How do liberty bonds work

Wars are expensive and, like every governmental effort, they have to be financed through some combination of taxation, borrowing, and the expedience of printing money. For this war, the federal government relied on a mix of one-third new taxes and two-thirds borrowing from the general population. Very little new money was created. These securities were issued by the Treasury, but the Federal Reserve and its member banks conducted the bond sales.

Generally speaking, the secretary of the Treasury proposes a funding plan for war financing and works with Congress to enact the necessary legislation, while the Federal Reserve operates with considerable independence from both the executive and legislative branches of government.

But World War I was different. The Treasury and the Fed, united under one leader, worked together in both the creation of the financial war plan and its execution. In the congressional debates over the structure of the Federal Reserve, the makeup of the Federal Reserve Board and even its very existence were key issues.

Carter Glass, opposed the idea of a central coordinating board. President Woodrow Wilson, however, insisted on a public agency with supervisory powers over the banks. The resulting compromise created a seven-member Federal Reserve Board seated in Washington, DC, with the secretary of Treasury designated ex officio as chair.

Congress cleared the bill in December At the time of the congressional declaration of war, the American economy was operating at full capacity, so the requirements of the war effort could not be met by putting underutilized resources to work. The wartime population would have to sacrifice to pay the bill, and McAdoo understood the point. Shortly after war had been declared, he delivered a speech that he later recorded for posterity:. But the question remained: how would the shift in output be arranged?

How should the war be paid for? There were three possibilities: taxation, borrowing, and printing money. For McAdoo, printing money was off the table. McAdoo also opposed printing money because it would hide the costs of war rather than keeping the public engaged and committed. McAdoo chose a mix of taxation and the sale of war bonds. The original idea was to finance the war with an equal division between taxation and borrowing.

Taxation would work directly and transparently to reduce consumption. Taxes are compulsory, and those who must pay are left with less purchasing power. Their expenditures will fall, freeing productive resources labor, machines, factories, and raw materials to be employed in support of the war.

Another advantage of taxation was that Congress could set the rate schedule to target those they thought should bear the greatest burden. President Wilson and the Democrats in Congress insisted on a sharply progressive schedule — taxing those with very high incomes at higher rates than the middle class and exempting the poor.

Some of the prominent economists of the day suggested that the war should be paid for entirely through such taxes, but McAdoo disagreed on grounds that the eventual cost of war was unknown at the outset. If the tax generated less money than was required, rates would have to be raised again and perhaps repeatedly. Furthermore, changing tax schedules always requires a controversial, complex, and drawn-out political debate.

Indeed, as the estimated cost of the war effort escalated, McAdoo came to the conclusion that, despite the high 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.

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 to purchase bonds. Higher saving as a share of income would necessarily mean lower consumption. Such a change in saving behavior, however, would be difficult to engineer and far from certain. Courtesy of the Schuffman Family. To tax or not to tax was not the question; who and how much to tax was.

Liberty Loan Bond, The following Woodrow Wilson video will give you additional important facts and dates about the political events experienced by the 28th American President whose presidency spanned from March 4, to March 4, Liberty Bonds. US American History. Outbreak and Causes of World War 1. America in World War 1. American Battles in WW1. First Published Cookies Policy.

Author Linda Alchin. Updated What induced so many to move their savings, which were previously held largely in banks, to the security markets? As a result, financial firms learned how to mass market securities, and middle-class Americans became accustomed to putting their savings to work outside the corner bank.

At least a third of Americans 18 or older bought bonds. Banks advanced customers money to purchase bonds, paving the way for the margin loans that played a significant part in the stock market run-up of the s. The researchers analyze data on bond sales in counties in 17 states during the war and control for other factors that could affect security purchases and commercial bank assets.