The World Wars

Third Liberty Loan Poster

Third Liberty Loan Poster

1913: Federal Reserve

The aftermath of the financial panic of 1907 caused many financial experts to rethink the need for a central bank in the United States. Legislation in 1913 enabled the formation of the Federal Reserve System, giving it the responsibility of maintaining flexibility in the money supply, providing a way to rediscount bank loans (by selling loans on a secondary market to increase credit), and overseeing the functions of the banking system. Prior to our entrance into WWI, the Treasury also underwent a process of reorganization. In 1916, the government prepared for war by raising taxes and authorizing the Treasury to borrow $300 million. Congress authorized the first Liberty Loan of $5 billion, and permitted the Treasury to sell $2 billion in short-term certificates to generate operating revenues. By the end of 1919, total debt exceeded $25 billion, but the war was won and a great burden of debt had been accepted and managed without causing substantial disruption to the economy.

1920: Reorganization

The Bureau of the Public Debt (established later, in 1940) is a direct descendant of the reorganization of the Treasury Department in 1919 and 1920. What had been the Office of the Register and the Division of Loans and Currency were both placed under a new Commissioner of the Public Debt, who headed the new Public Debt Service. A Division of Public Debt Accounts and Audits was formed to maintain auditing control over these two operations and the public debt efforts of the Federal Reserve. At the time, the number of Public Debt Service employees totaled 3061.

1929: Panic

Through the 1920s, federal budget surpluses got as high as $689 million. Total debt was gradually reduced from $24 billion to about $17 billion. But business activity began to decline in the summer of 1929, and the stock market crash followed in October. By the early 1930s, it was apparent that a major economic crisis was in progress. President Hoover tried to balance the budget, and FDR continued this after being elected in 1932, but bad times forced the deficit up as public works efforts (to offset financial hardships) were funded. By 1933, the budget deficit was nearly $3 billion, and the debt had risen to more than $22 billion. Many economists at the time disdained the attempt to balance the budget "no matter what," and, drawing on the ideas of the English economist John Maynard Keynes, thought that a general fiscal depression was as great a national emergency as a war, and that the government should be willing to use deficits to stimulate the economy, just as it would borrow money to fight a war.

John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods Conference, 1944

John Maynard Keynes (right)
and Harry Dexter White
at the Bretton Woods
Conference, 1944

1932: John Maynard Keynes

John Maynard Keynes (b. June 5, 1883 – d. April 21, 1946) was a British economist whose ideas, called "Keynesian economics," had a major impact on modern economic and political theory as well as on many governments' fiscal policies. He advocated an "interventionist" government policy, by which the government would use fiscal and monetary measures to mitigate the adverse effects of economic recessions, depressions and booms. He is one of the fathers of modern theoretical macroeconomics.

1935: US Savings Bonds go to War

The sale of United States Savings Bonds (first offered on March 1, 1935) helped manage the increasing public debt incurred as the country prepared for WWII. (See figure A in the right column)

1940: The Bureau

FDR created the Fiscal Service of the Treasury in April of 1940. As part of this agency reorganization plan, the Public Debt Service was designated the Bureau of the Public Debt. Total public debt was $50.7 billion at the time. But with the coming of WWII, that figure, and the operations of the Bureau itself, would be greatly altered yet again.

Norman Rockwell's Freedom of Speech Poster

Norman Rockwell's
Freedom of Speech Poster

1945: WWII

"And so my fellow Americans, I ask you to demonstrate again your faith in America by joining me in investing…"

Franklin D. Roosevelt, 1941, Radio Address

It has been estimated that total government expenditures during World War II were $323 billion. The effort to fight the war required a total mobilization of the financial resources of the United States; it is doubtful that any citizen was untouched by the war effort. This put great pressure on the fiscal agencies of the government. By 1945, defense expenditures would be 15-times what they were in fiscal year 1941.

Approximately $211 billion of the estimated $323 billion spent fighting the war was borrowed. Treasury attempted (with much success) to manage this borrowing while minimizing its impact on the economy. To do this, they worked to better tailor securities to meet the needs of purchasers, especially small investors, and encourage savings through the purchase of government securities.

After the First World War, many small investors were disappointed in their Liberty Bonds experience when values fell. To win back these small investors, the Treasury issued Savings Bonds as non-marketable securities. They were non-negotiable, registered (facilitating easy replacement if lost or stolen), with fixed values, and could be easily turned into cash. This helped make small investors and savers feel more secure. This effort was so successful that Savings Bonds constituted almost 18% of total public debt by the end of the war (helping to pay down nearly $50 billion). The increased reliance on non-marketable securities also helped Treasury attain one of Hamilton's original goals: widespread ownership of the debt.