserted it was a bankers’ loan [New York Times 23 June 1917].

In all there were four Liberty Loan drives initiated during the war and a fifth “Victory Loan” issued after the armistice. The second Liberty Loan, for $3 billion, was open for six weeks and concluded on November 15, 1917. It was during that effort that the Italian biplane bombed Fifth Avenue. The third and fourth drives were each about a month long in April ($3 billion) and October of 1918 ($6 billion) [Kang and Rockoff 2006: 34-36]. Because interest rates on alternative assets had risen, the rates on the subsequent loans were increased to keep them competitive. They were 4 percent on the second loan and 4¼ percent on the third and fourth. Because of the heavy oversubscription of the first loan, the tax exempt provision was

17 The numbers of original sales by denomination are reported in the Treasury Department’s Annual Report for 1921 [Exhibit 48, p. 258]. For all four war-time campaigns taken together 54 percent of the bonds were for the lowest denomination. Of course, the distribution of dollars raised from each denomination is skewed toward the bonds with higher face value. Over the four campaigns 63 percent of proceeds were from bonds valued $1,000 and up. As McAdoo remarked: “The men and women of large and moderate means owe a greater duty” [1917: 3]. The majority of the large denomination bonds were probably purchased by corporations. Newspapers from time to time listed the subscriptions by corporations and financial institutions. For example, see the listings in the New York Times [9 April 1918: 1+4]. Goldman-Sachs, Home Insurance, Johns-Manville, Dry Dock Savings Bank, and the Bowery Savings bank each subscribed for $1 million. Over in Brooklyn, Williamsburg Savings, Dime Savings, and First National Bank also joined the one-million-dollar club.

Liberty Calling Page 15 removed from the subsequent loans [McAdoo 1931: 408]. All five campaigns were oversubscribed.

The loan drives were the subject of the greatest advertising effort ever conducted by the American government. For the first drive in May 1917 there were to be 11,000 billboards and streetcar ads in 3,200 cities, all donated [U.S. Committee on Public Information, 21 May 1917]. During the second drive sixty-thousand women were recruited to sell bonds [McAdoo 1931: 407]. Organized into the National Woman’s Liberty Loan Committee, this volunteer army stationed women at factory gates to distribute seven-million fliers on Liberty Day. They arranged for the mail-order houses of Montgomery Ward and Sears-Roebuck to mail two million information sheets to farm women. With the “enthusiastic cooperation” of librarians they inserted four-and-one-half million Liberty Loan reminder cards in public library books in 1,500 libraries [U.S. Treasury, National Woman’s Liberty Loan Committee 1917: 23-24]. According to an article in the New York Times there were more than 9-million posters, 5-million window stickers, and 16-million lapel buttons issued for the Third Liberty Bond drive [New York Times 10 March 1918]. McAdoo consciously made himself the public face of the bond sales and posed as the leader of a great national crusade. He went on extended speaking tours, visiting 23 cities, and reported warm receptions at every stop [For an example see the Cincinnati Enquirer 12 June 1917: 1]. In Limon, Colorado (population approximately 800), the citizens who greeted his arrival wore badges that read: “How’de do! McAdoo!” [McAdoo, Annual Report 1917: 6; Craig 2013: 171].

This elaborate effort was conducted with unprecedented ingenuity by a home-grown propaganda ministry called innocuously “The Committee on Public Information.” The propaganda campaign – McAdoo saw it as an educational campaign – was essential, not simply to explain bonds, but to sell the war. This campaign was designed before the adoption of scientific opinion polls, but we can be fairly certain public sentiment before 1917 was not only against American involvement but not even agreed on which European military to root for. A poll of newspaper editors in 1914 by the Literary Digest found 242 declaring their personal neutrality, 120 who supported the British-French alliance, and 20 who supported the Germans. When queried regarding the views of their readership, the editors reported 189 cities supported the Allies, 38 the Germans, and 140 were neutral or divided. Even those who declared

Liberty Calling Page 16 allegiance to one side or the other frequently opposed American military involvement. Running for reelection in 1916, Wilson adopted the campaign slogan “He kept us out of war” and pushed his argument for non-involvement relentlessly. In a post-election recap, “Why Wilson Won,” the Literary Digest canvased newspaper editors in previously-red states that had unexpectedly voted for the President. Editors from California, Washington, Kansas, Minnesota, Ohio, and New Hampshire all mentioned the popularity of the anti-war sentiment as an important factor in tipping the election. “The potency of the peace argument among women voters is acknowledged by editors and press correspondents, and it was set down by several observers as decisive in Kansas, Utah, and Washington.” Only twelve states allowed women to vote, Wilson won ten.18

Wilson’s Republican opponent, Charles Evans Hughes, was also for peace. So, not surprisingly, a major campaign was needed to persuade the public of the necessity and the legitimacy of military action against the Germans. Persuasion would be difficult because American involvement was predicated, not on a desire for territory or revenge, but on an intangible ideal: “a war to end war” in H. G. Wells’ catchphrase. When asking for war on April 2, 1917 Wilson framed the war’s objective: “The world must be made safe for democracy.”19

For the task of molding and solidifying public opinion Wilson turned to George Creel, a journalist – one of the muckrakers – twelve days after Wilson’s speech to Congress. Creel created the Committee on Public Information and staffed it with psychologists, fellow journalists, artists, and advertising designers. The Committee seemingly invented and certainly perfected all of the techniques now associated with modern advertising. The magazine illustrator

18 The Literary Digest poll was reported in the issue dated November 14, 1914 [p. 939]. The election wrap up appeared on November 18, 1916. The election was close and the result was not confirmed until the Friday after Tuesday’s voting when California’s 13 electoral votes went to Wilson carried by a margin of only 3,806 popular votes. And, that outcome was not certain until ballot boxes from several rural precincts of Sierra County were hauled by horse-drawn sleds over roads made all but impassable by snowdrifts. The results of the voting are described in Scott Berg’s biography of Wilson [2013: 397-417]. And, yes, the Republican color was red even then [Berg 2013: 414].

19 Wilson called the Congress into extraordinary session and asked a joint meeting of both houses to declare war on April 2, 1917. They did so on April 6. There was still strong doubts in many quarters about the wisdom of joining the war. Senator Robert LaFollette (D, Wisconsin) claimed: “This war is being forced upon our people without their knowing why and without their approval” [Congressional Record, Senate, April 4, 1917, 224–225]. Earlier, on January 22, 1917, Wilson had hoped for “peace without victory.” It would be difficult indeed to sell this.

Liberty Calling Page 17 Howard Chandler Christy drew Liberty as an attractive young woman dressed in a see-through gown cheering on the troops. While working for Creel the man now regarded as the “Father of Public Relations,” Edward Bernays, pioneered the techniques of manipulating and managing public opinion based on the theories of mass psychology. The Committee appealed to innate motives: the competitive (which city would buy the most bonds), the familial (“My daddy bought a bond. Did yours?”), guilt (“If you can’t enlist, invest”), fear (“Keep German bombs out of your home”), revenge (“Swat the Brutes with Liberty Bonds”), social image (“Where is your Liberty Bond button?”), gregariousness (“Now! All together”), the impulse to follow a leader (President Wilson and Secretary McAdoo), herd instincts, maternal instincts, and – yes – sex. Bernays’ uncle was Sigmund Freud.20 {Figure 5}

McAdoo was solidly behind these efforts of the Committee. Writing in December 1917 he confessed concern: Up to the present there has been relatively small denial of pleasures, comforts, and conveniences on the part of the average citizen. … The great difficulty is to impress this lesson of economy upon the American people. It will require widespread propaganda and constant effort [McAdoo, Annual Report 1917: 2].

In these years before radio the Committee organized an enormous legion of 75,000 volunteer public speakers to deliver four-minute speeches promoting bond sales. The goal was to appear during the intermission at every screening at every cinema in the country. These “Four-Minute Men” were provided detailed advice on public speaking and were offered suggestions regarding the content and tone of their exhortations in a Bulletin issued every few weeks.21 Every Four Minute Man was urged to make up his own speech [Four Minute Men Bulletin 29 July 1918: p. 22], but the advice was often specific:

20 Histories of the U.S. Committee on Public Information have been written by James Mock and Cedric Larson [1939] and Alan Axelrod [2009]. Walter Lippmann also surveyed the propaganda work of the Committee in his influential book Public Opinion [1922]. After the war Edward Bernays wrote the classic handbook, Propaganda [1928].

