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

Berkeley Economic History Laboratory Working Paper No. 2015-09

66 Pages Posted: 27 Sep 2015

See all articles by Richard C. Sutch

Richard C. Sutch

University of California, Riverside and Berkeley; University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: September 15, 2015

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.

Keywords: Liberty Bonds, World War I, William G. McAdoo, Federal Reserve, savings rate

JEL Classification: N2, N4, H3, H2, H6

Suggested Citation

Sutch, Richard C., Financing the Great War: A Class Tax for the Wealthy, Liberty Bonds for All (September 15, 2015). Berkeley Economic History Laboratory Working Paper No. 2015-09. Available at SSRN: https://ssrn.com/abstract=2665730 or http://dx.doi.org/10.2139/ssrn.2665730

Richard C. Sutch (Contact Author)

University of California, Riverside and Berkeley ( email )

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University of California, Berkeley ( email )

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National Bureau of Economic Research (NBER)

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