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.