21 A history of the Four Minute Men may be found in James Mock and Cedric Larson [1939: Chapter 5]. Also see the journal article by Alfred Cornbise [1984] and the book by Alan Axelrod [2009: Chapter 5]. The idea of restricting these exhortations to four minutes was a stroke of advertising genius. Even today commercials, popular songs, and most public-service messages rarely exceed four minutes in length.

Liberty Calling Page 18 Avoid discussion of economic theories, directly or by implication. These theories and all other theories have no relation to the topic of these speeches. … Director General Roger W. Babson, of the Division of Information and Education of the Department of Labor, suggests, as introduction for a speech, something like the following: "I know nothing of ‘Labor and Capital.' I know only honest Americans who all want to help in this great fight of the people against Kaiserism." [Four Minute Men Bulletin 29 July 1918: 3].

Celebrities were recruited. Charlie Chaplin, Mary Pickford, and Douglas Fairbanks, certainly among the most famous personalities in America, toured the country holding bond rallies attended by thousands. In those days, if you wanted to see film stars out of character, you had to show up in person. Great enthusiasm marked the Liberty Loan meeting in front of the Sub- Treasury [now Federal Hall on Wall Street in New York City] yesterday, at which Douglas Fairbanks and Charlie Chaplin took part. As far as the eye could reach from the top of the steps of the Sub-Treasury the streets were a mass of upturned faces, and apparently all who could get the necessary room to free an arm raised it aloft when they were asked to pledge themselves to buy Liberty Bonds. [New York Times 9 April 1918].

{Figure 6}

Ruth Law, the aviator, was also famous, a national hero, and a new role model for young girls, although she is largely forgotten today. In 1916 she thrilled the nation with her flight from Chicago to New York State breaking the American record for a non-stop air flight (590 miles). It was a remarkable feat for anyone, but completed by a young woman (!) in an obsolete Curtiss biplane with an open, unshielded cockpit it was “marvelous,” “heroic,” and “most wonderful.” Before the flight, mechanics and other experts said the plane – with only a single 100- horsepower motor to power a single propeller mounted in the rear – simply was not capable of such a flight. Her own mechanic wept as she took off, certain that she would die in the attempt. The airworthiness of the biplane notwithstanding, many predicted Law would not have the endurance to withstand the intense cold and biting wind of the upper air at 5,000 feet. But she did.22

22To condition her body against the elements before the flight, she slept in a tent on the roof of the Morrison Hotel in Chicago. Newspapers consistently described Law as an “aviatrix,” or – worse – the “little bird woman.” After she landed on Governors Island in Upper New York Bay, she faced about fifty newspaper men. “‘You have made the longest flight a woman ever made, haven’t you?’ they asked. ‘I have made the longest flight an American ever

Liberty Calling Page 19 {Figure 7} Five months later, the United States entered the war. Law volunteered to fly combat missions in France but was denied because of her gender. No surprise there, but she was outraged [Law 1917: 12]. She couldn’t fly for the Army and she couldn’t fly without government support because the government had shut down civilian aviation to conserve fuel. So she volunteered to fly for Liberty Bonds. McAdoo agreed. The gasoline was donated. For ten days in June of 1917 she barnstormed the Midwest dropping cardboard bombs advocating the purchase of Liberty Bonds. Elaborate preparations were made for guiding her flight. At Omaha a standing balloon will be suspended over Fort Crook, to allow the aviatrix to get her bearings … Her way from Omaha to St. Joseph will be marked by a huge white arrow a hundred feet long and ten feet wide, being built under the stationary balloon … On the arrow, in black letters will be “To St. Joseph.” At St. Joseph a huge white cross forty feet square … will indicate where to land [Lincoln Daily Star 7 June 1917].

It was a sensation. Her over flights made front page news throughout the region. “Immense crowds” greeted her landings [Moberly Daily 9 June 1917]. Three-thousand cheering spectators witnessed her take off from Lincoln as she head to St. Joseph, Missouri [Lincoln Daily Star 8 June 1917: 1+4, also Muskogee Times-Democrat 9 June 1917: 1].

Her trip was not without risks. In route from St. Louis to Chicago the gasoline tank exploded enveloping her airplane in flames at 2,000 feet. Her life was saved only by consummate coolness and quickness of wit. Without a moment’s hesitation she pointed the nose of her machine straight down and descended with such velocity that the wind blew out the fire. She was uninjured, save for burns about the face [Cincinnati Enquirer 15 June 1917: 2].

In April of the next year during the third campaign there was a Liberty Day Parade up Washington’s Pennsylvania Avenue. President Wilson stood throughout, “hat over his heart” viewing 40,000 government clerks and other Washingtonians file past the White House for more

made,’ she replied, leaving no doubt that she wished to be known as an aviator rather than an aviatrice.” The primary source of information for Law’s 1916 cross-country flight is the New York Times, November 20 and 21, 1916. The best historical account is by Eileen F. Lebow [2002, Chapter 11]. There is a delightful children’s picture book based on the Times articles written by Don Brown [1993].

Liberty Calling Page 20 than three and one-half hours. “Ruth Law, in a light airplane, and military aviators in their heavy machines hummed overhead, looping and diving” while canvassers gathered “a multitude of pledges” [Gettysburg Times 27 April 1918].23 All this to sell McAdoo’s bonds. By war’s end, after four drives, twenty million individuals had bought bonds and more than $17 billion dollars had been raised – not the $7 billion as first authorized. Taxes collected amounted to $8.8 billion. Almost exactly two-thirds of the war funds came from bonds and one-third from taxes [McAdoo 1931: 412, Kang and Rockoff 2006: 36].24 This was a time when seventeen billion dollars was an almost unthinkable number. An equal share of gross domestic product today would amount to $3.6 trillion.

Did the plan succeed? In one sense the answer is obvious. The money was raised as planned (one-third taxes, two-thirds borrowing). This was accomplished without an abrupt structural shock or a collapse of financial markets. The campaigns elicited broad-based patriotic support for the war. The financial front stood with the military front to share in and celebrate the victory. McAdoo was regarded as a hero. An editorial in the Washington Post gushed:25 He is performing a work of heroic proportions, more effective against Germany than any single army. The blows he administers are not spectacular, but they reach a vital spot and are of terrific violence. They are backed by the mighty power of the American people and a continent of resources. The nation is exerting its money power effectively because Mr. McAdoo thinks and acts on a national scale [Washington Post 1 May 1917: 6].

23 Law’s flights for Liberty Bonds were extensively reported throughout the country. For a sampling see the Lincoln [Nebraska] Daily Star [June 7 and 8, 1917], The Seattle [Washington] Star [June 8, 1917], the Hartford [Kentucky] Republican [June 8, 1917], the Muskogee [Oklahoma] Times-Democrat [June 9, 1917], the Cincinnati Enquirer [June 15, 1917], and the Gettysburg [Pennsylvania] Times [April 27, 1918].

24 Milton Friedman and Anna Schwartz estimated the breakdown as 25 percent from taxes, 70 percent from borrowing, and 5 percent from “direct money creation” [1963: 121]. Direct money creation, as Friedman and Schwartz define it, is the increase in the sum of bank reserves on deposit at the Federal Reserve plus currency in the hands of the public, sometimes called “high-powered money.” According to Hugh Rockoff, “the effect was much as if the government had simply printed money and used it to pay soldiers, much as it had done with the “greenbacks” in the early phase of the Civil War” [Rockoff 2004: 8].

25 The Committee for Public Information was not above planting favorable editorials spotlighting the “Commander- in-Chief of the Liberty Loan” [Craig 2013: 170]. Perhaps they had a hand in the editorial published in the Washington Post.

