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Rh commercial credit, encouraging subscribers to the Liberty and Victory loans to pay for them from current savings; and (in minor degree) by repressing unnecessary consumption through the adequate taxation of personal incomes and the use of luxury taxes. Financial preparation for a long war, perhaps of three years, was made, with due appreciation of the fact that in the early months the most effective contribution of the United States would take the form of generous supplies of goods and credit to the Allies. As stated by R. C. Leffingwell, Assistant Secretary of the Treasury, who more than any other one man guided the credit operations of the Government during the war:—

“The Treasury's war problem was to meet the financial requirements of the Governments of the United States and the Allies promptly and without stint, and to meet them so far as possible from the saved incomes of the people, avoiding avoidable inflation. These objectives must be pursued in such ways as would not interfere with, but on the contrary facilitate, the mobilization of the Nation for war purposes and the production and transportation of munitions.”

As the principal credit instrument with which to achieve these ends, the Government used, for the most part, terminable bonds with moderate but adjustable maturities (in no case exceeding 30 years), partially subject to taxation, issued every six months from the beginning of the war to May 1919, at interest rates which because of the conversion privilege varied with the changing credit conditions but were always high enough to stimulate the instinct of saving, yet low enough to utilize fully the patriotic fervour of the people.

In order to avoid credit strain, with its demoralizing effects upon interest rates and business, the huge bond issues were preceded by practically monthly issues of short-dated tax and loan certificates, to be taken up by the payments for taxes or by the subscriptions to Liberty Bonds. When the war debt was at its peak, at the close of Aug. 1919, the gross debt amounted to $26,596,701,648 (or to $25,478,392,113, deducting the net balance in the general fund); of which short-time Treasury certificates constituted $4,201,139,050. As an essential part of the credit machinery, the Treasury adopted as particularly suited to the decentralized character of the country's banking system, upon which the burden of distributing the war loans fell, the device of “payment by credit,” by which banks subscribing for Government loans held their subscriptions as a credit to the account of the Government until the Government called for the funds. This reduced the credit strain by preventing the concentration of funds in the Government coffers, and “developed the further advantage that in the difference between the rate borne by the securities and the rate charged on the deposit, banks found some compensation for their time, trouble and the loss of deposits, resulting from the sale of securities to investors” (Leffingwell). This method of payment by credit has been criticized both as paying huge sums to the banks for creating credit which could have been as easily manufactured by the Government itself; and also as productive of inflation. Neither charge will bear analysis. The banks lost rather than gained by the Government's absorption of the investment resources of the people and by the repression of “non-essential industry”; and the device checked rather than stimulated inflation. If the Treasury had actually drawn into the reserve banks and its own offices the proceeds of these great loans, not only would it have demoralized the money market and increased money rates, but after a period of agitation perhaps panic there would have been heavy calls for discounts upon the reserve banks and “upon the re-deposit of the proceeds of certificates, depositary banks would be put in possession of loanable funds. . . . It was better to make one bite of the cherry and to avoid the money strain and inflation which would have been inevitable if the money had been first drawn out of the banks and then re-deposited with them” (Leffingwell).

In its decision of the momentous credit questions arising during the war, the Government steered a middle course, avoiding the mistakes which characterized the Civil War financing in the United States and much of the European financing during

the World War. One set of critics urged much greater reliance upon short-time debt. Another set urged long-time bonds, “sold over the counter,” at interest rates high enough to keep the bonds at par when the inevitable post-war reaction set in. The Government took the intermediate course, utilizing but not abusing the patriotism of the people on the sound assumption that no rate of interest could have been sufficiently high to float these huge issues on a commercial basis alone. And its use of anticipatory short-time certificates was designed not only to prevent money stringency during the war, but to keep some pressing war debt current for extinguishment in the prosperous time which usually follows the termination of a great war. “No administration could have resisted the pressure for reduction of taxes and increase of expenditures if the war debt at its maximum of $25,300,000,000 had been funded, and it had subsequently appeared that taxes and salvage would more than meet current expenditures. The time to pay down a war debt is immediately after the war” (Leffingwell). With the depression that set in in 1921, the Government introduced successfully the device of selling notes running from three to five years along with the more temporary Treasury certificates. And the same middle course was taken, with the results already stated, between the proposals to exempt Government obligations entirely from taxation and to subject them to all Federal taxes at full rates; between those who counselled “conscription of wealth” and those who would have paid practically the whole cost of the war with credit devices of one kind or another. One mistake, the issue of Government paper money, was wholly avoided, and bank credit utilized in its place. But every effort was employed to draw the borrowings from actual savings and to get Government securities as rapidly as possible out of the banks into the hands of investors. These efforts succeeded; on June 1 1921 (according to reports from banks transacting over 40% of the commercial banking business of the country), less than $600,000,000 of the long-time debt of $15,271,000,000 outstanding, only $186,412,000 Victory notes (out of $4,022,000,000 outstanding) and $184,086,000 Treasury certificates (out of $2,572,000,000 outstanding) were pledged with these banks as security for loans and discounts.

The management of the credit operations of the war was not without its shortcomings. The preferential discount rate for loans secured by Government obligations may have been a mistake; perhaps, too, much use may have been made of bank credit and not enough use of taxation particularly of taxes on the consumption of luxuries and on incomes of the moderately rich; and it seems unquestionable that, owing to inability to gauge the exact time and amount in which the subscriptions to the Liberty loans would be paid, there was an overlapping of Treasury certificates and of bond subscriptions, with the result that the Treasury balance throughout the war was unnecessarily large. But these errors and defects were of secondary importance. The smoothness and efficiency with which the credit machinery worked during the World War particularly in contrast with its inefficient management during the Civil War indicate that in essentials the credit policy of the Government was sound and its administration remarkably efficient. The response of the people to the call for bond subscriptions, the cheerfulness with which the heavy war taxes were borne, and the absence of even a temporary breakdown in the credit mechanism with which the war was financed, were all admirable.

State and local finance were affected in unexpected ways by the war. At the beginning of the decade under review, state Government in particular was undergoing an unusually rapid expansion; and both state and municipal expenditures were increasing nearly twice as rapidly as those of the Federal Government. The tax burden, in the case of the state and local Governments, was increasing but not so rapidly as expenditures; increasing deficits were the rule; and the public debt both in total amount and per capita was increasing. The situation at the beginning of the decade and the principal financial movements throughout the decade are suggested in Tables II. and III. It should be noted that the Federal expenses or cost payments in Table II. do not include payments made for the purchase of obligations of foreign Governments; and that the per capita statistics quoted in Table III. represent net expenditures and revenues after deduction of working credits and tax refunds.