Gold, Blood and Power by James Lacey

Author:James Lacey
Language: eng
Format: epub
Publisher: Pronoun

Figure 5. Real GDP and Price Levels.

The total cost of the war was immense ($33 billion), equaling over 40 times the amount the government brought in from all sources in the year before America’s entry. At first, the government was at a loss as to how to meet such a vast expense, as no one had any clear understanding of the best methods for war financing on so vast a scale. There was, however, a widespread consensus that most or as much as possible of the cost should be paid for through taxes. Secretary of the Treasury William Gibbs McAdoo strongly advocated that taxes pay for at least 50 percent of the war, dropping it to 33 percent later in the war. As Hugh Rockoff points out, “There was no precise theory behind these figures, but rather an intuition that too much borrowing or too high a level of taxes would be bad for the economy.” 142 In the end, the U.S. Government, similar to every other war participant, combined a number of different approaches, including: increasing the income tax (the top rate went from 1.5 percent to over 18 percent), increased excise taxes (alcohol and tobacco), and an increase in luxury taxes. These tax increases on “sinners” and the rich were a result of President Woodrow Wilson’s adamant support for the idea that the rich should pay for as much of the war as possible. 143 Surprisingly, the nation’s wealthy industrialists, unwilling to risk being branded as war profiteers, were strong supporters of increasing their own tax burden. 144

But tax changes are slow to take hold and rarely popular with electorates. As a result, this war, like every major war of the modern eras, was still largely financed through increasing debt. To sell this vast amount of debt, the Department of the Treasury drew on the lessons from the Civil War. In that war, Secretary of the Treasury Samuel Chase enlisted the services of the firm of Jay Cooke to help sell national bonds to as wide a spectrum of the American population as possible. There is no doubt that Cooke was effective in siphoning off funds from a large segment of the middle class, but this time around, Secretary McAdoo thought the Treasury could do better on its own, while also saving on the commissions that would be incurred if the debt was sold through third parties. In his unceasing efforts to sell debt to the masses, Sec retary McAdoo traveled the country while simultaneously enlisting the aid of Hollywood and any other influential groups that could help drum up support for Liberty Bonds and later, Victory Bonds. This campaign exerted enormous social pressure to purchase bonds, but its necessity remains an open question. 145 At an average interest rate of 4 percent, coupled with preferential tax treatment, these wartime issues of debt were highly competitive with any other investment vehicle. Patriotism may have been part of the selling technique, but purchasers were making a hardy profit on their patriotic feelings.

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