Liberty Calling Page 21 But there is another sense in which the plan did not achieve all that was hoped for. As McAdoo feared, inflation was not avoided. Price inflation actually began in 1915 shortly after the outbreak of war in Europe. The gold standard was primarily to blame. Once gold began flowing back into the United States around December of 1914, the circulation of gold-backed currency soared. Much of the gold was being spent in the United States by European governments procuring food, munitions, and other supplies. Since these purchases were uncoordinated and thus competitive, inflation was a consequence [Strong 1921: 453]. Wholesale prices rose 65 percent during the period of American neutrality. Shortly after war was declared by Congress the legal reserve requirements for Federal Reserve Banks was lowered and the Fed adopted an easy money policy to accommodate the government’s commitments. But the rate of inflation actually slowed, thanks in part to the deflationary effect of high taxes and the abnormally high saving produced by the purchase of bonds.26 {Figure 8}

While the pace of inflation slowed rather dramatically, it did not stop. Wholesale prices continued to rise at approximately five percent per year between July 1917, when the first loan was taken up, and November 1918, the date of Armistice. Still, this was much lower than the 20- percent rate of annual increase recorded between July 1914 and July 1917 [NBER data series 04193, “WPI other than farm products & food”]. A large part of the reason that inflation was not completely halted was that banks lent money to enable bond purchases. McAdoo, anxious to keep the small borrower in the market for the subsequent issues of bonds, implemented a “borrow-to-buy plan.” Commercial banks pledged to make loans that borrowers would use to purchase bonds. They would charge the same rate of interest that the bonds themselves carried. The loans would be secure since the bonds served as their collateral. As the loans were made, the Federal Reserve accommodated the scheme by issuing Federal Reserve Notes. While the

26 On the inflation during the war see Russell Leffingwell [1920: 34], Barry Eichengreen [1992: 70-73], and Milton Friedman and Anna Schwartz [1963: 206-218 and note 33]. During the American engagement the government attempted to control prices by managing the supply of and demand for a few key commodities rather than by direct price control. The U.S. Food Administration under the directorship of Herbert Hoover manipulated the prices of wheat relying upon cooperation rather than coercion [Hall 1973: 45]. The War Industries Board under the leadership of financier Bernard M. Baruch focused on the price of steel [Kester 1940]. Hugh Rockoff suggests the impact of these agencies on inflation was small [2004: 15-17] apparently reversing his earlier conclusion that they arrested “the inflationary spiral” [1984: 83]. The agencies’ impact was small perhaps because “production, not inflation” was the first concern of Hoover and Baruch [Kennedy 1980: 119].

Liberty Calling Page 22 Fed did not print money to pay for the war, they did print notes which the banks lent to those who used the funds to purchase bonds, and the proceeds from the bond sales helped pay for the war. It comes to much the same thing. Perhaps as much as 7 percent of the bonds were financed in this way.27 {Figure 9}

After the fact the Treasury and the Fed would assert that they had limited the expansion of credit during the war “as far as practicable.” Benjamin Strong, the Governor of the New York Fed, asserted that the expansion of credit during the war was “inevitable, inescapable, and necessary, and was in my opinion, defensible” [1921: 452]. A Treasury official asserted, “government expenditures and commitments always outran the provision made for them by the Treasury, whether in cash or credit.” The Treasury explained: Government contracts covered future production for months or years ahead, but the Treasury never during the whole period of the war had provided money or bank credit sufficient to meet its requirements for more than a few weeks ahead. Prices rose in response to the effective demand of the United States Government sustained by the general credit which its resources and taxing power and the devotion of one hundred million people gave it [Leffingwell 1920: 34].

The devotion of the people was clearly manifest. Most of McAdoo’s bonds were purchased by the public, 62 percent of the value sold by one estimate [Goldsmith 1955: I, Table V-2, pp. 474-475]. The Treasury calculated that 20-million people or more subscribed for some or all of the loans [Leffingwell 1920: 23]. That is pretty impressive given that there were only 24-million households at the time. A government survey of almost 13,000 urban wage-earners conducted in 1918 and 1919 indicated that 68 percent owned liberty bonds.28 More than half of

27 Milton Friedman and Anna Schwartz estimated that the war expenditures were covered 25 percent from taxes, 70 percent from borrowing, and 5 percent from “direct money creation” [1963: 121]. Direct money creation, as Friedman and Schwartz define it, is the increase in the sum of bank reserves on deposit at the Federal Reserve plus currency in the hands of the public, sometimes called “high-powered money.” According to Hugh Rockoff, “the effect was much as if the government had simply printed money and used it to pay soldiers [Rockoff 2004: 8].

28 Only married wage workers and salaried workers earning less than $2,000 per year were surveyed. The family had to include a husband, his wife, and at least one child. Non-English speakers and “slum” families were excluded [Olney 1993]. The survey was conducted by the U.S. Bureau of Labor Statistics. The original survey forms for each interviewee were retained by the National Archives. The data on Liberty Bond ownership was collected from these manuscripts by Martha Olney.

Liberty Calling Page 23 the bonds sold were $50 bonds, the lowest denomination [Treasury Department, Annual Report 1921: Exhibit 48, p. 258; Gilbert 1970: 131 and 135]. It seems undeniable that the emotional advertising campaign effectively produced a broad and strong desire to do one’s part for the war effort by participating in this way. After the war, McAdoo’s assistant in fiscal matters, Assistant Secretary Russell Leffingwell, described the loan campaigns “as the most magnificent economic achievement of any people. … the actual achievement of 100,000,000 united people inspired by the finest and purest patriotism” [Leffingwell 1920: 24; McAdoo 1931: 403]. {Figure 10}

The motive for purchasing Liberty Bonds was not, of course, purely patriotic. McAdoo’s campaign appealed to the patriotic and nationalistic instincts of Americans, but also to their self- interest. The education campaign was intended to teach the prudence of saving at all times, not just during war emergencies, the safety of government bonds, and the military “necessity” of reducing consumption. We have … organized a war-savings campaign upon a wide scale and shall bring to the attention of every man, woman, and child in the country the privilege now offered to them of serving themselves and serving their country by depositing their savings with the Government of the United States upon the safest security in the world [McAdoo 1917: 2].

{Figure 11}

The appeal to self-interest was made palatable perhaps by its wrapping in the American flag. For those for whom neither self-interest nor patriotism sufficed there could be intimidation. Some forms were subtle as when a list of bond purchasers in a community was published in an honor roll. Some intimidation, however, occasionally stepped over the line when individuals who refused to purchase bonds were publically humiliated. The town of Baxter Springs, Kansas, installed a yellow bulletin board at the corner of Eleventh Street and Military Avenue for the public posting of the names of “slackers” and “yellow dogs.” “Anyone who shows disrespect to a Liberty Bond or Thrift Stamp salesman is a Yellow Dog” [Baxter Springs News 18 October 1918: 2]. The Watauga Democrat published in Boone, North Carolina, reported that “Throughout North Carolina and the nation sentiment toward the slacker is crystalizing and the fine finger of scorn and contempt is searching him out.” The slacker is one who can but does not buy Liberty Bonds. “The slacker is a marked man. … His children and his children’s children

Liberty Calling Page 24 after him will pay a bitter price for his disloyalty” [6 June 1918: 1]. Given such rhetoric it is not surprising that some slackers were attacked physically by vigilantes. The Liberal Democrat of Liberal, Kansas, advocated “yellow paint and chicken feathers” [2 May 1918]. An unfortunate Henry Lange of Carlsbad, New Mexico was kidnaped and “administered a liberal coat of tar and feathers” [Evening Current 29 April 1918: 2].

Fighting ended on Armistice Day, November 11, 1918. The fifth and final bond drive – dubbed the Victory Liberty Loan and advertised as necessary to “finish the job” and to “bring the boys home” – was launched the following year. It concluded in May of 1919. Creel’s Committee on Public Information was terminated in August. We might then suppose that the pure patriotic motive to continue holding Liberty Bonds would weaken and the stigma on those who sold would be removed. Some individuals and corporations would divest themselves either to diversify their portfolios or to finance an increase in consumption. If that occurred in any great volume, the rush of sell orders should have depressed bond prices. That would push up the yields earned by the bond’s new owners. But that didn’t happen. Two economists at Rutgers University, Sung Won Kang and Hugh Rockoff, examined the prices of Liberty Bonds on the open market and reported that Armistice appears to have had little effect. “The yields were remarkably stable for the following year.” Surprisingly, they suggest this stability indicates that the patriotic motive during the war-time drives had been weak. “There seems to be little evidence that a large reservoir of patriotism was being unwound” [2006: abstract and p. 18].

There is a danger, however, of misunderstanding their findings. The stability of Liberty Bond prices in 1919 by itself leads to no conclusion about the support for the war by members of the public. Indeed, throughout the bond drives the “nation showed its heart was in the war for liberty,” as one Pennsylvania newspaper expressed it [Gettysburg Times 27 April 1918]. How then to explain the failure of bond prices to fall once the war was over?

First, the Allied victory was in doubt until a few months prior to the Armistice. Purchasing and holding Liberty Bonds during the war carried the risk that a German victory could lead to default. The bonds required a risk premium that reduced their value. Once victory was assured however, the bonds returned to the “risk-free” status of sovereign bonds during

Liberty Calling Page 25 peace time. This reduction in risk should have increased their value as an asset and offset any tendency for prices to soften.

Second, it is doubtful that members of the public, the putative patriots, would actually have had much of a desire to sell bonds. Most of the Liberty Bonds were purchased by individuals who were relatively inexperienced with financial markets. Despite their new-found understanding, what they had come to know was a streamlined bond market established by the Federal Reserve Banks, staffed by a volunteer sales force, and promoted and explained by a relentless advertising campaign. They probably remained in the dark about the value of portfolio diversification, the connection between risk and return, and the mechanics of the brokerage industry. Sophistication about such matters would blossom after 1922, but it is not obvious that the bulk of the public would consider diversifying to higher-yielding, but risky, financial assets before the mid-1920s. Moreover, those wage earners who withdrew money from their savings deposits (their accumulated past saving) to loan to the government during the war would not see an advantage of selling bonds simply to restore their bank balances. Once the war was won Liberty Bonds were safer than, and just as remunerative as, savings deposits at the local bank.

The public’s desire to sell bonds to purchase automobiles or durable goods would probably have to wait until the production lines for such items revived. For autos that didn’t happen until the late summer of 1919 [NBER 1107a, U.S. Department of Commerce 1927], for other durables it began only after the depression of 1920-1921 was past [Olney 1991: Tables A.6 and A.7]. There is a further point emphasized by Hartley Withers, the editor of The Economist, “the war has taught a great many people who never saved at all to save a good deal” [Withers 1919: 9]. This was just as McAdoo hoped. He predicted shortly after the Armistice that the “campaign for war-savings should have a permanent effect in stimulating and encouraging peace savings” [McAdoo 1918: 2]. The Liberty Loan campaigns probably made life-cycle savers out of some who were not savers before. If so, they would have no reason to dissave.

Third, and this is Kang and Rockoff’s significant point, institutional holders of government bonds such as banks, corporations, and insurance companies kept their profit motives intact during the war. They were less likely to have been motivated by patriotism and swayed by the emotional propaganda than the general public, so the ending of the Liberty Bond

Liberty Calling Page 26 promotions and the easing of social pressure to hold bonds, would not have had much impact on them. Indeed, non-financial corporations, insurance companies, pension funds, and the Postal Savings System collectively increased their holdings of U.S. government bonds in both 1919 and 1920 [Goldsmith 1955, volume I, table V-48, pp. 533-536]. In that sense, if Kang and Rockoff’s conclusion that patriotic motives were weak is limited to the financially sophisticated and profit oriented, they are right to emphasize the primacy of financial incentives over social solidarity [2006: 33]. But Liberty Bonds and the little baby bonds were meant to appeal to the general public, unite the nation, engage the home front, and win the war. That they did.

The stability of the yields on Liberty Bonds in the year following the fifth bond campaign did not last into 1921. Yields rose as bond prices fell below par. However this change was the consequence, not of a flight from bonds, but rather, of a deliberate monetary policy change by the Federal Reserve in response to a surprising post-war economic boom.29 The expansion was propelled by an unusually favorable investment outlook. Credit was cheap. There was high pent-up demand by corporations for capital goods. Consumption returned to more normal levels. There was also an abnormally strong demand for American exports from war-devastated Europe.

But the boom would be short lived. Policy makers in Washington were worried. The federal debt had exploded because of wartime expenditures. The pace of inflation picked up following the Armistice and remained high in 1919 and 1920. Industrial goods prices rose 25 percent over that year. The orthodoxy of the time suggested that the federal budget should be brought into surplus, the debt reduced, and prices returned to “normal” levels. Following that prescription, authorities implemented what today would strike most economists as incredibly harsh policies. From the fiscal year beginning in July 1918 to the following one, federal spending was slashed from $18.4 billion to $6.4 billion and then reduced again another 22 percent to $5 billion the following fiscal year. Government deficits turned into surpluses.

Meanwhile, the Federal Reserve responded to the continuing inflation by raising its discount rate from a low of 4 percent in November 1919 to 7 percent by June 1920 (a level not

29 McAdoo left the Treasury and the Board of Governors in December of 1918 to be succeeded by Carter Glass.

Liberty Calling Page 27 reached again until 1973) and then maintained that rate throughout the ensuing deflation.30 The consequent deflation was the most precipitous in U.S. history (Figure 8). Wholesale prices fell 37 percent between 1920 and 1921. The collapse of prices and the decline in government demand triggered a sharp deflationary recession known to economic historians as the “Depression of 1920-1921” [O’Brien 1997]. The index of industrial production fell 48 percent by one measure and fell by one third by another. The civilian private non-farm unemployment rate soared from 1.9 percent at war’s end to 16.3 percent in 1921.31

The Berkeley economist and inveterate blogger Brad Delong has described the mechanism with characteristic clarity [2011]. The 1920-1921 depression was triggered by a Fed decision to fight inflation by forcing interest rates up. The resulting financial squeeze rendered new construction, other forms of investment, and some durable consumption goods – items that were typically purchased with borrowed funds – unaffordable. Purchases declined. The excess supply of goods caused prices to decline. Falling prices only made the economic conditions worse as they encouraged the postponement of spending on big ticket items as customers waited for yet lower prices. Unemployment spread as businesses cut back production in the face of dwindling demand. The unemployed tightened their belts. The excess supply of labor caused wages to fall. The employed had less to spend.

But, as soon as the inflation-fighting goal was achieved, the Fed ended the squeeze. The discount rate was promptly lowered back to 4 percent and the economy snapped back to reasonably-full employment. The recovery was rapid because the speed of any recovery is

30 Benjamin Strong, the President of the New York Federal Reserve Bank, clearly states that the discount rate was increased as a deliberate anti-inflation move [1921: 501-504]. Milton Friedman and Anna Schwartz’ conjecture that declining reserve ratios was the motive for the rate increase seems, to me, an inadequate explanation [1963: 229- 231]. See Daniel Kuehn for a helpful analysis [2010: 7-10]. The discount rates for each Federal Reserve district during this period are presented in the Board of Governor’s Banking and Monetary Statistics [1943: Table 115, pp. 439-440].

31 The Depression of 1920-1921 has been described by Robert A. Gordon [1974: 17-23], Christina Romer [1988], Anthony O’Brien [1997], Paul Krugman [2011], and Daniel Kuehn [2010]. The data cited are reproduced in Susan Carter et al [2006: Series Ea650 for the Federal debt, Cc2 for consumer prices, Cc66-67 for wholesale prices, Ea644 for federal expenditures, Cj113-114 for the Federal Reserve discount rate, Cb28 and Cb31 for industrial production, and Ba476 for the civilian private non-farm unemployment rate]. The civilian unemployment rate (including agriculture and government employees) rose to 11.3 percent [Series Ba 475].

Liberty Calling Page 28 linked to what caused the downturn. “All the lines of business that had been profitable before the downturn [became] profitable once again. From an entrepreneurial standpoint, therefore, recovery was a straightforward matter: simply pick up where you left off and do what you used to do” [DeLong 2011]. By 1922 the favorable long-term investment outlook again made itself felt and the twenties began to roar ahead. After the “return to normalcy,” yields on the bonds returned to about the level at issue and prices returned to close to par [Kang and Rockoff 2006: 18].

McAdoo had taken a gamble when he depended on faith that Americans could be induced to save more heavily than they would otherwise. He won that gamble. Saving rates shot up during the war and then returned close to their pre-war normal following the end of hostilities.32 Consumption fell during the war. Stanley Lebergott’s extensive study of consumption expenditures found that spending in real terms was running nine percent below trend by 1919 [1996: Table A2, Carter et al. 2006: Series Cd78]. {Figures 12 and 13}

During the war there was an effort to reinforce the Treasury’s exhortations to save with Herbert Hoover’s campaign urging people to eat less wheat and less meat. Mondays and Wednesdays were to be wheatless; Tuesdays meatless. On Saturdays all meals were to be porkless, one meal wheatless, and one meal meatless. Voluntary plans were issued for each day of the week. The New York Times reported that thirteen million households had signed a pledge to follow the guidelines. Bakeries, hotels, and restaurants were ordered to make and serve only “Victory Bread” containing at least 20 percent of grains other than wheat [New York Times 27 January 1918: 1+2]. Hoover’s Food Administration had a parallel in the Fuel Administration which proclaimed gasless Sundays, heatless Mondays, and lightless nights. These war-time efforts probably did little to directly affect total saving. They were intended to conserve food and fuel for the war effort, but they also contributed to the active engagement of the home front. {Figure 14}

32Paul David and John Scadding report that the variation in saving rates for the first three decades of the twentieth century was “extremely small” except for the World War I years when they soared [1974: 225]. Martha Olney [1991: Figure 2.2, p. 54] and Richard Sutch [2006: Figure Ce-F, p. 294] have confirmed this finding.

Liberty Calling Page 29 The anomaly of World War I was the sharp, sizable, and autonomous rise in the saving- income ratio. Figure 13 charts my measure of personal saving as a fraction of disposable income for 1900 to 1929. The jump up during the war is evident.33 It is even more pronounced when personal saving is expressed as a percentage of “permanent/life-cycle income.”34 Clearly, changes of this magnitude are not explicable with the simple version of Keynes’ stable consumption function. But, in retrospect, it is easy to see that the Liberty Bond campaign with its extraordinary appeal to patriotism produced an autonomous downward shift of the consumption function. Keynes noted the possibility that “abnormal or revolutionary circumstances” could shift the otherwise “fairly stable” relationship he postulated between consumption and income [1936: 91, 96].35

There is no room for doubt; many households purchased Liberty Bonds during the war. Figure 15 graphs the holdings of U.S. government securities (almost entirely Liberty Bonds) by households.36 In 1919, with the war over and won and the Victory Loan drive concluded by June, we might presume that the pressure to hold liberty bonds was relieved. However, the public was urged to continue to hold on to their bonds. In August the Treasury Department warned that some owners were “willing to sacrifice these securities at prices far below the market in order to

33 Charles Gilbert writing in 1970 asserted that savings during the war “failed to maintain their prewar rate” and that the borrowing plan was “doomed to failure” [1970: 214-215, 118]. On this matter he is clearly wrong. He cites data from the Economic Record published by the National Industrial Conference Board to support the claim. Those estimates, made in 1940 by Martin Gainsbrugh and Harlow Osborne, were rejected by Simon Kuznets, who reported an inexplicable discrepancy between the Conference Board estimates and the primary sources [Kuznets, Epstein, and Jenks 1941: 304]. In any case, the Gainsbrugh-Osborne data on the volume of savings had, by 1970, long been superseded by the much higher estimates of the Department of Commerce and Raymond Goldsmith [1955 II, Table B-11, p. 181]. In 1958 Gainsbrugh writing with Morris Cohen implicitly accepts the superiority of the Department of Commerce methodology [1958: 187].

34 Disposable income dramatically rose above its long term-trend during the war years. Economic theory expects that saving out of transitory income would be high, thus saving compared to trend income would be a higher fraction than when compared to current income [Friedman 1957, Ando and Modigliani 1963, Hall and Mishkin 1982, and Bernanke 1984].

35 Note that Goldsmith [1955: volume I, p. 29], Modigliani [1966: Appendix B, column 10 and footnote 9, pp. 215- 217], and David and Scadding [1974: Table 2, p. 355] all quite appropriately exclude World War I from their tests of saving theories.

36 The chart cumulates the data on personal saving in the form of U.S. securities presented in the data appendix, Table 2, column 8. These estimates were made by Raymond Goldsmith [1955, volume I, table T-6, column 18, p. 354].

Liberty Calling Page 30 satisfy the desire for luxuries.” The fear expressed was that consumption thus financed would accelerate the inflation before production could catch up [New York Times 27 August 1919 quoting a Treasury Department statement]. How influential such warnings were is unclear. But it was not long before households began to reallocate their asset portfolios away from bonds. The figure illustrates the decline in holdings that began in 1920 and continued through 1930. Institutional purchases, primarily by banks during the recession in 1922, took up only a small fraction of the bonds sold by the public.37 {Figure 15} So the disinvestment after 1919 was largely the result of Treasury retirements. These open market purchases designed to raise and stabilize bond prices were made by the War Finance Corporation beginning in June 1918 and ending in April 1920.38 Thereafter retirements took place through the mechanism of congressionally-authorized purchases financed by government surpluses throughout the 1920s.39 These retirements facilitated portfolio adjustments by private households, but they were designed primarily to support the price of bonds on the open market. This was thought to be only fair to the patriots who sacrificed to purchase bonds in the nation’s time of need [U.S. Treasury 1920: 108]. Except during the “liquidity squeeze” of 1920 the yields on Liberties were kept close to par [Kang and Rockoff 2006: Figure 4].

The chart of the movements of the aggregate personal saving rate (Figure 13) also suggests that saving defined to include consumer durables did not decline to below pre-war

37 Changes in institutional holdings of government securities are reported by Goldsmith [1955, volume I, table T-48, pp. 533-536.

38 Interestingly, these purchases of the long-term Liberty Bonds were financed by the sale of short-term certificates. This had little impact on the national debt outstanding but did shorten the average maturity of the debt. In that sense it was similar to “Operation Twist” of 1961 and the quantitative-easing policy initiated in late 2010 and known in the financial press as “QE2.” James Butkiewicz and Mihaela Solcan report that a twist in the term structure during the 1918-1920 period was statistically detectable [2012: 5-6]. However, the magnitude was quite small and probably of negligible economic significance. A test of the War Finance Corporation era patterned after that reported by Franco Modigliani and Richard Sutch reveals no visibly noticeable change in the structure of interest rates [1966: 179-180]. Also see Eric Swanson [2011].

39 A sinking fund was established to purchase the bonds in the open market. In addition, repayments by foreign governments on loans financed by Liberty Bond sales were used to retire Liberty Bonds [U.S. Treasury, Annual Report 1920: 107-115; and 1929: 16].

Liberty Calling Page 31 levels after the war was over and the propaganda push ended. We might have expected otherwise. The abnormal saving during the war would have swelled households’ asset portfolios and thus eased the burden on households to accumulate in order to reach a target level of wealth by retirement.40 I suggest that one reason that a decline is not evident is that the war experience and the war bond propaganda produced an increase in the fraction of the population that engaged in life-cycle saving. This would counteract any tendency for aggregate saving rates to decline. However, the end of the war should have caused some wealth holders to readjust their asset portfolios shifting away from government bonds towards other assets. Martha Olney has accumulated a good deal of evidence that such a shift took place as households increased their holdings of consumer durable goods (automobiles, furniture, household appliances, and other major durables). “Households did not save less in the 1920s than they did previously, but, rather, they saved differently [Olney 1991: 54 emphasis in the original]. We might say that the funds received when Liberty Bonds were retired were used to fund durable good purchases.41

For some, the accumulated savings also enabled and encouraged retirement of the elderly. Together with Social Security this was a factor in the general decline in the labor force participation of men over 60 during the middle decades of the twentieth century [Ransom, Sutch, and Williamson 1991].

In an effort to keep American’s new enthusiasm for saving alive following the war, Secretary of the Treasury Carter Glass declared the first annual “Thrift Week” to begin on

40 I might add to this hypothesized reduction in the need to save, the proliferation of company pension plans in the 1920s. Most of these plans were unfunded but it is possible that the anticipated benefits reduced the motivation to save from personal income. From the point of view of a worker these promises constituted “pension wealth” much as the pay-as-you-go Social Security System created “Social Security wealth.” On the appearance of company pensions and their expansion during the 1920s see Roger Ransom, Richard Sutch, and Samuel Williamson [1993]. On the possibility that social security wealth might reduce savings rates see Martin Feldstein [1974], Dean Leimer and Selig Lesnoy [1982], and Franco Modigliani and Arlie Sterling [1983].

41 Durable goods (automobiles in particular) are large expenditures. They are primarily debt-financed and illiquid. Durables purchases should be relatively sensitive to liquidity constraints and imperfections in the market for consumer loans [Olney 1991]. As Frederic Mishkin has shown increased financial asset holdings are a powerful encouragement to durable goods expenditures because they provide liquidity and circumvent credit market imperfections [1976].

Liberty Calling Page 32 Benjamin Franklin’s birthday, January 17, 1920.42 The goal was “designed to concentrate the minds of the people on essential financial maxims,” to “implant the thrift idea in millions of workmen.” The initial focus was directed on factories in more than 300 cities. The drive had the endorsements of the Y.M.C.A. the American Bankers’ Association, the League of Building and Loan Associations, the National Association of Real Estate Boards, and many other national and local groups.43

By 1922 the thrift campaign sought to enroll one-half million individuals and 30,000 public school children. But, with the Depression of 1920-1921 in the past, the organizers began to hedge their rhetoric. “Special emphasis will be placed, they declared, “not upon the limitation of spending, but upon the use of judgment in spending for the necessities and comforts of life” [Hungerford 1922]. Worried business leaders had begun a countermovement to thrift the year before. The “Prosperity Drive,” sponsored by the Rotary Club, sought to “restore consumer confidence and energize retail buying.” The promoters “planned to spread the propaganda of prosperity through newspaper publicity, advertising, motion pictures, and ‘four minute’ public speakers.” Their campaign slogans included “Buy What You Need Now,” “Circulate the Dollar,” “Full Speed Ahead,” and “Clear the Track for Prosperity.” One full-page advertisement asserted “Neither autocrat nor artisan, magnate or mechanic, employer, or wage- earner, can afford to stop buying.”44 In all likelihood neither of these warring campaigns had much impact. To the extent that they did, they probably cancelled each other. {Figure 16}

42 In retrospect the declaration that January 17, 1920 would be the start of “National Thrift Week” was sadly timed. At the end of that week, January 23, the discount rate was raised from 4.75 to 6 percent shocking the economy into recession. If I had to pick a day when the economy began to collapse it would by January 17. That makes it a tragic-comic coincidence that the Depression of 1920-1921 began on the day that the Volstead Act prohibiting the sale of “intoxicating liquors” became effective: January 17, 1920. Another ironic coincidence is that January 17, 1920 was Alphonse Capone’s twenty-first birthday

43 For a discussion of the origins of the Thrift Week movement see Richard Harris [2012: 36-38], The U.S. War Loan Organization [Farnsworth 1919], and the New York Times [2 October 1919 and 17 January 1920].

44 The Prosperity Drive is described in the New York Times [24 June 1921: 26 and 7 January 1922: 15], the Ogden Standard-Examiner [6 January 1922: 2], and the Nebraska State Journal [18 June 1922: 4].

Liberty Calling Page 33 Conclusion

By McAdoo’s own assessment, the Liberty Loan campaigns were a great success. With the help of the Committee on Public Information, the educational mission he designed informed the public and sold bonds, but it also generated a great outpouring of patriotic energy from ordinary Americans – factory workers, laborers, farmers, journalists, school-teachers, mothers, schoolchildren. That energy not only produced the billions of dollars needed and delivered them on schedule (see the frontispiece), but also supplied all the volunteer labor and supplies employed to carry out the campaign. The program was designed to lower aggregate consumption, increase the savings rate, and moderate inflation. Historical statistics suggest that it did. During the war McAdoo’s model was imitated by the British and particularly the Canadians. During the Great Depression the National Recovery Administration created the Blue Eagle as a symbol of voluntary compliance with NRA regulations. Many of the lessons learned were applied during the Second World War which also relied heavily on borrowing.45 The economic history of this episode suggests that McAdoo’s pride in his war finance plan was justified.

McAdoo’s accomplishments as Secretary of the Treasury are not limited to the success of the Liberty Bond campaign. His work to create a decentralized federal bank was critical in preventing the capture of the Federal Reserve by New York bankers. For this he should be

45 Attempts to employ CPI’s tactics to produce macroeconomic effects have not always been successful. In 1974 President Ford’s launch of the WIN – “Whip Inflation Now” – campaign complete with WIN buttons and a fight song – was intended to encourage saving. It not only proved completely ineffectual but was widely ridiculed [Mieczkowski 2005: Chapter 8]. Alan Greenspan described WIN as “unbelievable stupidity” [Greenspan 2007: 66]. And he was chair of the Council of Economic Advisors at the time. The fight song was written by Meredith Willson, famous for the award-winning Broadway show The Music Man. The chorus goes “WIN, WIN, we’ll win together/ we will win together/ who needs inflation/ not this nation” [Raffensperger 1974: 1]. The White House abandoned the song when they quietly shut down the WIN effort in the face of mounting unemployment, withering academic criticism, and sustained political satire. Bruce Springsteen, however, used the catch phrase in a song he published in 1982 but probably wrote in the 1970s, Out of Work: “Hey mr president I know you got your plan/ You're doing all you can now to aid the little man/ We got to do our best to whip that inflation down/ Maybe you got a job for me just driving you around” [Bruce Springsteen 1982]. Springsteen donated the song to Gary U.S. Bonds who recorded it with the E-Street Band. Gary Anderson’s first producer had changed his name from Anderson to “U.S. Bonds” in the mid-1950s hoping to stimulate airplay by patriotic radio disc jockeys.

Liberty Calling Page 34 regarded as a progressive hero.46 His actions to close the stock market and keep the currency convertible to gold in 1914 led to the supremacy of the dollar in world financial markets. That role for the U.S. dollar has persisted to this day. The sharply progressive tax structure of 1917 and 1918 which was only partially lowered in the 1920s, created a federal fiscal capacity that has also persisted [Besley and Persson 2008 and 2009]. That taxing power was used to finance an infrastructure of highways, air traffic control, electrical power generation and transmission, scientific research and development, the internet, and higher education; all of which propelled and helped sustain economic growth. The tax receipts also allowed for budget surpluses in the 1920s and the retirement of the Liberty Bonds. We can also report that progressive income and estate taxation were responsible for much of the decline in income inequality during the interwar period [Piketty and Saez 2006: 203]. {Figure 17}

McAdoo’s faith in and reliance upon borrowing during a time of emergency proved the value of deficit spending and emboldened those who advocated fiscal policy to fight business recessions and unemployment.47 McAdoo’s belief – novel for his time – that public opinion could be changed and mobilized to provide the will and the way to achieve great things provides a continuing foundation for an optimistic, progressive, and democratic view of our free-market capitalist economy.48

Looking back on this period, McAdoo reflected “I like to make things better, to reshape old forces and worn-out ideals into new and dynamic forms” [McAdoo 1931: 528]. The world

46 Although the Fed was intended to prevent banking crises like the one in 1907, it proved inadequate to task when the banking system collapsed during the 1930s. However, I am not aware of any evidence that a central bank controlled by bankers as New York wished would have been able to prevent the depression of the 1930s or the bank failures that accompanied the downturn. It is also worth noting that during McAdoo’s tenure at the Treasury and Fed he was able to prevent the liquidity crisis of 1914 from inducing a bank panic when the New York bankers seemed powerless to help [Jacobson and Tallman 2013].

47 An unfortunate bit of his legacy is the federal debt ceiling which has entangled and sometimes paralyzed our political system of decision making.

48 Propaganda is indeed powerful, but it can also be used for evil. A useful reminder is the paper “Radio and the Rise of Nazi in Pre-war Germany” by Maja Adena et al [2013].

Liberty Calling Page 35 of finance has generated few progressive leaders of heroic stature, but William Gibbs McAddo should be high on any list of nominees.

Liberty Calling Page 36

Figure 1. William McAdoo (1863-1941), Woodrow Wilson's Secretary of the Treasury (1913-1918), circa 1914 [Everett Collection, number 15033]. The New York Herald described him as “very tall, very slight … something of a dreamer in his deep set eyes, something of dynamic energy in his long, slight, sinewy body, something of a race horse in the impression of his whole self” [Craig 2013: 36]. The New York Times elaborated. “Sometimes, he does not seem to know what to do with his legs or his arms. In personality, however, he is … a sweetness and light man. His smile is all pervasive” [New York Times 23 November 1918: 2].

Liberty Calling Page 37

Figure 2. Federal income taxes only fell upon the rich, a “class tax” as it was called. Income taxes were introduced in 1913, but the war-time emergency led Congress on McAdoo’s urging to impose very high marginal rates on those who received enormous incomes. For income earned in 1918 the tax on all increments of income over one million dollars was 77 percent [Robert Murray Haig, “The Revenue Act of 1918,” Political Science Quarterly 34 (3) September 1919: Table 5, pp. 390-391].

Liberty Calling Page 38

Figure 3. A Liberty Bond with its coupons. This one was issued for the second liberty loan, sold for $50, and earned $1 every six months.

Liberty Calling Page 39

Figure 4. McAdoo felt that it was important to enroll women in the home front’s war bond drives. This poster proposes that when shopping women could make a small but significant contribution.

Liberty Calling Page 40

Figure 5. Liberty Bond Poster by the nationally-prominent artist Howard Chandler Christy, 1917. Prior to the war Christy had published magazine illustrations for Life, Leslie’s Illustrated Weekly, Century Magazine, Scribner’s Magazine, and Harper’s New Monthly Magazine and was famous for a portrait of the Rough Rider Theodore Roosevelt.

Liberty Calling Page 41

Figure 6. “Douglas Fairbanks Boosting Charlie Chaplin to Boost the Liberty Loan in Front of the Sub- Treasury Building: All Wall Street Looking on with Approval,” April 8, 1918 [New York Times Collection, Museum of Modern Art, MoMA Number: 2204.2001].

Liberty Calling Page 42

Figure 7. Ruth Law (1887-1970), circa 1916 [probably public domain, original source unknown]. The front page of the New York Times reported on November 21, 1916: “A hundred and twenty pounds of pluck called Ruth Law glided her little old 100 horse power ‘pusher’ aeroplane down on a swift wind out of a mixture of fog and Jersey smoke yesterday morning and landed on Governors Island, winner of the American non-stop cross-country aviation record, and breaker of all world’s records for women fliers” [New York Times 21 November 1916: 1].

Liberty Calling Page 43

Figure 8. This chart of wholesale prices shows little inflation before the onset of large gold flows from Europe in December of 1914. However, there was a dramatic inflation during the period of American neutrality. The imposition of high taxes and a relentless exhortation to reduce consumption during America’s active involvement in the war minimized, but did not entirely halt, the inflation. The inflation that followed the Armistice was brought to a halt by a credit squeeze engineered by the Federal Reserve. The consequence was a severe but short-lived depression and an impressive deflation of prices. After 1921 price stability returned but at a level higher than that set in the pre-war period. Source: The U.S. Bureau of Labor Statistics as reported by the National Bureau of Economic Research Macro Data Base Series 4193.

Liberty Calling Page 44

Figure 9. A public service advertisement describing McAdoo’s “Borrow and Buy” plan that allowed commercial banks to indirectly fund a portion of the Liberty Bond drive. The description reads: “THE UNDERSIGNED BANKS PLEDGE THEMSELVES to make loans on the 4% Government Bonds at the same rate of interest paid to you by the Government. Such loans will not interfere with any borrower’s regular line of credit. We urge every bank in the United States to do likewise” [New York Times 26 October 1917: 7].

Liberty Calling Page 45

Figure 10. It has been said that the United Statesinvented confiscatory taxation of excessive incomes [Piketty 2014: 505-508]. If so, this is its first portrait. The personal income tax was, of course, compulsory, but the suggested fair share of Liberty Bonds was merely “recommended.” This scale was proposed by Banker’s Trust in 1918 and widely published in newspapers around the country.

Liberty Calling Page 46

Figure 11. The Committee on Public Information sought to mix its call to patriotism with an appeal to self-interest. This poster advocates saving for retirement. It is possible that the Liberty Bond campaign by relentlessly advocating saving and educating Americans about financial assets such as bonds actually converted some non-savers into life-cycle savers.

Liberty Calling Page 47

Figure 12. Aggregate consumption fell far below trend during the war. Data Table1: Column 6 as a percent of Column 1.

Liberty Calling Page 48

Figure 13. The personal saving rate, 1900-1929, plotted as a three-year moving average of disposable personal income and, alternatively, of permanent life-cycle income. Data Appendix, Table 1, columns 18 and 19.

Liberty Calling Page 49

Figure 14. Herbert Hoover’s Food Administration claimed that 13-million households signed a pledge to follow these voluntary guidelines (February 1918). This sheet was to be hung “where you will see it every day.” Note the tape marks at the top, indicating that the original owner had, indeed, once posted it [public domain].

Liberty Calling Page 50

Figure 15. Almost all interest-paying government securities were Liberty Bonds. The decline of the total volume outstanding of these securities was a consequence of a government repurchase plan after 1921 designed to keep bond prices close to par [U.S. Treasury Department, Annual Report 1920: 107-115]. Since purchases by institutional holders were small, the decline in holdings by households mirrored the volume outstanding. Source: Data appendix, Table 2, columns 8 and 11.

Liberty Calling Page 51

Figure 16. The Bryan Weekly Eagle (Bryan, Texas) ran this full-page advertisement on March 31, 1921, page 4. Similar exhortations to spend were published throughout the country as part of the Prosperity Drive intended to increase consumption during the depths of the Depression of 1920- 1921.

Liberty Calling Page 52

Figure 17. Because a progressive system of taxation was kept in place after World War I, until it was partially dismantled by President Ronald Reagan, the expanded fiscal capacity of the government was kept intact and used to finance infrastructure for transportation and communication, basic research, higher education, and many other public investments. Source: Appendix Data Table 1: columns 3 and 1.

Liberty Calling Page 53

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Liberty Calling Page 64 Data Table 1: Calculation of the Personal Saving Rate

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 22

Personal consumption Personal Social Personal expenditures consumption Personal insurance tax and Personal without expenditures saving with Interest paid Total US Personal contrib- nontax disposable consumer with consumer Military Consumer consumer Transfers to by personal government Other Consumer Consumer PD trend 1902-1913- income utions payments income durables durables clothing durables durables foreigners consumers saving securities assets durables durables Personal saving rate 1927 Million Million Million Million Million Million Million Million Million Million Million Million Million Million dollars dollars dollars dollars Million dollars Million dollars dollars dollars dollars dollars dollars dollars Million dollars dollars dollars dollars Percent Percent Percent dollars Source Sutch Lebergott Lebergott Sutch Sutch Lebergott Lebergott Lebergott Sutch Lebergott Lebergott Goldsmith Goldsmith Goldsmith Goldsmith Olney HSUS series Cd1 Cd13 Ce3+Ce7 Cd411 Data Data Calendar Table Data Data (5+9 Data (12- Data (13- (9/4) Data ma(9) Normal Log of year (col.) (2+3+4) A-6(1) A-6(2) +10+11) Data (6-7-8) A-6(4) A-1(12) Note a 15+16) A-6(6) A-6(7) T-1(2) T-6(18) 13-15) T-6(5) A-6(TOT) *100 ma(17) *100 /(20) income PDI

1900 17,932 13 223 17,696 15,355 16,393 3 1,035 2,134 95 112 1,274 -45 1,137 182 1,042 12.06 20,275 9.917 1901 19,474 14 253 19,207 16,656 17,785 3 1,126 2,303 104 144 1,363 -33 1,176 220 1,160 11.99 13.96 13.19 21,152 9.959 1902 22,350 15 269 22,066 17,845 19,079 3 1,231 3,935 105 181 2,942 -16 2,685 273 1,266 17.83 13.92 13.29 22,066 10.002 1903 21,750 16 287 21,447 18,601 19,904 3 1,300 2,562 115 169 1,501 -24 1,242 283 1,344 11.95 13.69 13.05 23,020 10.044 1904 22,558 16 295 22,247 19,467 20,768 3 1,298 2,515 127 138 1,424 -24 1,210 238 1,329 11.30 13.75 13.46 24,015 10.086 1905 25,994 18 308 25,668 20,708 22,208 3 1,497 4,619 133 208 3,458 -7 3,091 374 1,535 18.00 15.31 15.50 25,053 10.129 1906 27,494 19 312 27,163 22,253 23,897 3 1,641 4,516 147 247 3,240 7 2,717 516 1,792 16.63 15.82 16.14 26,135 10.171 1907 27,745 21 331 27,393 23,406 25,222 4 1,812 3,519 177 291 2,098 -75 1,743 430 1,851 12.85 13.99 13.99 27,265 10.213 1908 27,670 22 345 27,303 23,521 25,026 4 1,501 3,410 192 180 1,996 3 1,892 101 1,515 12.49 13.24 13.26 28,443 10.256 1909 30,851 23 362 30,466 25,672 27,499 4 1,823 4,386 187 221 3,000 -32 2,579 453 1,839 14.40 13.87 14.09 29,673 10.298 1910 32,680 25 385 32,270 27,077 29,059 4 1,978 4,748 204 241 3,244 8 2,751 485 1,989 14.71 13.76 13.94 30,955 10.340 1911 31,795 26 394 31,375 27,089 29,109 4 2,016 3,814 224 248 2,094 19 1,723 352 2,072 12.16 14.70 15.12 32,293 10.383 1912 35,756 27 405 35,324 28,732 31,042 4 2,306 6,087 212 293 4,239 4 3,759 476 2,324 17.23 14.31 14.51 33,689 10.425 1913 35,622 31 446 35,145 29,878 32,410 5 2,527 4,763 207 297 2,667 -1 2,226 442 2,538 13.55 14.66 14.80 35,145 10.467 1914 36,491 30 472 35,989 30,749 33,140 5 2,386 4,751 170 319 2,545 -2 2,382 165 2,371 13.20 15.17 14.71 37,329 10.528 1915 37,641 29 512 37,100 29,687 32,234 5 2,542 6,961 150 302 4,684 -3 4,476 211 2,488 18.76 16.97 16.68 39,650 10.588 1916 43,597 40 622 42,935 34,287 37,811 7 3,517 8,133 150 365 5,563 -123 4,847 839 3,409 18.94 20.63 22.72 42,114 10.648 1917 57,559 53 1,213 56,293 42,060 46,448 33 4,355 13,615 180 438 10,072 3,401 5,998 673 4,216 24.19 22.88 28.81 44,732 10.708 1918 68,100 53 1,710 66,337 48,629 53,209 207 4,373 16,915 268 525 12,686 8,670 4,317 -301 3,928 25.50 23.69 31.84 47,512 10.769 1919 71,445 59 1,908 69,478 53,111 59,353 83 6,159 14,851 832 684 9,764 3,148 6,155 461 5,548 21.38 21.70 29.37 50,466 10.829 1920 71,560 62 1,778 69,720 55,593 62,949 30 7,326 12,699 634 794 6,568 -668 6,722 514 6,645 18.21 17.76 21.88 53,602 10.889 1921 57,313 66 1,472 55,775 47,046 51,942 19 4,877 7,636 450 643 1,286 -611 2,198 -301 6,049 13.69 16.55 18.34 56,934 10.950 1922 63,754 70 1,740 61,944 50,057 55,947 14 5,876 10,994 314 579 6,300 -2,686 8,090 896 5,590 17.75 17.53 18.45 60,473 11.010 1923 71,813 73 1,587 70,153 54,311 61,890 14 7,565 14,848 328 666 9,880 -277 7,973 2,184 7,152 21.17 19.63 20.71 64,232 11.070 1924 72,231 77 1,690 70,464 55,433 62,716 15 7,268 14,070 339 622 8,616 -1,516 8,291 1,841 7,295 19.97 20.65 21.97 68,224 11.131 1925 78,993 83 1,825 77,085 59,876 68,234 14 8,344 16,048 373 788 10,744 -295 8,405 2,634 7,938 20.82 20.20 21.15 72,465 11.191 1926 82,037 89 1,890 80,058 62,937 71,847 13 8,897 15,865 361 895 10,103 -639 8,045 2,697 8,459 19.82 20.32 21.02 76,969 11.251 1927 83,903 95 2,055 81,753 63,880 71,997 12 8,105 16,616 355 902 10,074 -2,260 10,654 1,680 8,222 20.32 18.74 18.50 81,753 11.311 1928 82,698 101 2,452 80,145 65,754 74,603 13 8,836 12,886 346 1,159 6,014 -975 5,328 1,661 8,533 16.08 19.20 18.55 86,834 11.372 1929 91,310 100 2,300 88,910 68,202 77,457 12 9,243 18,833 343 1,532 11,485 -473 10,007 1,951 9,299 21.18 92,232 11.432

Note a: From Carter et al, HSUS: Cd14(jewelry and watches), Cd25(furnature), Cd26(household appliances), Cd27(china and tableware), Cd28(other durable furnishings), Cd41(orthopedic and ophtalmic products), Cd53(motor vehicles and horse-drawn vehicles), Cd54(tires and accessories), Cd61(books and maps), Cd64(miscellaneous other durable goods), Cd65(music instruments, radios, phonographs, etc). Data Table 2: Holdings of U.S. government securities

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Goldsmith Cumulative Banks Total outstand- Commer- Mutual Federal Total Instit- Other Instit- Federal Total instit- ing Personal cial savings Total Reserve utions utions Personal (1+4) (1+4+5) Total Banks Reserve utions Million Million Million Million Million Million Million Million Million Million Million Million Million Million Million dollars dollars dollars dollars dollars dollars dollars dollars dollars dollars dollars dollars dollars dollars dollars V-2(1) T-6(18) T-48(14) T-48(16) cols 2+3 T-48(17) V-48(1) cols 6-4-5 Col 1 Cols 1+4 Cols 1+4+5 Cols 1+6 Col 4 Col 5 Col 6

1916 12 -123 78 14 92 39 135 4 -123 -31 8 12 92 39 135 1917 6,156 3,401 1,498 116 1,614 67 2,737 1,056 3,278 4,984 5,090 6,150 1,706 106 2,872 1918 13,704 8,670 221 276 497 117 4,963 4,349 11,948 14,151 14,374 19,783 2,203 223 7,835 1919 4,776 3,148 -146 271 125 61 1,326 1,140 15,096 17,424 17,708 24,257 2,328 284 9,161 1920 -1,854 -668 -928 170 -758 -13 -692 79 14,428 15,998 16,269 22,897 1,570 271 8,469 1921 -552 -611 -182 117 -65 -53 68 186 13,817 15,322 15,540 22,354 1,505 218 8,537 1922 -669 -2,686 1,329 115 1,444 202 2,010 364 11,131 14,080 14,500 21,678 2,949 420 10,547 1923 -832 -277 -217 43 -174 -302 -567 -91 10,854 13,629 13,747 20,834 2,775 118 9,980 1924 -964 -1,516 332 -31 301 406 656 -51 9,338 12,414 12,938 19,974 3,076 524 10,636 1925 -737 -295 -223 -81 -304 -165 -364 105 9,043 11,815 12,174 19,315 2,772 359 10,272 1926 -1,168 -639 -442 -128 -570 -60 -457 173 8,404 10,606 10,905 18,219 2,202 299 9,815 1927 -1,121 -2,260 728 -115 613 302 1,172 257 6,144 8,959 9,560 17,131 2,815 601 10,987 1928 -677 -975 362 -111 251 -389 229 367 5,169 8,235 8,447 16,385 3,066 212 11,216 1929 -969 -473 -536 -132 -668 283 -540 -155 4,696 7,094 7,589 15,372 2,398 495 10,676 1930 -254 -227 134 36 170 218 -50 -438 4,469 7,037 7,750 15,095 2,568 713 10,626