In return for deploying their armies against the British Empire in the Middle East and Russia in the Caucasus, the Turks received gold shipments and mark loans, rather than exporting gold to Berlin as the Austro-Hungarians did. In a roundabout way, Austria-Hungary was therefore supplying the Ottomans with gold.
Ottoman foreign debt rose from million Turkish pounds in to million Turkish pounds by Due to price inflation, the real value of the debt was relatively low, and because only one war loan was launched, Ottoman society remained remarkably untouched in fiscal terms. As a relatively undeveloped country in the early 20 th century, Bulgaria had to be willing to accept credits from whomever would offer them on good terms. Great Power interest in the Balkans endowed the Bulgarians with the occasional ability to negotiate more favorable terms.
However, after its defeat in the Second Balkan War , the country was left with a large debt burden which it owed to French, Russian, and Austro-Hungarian banks and desired to consolidate on a more secure footing. Attempts by the French to woo Bulgaria into joining the Entente by promising to buy its entire harvest were tempting but insufficient, and in September Sofia joined the Central Powers—a decision immediately rewarded with a monthly revolving credit from Disconto backed by the Reich.
The Entente achieved much better coordination in its international financial assistance than the Central Powers. In the first year of the war, the Franco-Russian military alliance bore the brunt of the fighting while Britain arranged the logistics and the money.
As the war entered its second year, London increased its direct military participation and became increasingly reliant on Wall Street as an ultimate backstop.
As the alliance expanded, its financial center of gravity moved westward. Altogether, without the trans-Atlantic link the Entente would have been unable to develop a war-winning multi-front strategy of attrition. This was an enormous amount of borrowing, as much as the entire British foreign capital stock before the war. Britain and France were therefore both big lenders and borrowers at the same time, although the British balance sheet matched debts and assets much more evenly. As the only government that never had to fund itself through external debt, the United States was the backstop of this global credit pyramid.
The French slide into dependency, first on London and subsequently on Wall Street, may seem surprising considering its wealth and well-developed financial sector, the third-largest in the world. However, France was constrained by several factors. Already before the war its government debt constituted more than 70 percent of GDP, one of the highest debt burdens among all belligerents. Moreover, the destruction and loss of industry and agricultural land in the north and east was compounded by military conscription, both reducing the fiscal base.
Finally, much of French foreign wealth was long-term capital investment in Central and Eastern Europe that could not be liquidated quickly to raise money. Italian borrowing, then, was mainly a temporary compensation to finance imports. By late Rome began to place its treasury bonds in the American market. Most Italian debt remained domestic, however: by the end of the war the public debt stood at percent of GDP, of which a quarter was owed to Britain, the US, and France, and the rest held within the country.
For France especially, the prospect of tying down German military resources in the east had made its immense investments in Russia since the mids a sound long-term plan. Despite its perceived military prowess, Russia required enormous additional amounts of credit to mobilize and sustain the war against the Central Powers. Its very backwardness in economic development thus sucked in French and British lenders more deeply as the war continued. When, in the wake of the October Revolution , the Bolsheviks announced that they would take Russia out of the war and would not honor tsarist-era debts, consternation gripped both Western capitals and Western capital.
For Britain, which had a very diverse portfolio of foreign investments in every continent, this was a serious setback but not a crippling blow. But for France, which owned 43 percent of the 9. Moreover, three quarters of the French-held Russian debt was in the possession of a group of 1. Unlike in other countries, in France the emprunts russes became a highly contested political and electoral issue and a major source of popular anti-Communism among the French public.
Now that the Russians were out of the war and temporarily out of the international financial system, rebalancing public finances after the war relied even more than before on exacting an overwhelming victory against the Central Powers. There was one notable outlier within the wider Allied coalition: Japan. As the main Asian ally of the Entente, Japan fought only briefly and managed to increase its economic and financial stature considerably during the conflict. At the outset of the war it had been a net debtor with only small gold reserves, but by the Japanese net foreign asset position, boosted by a wartime export and shipping boom, showed a 1.
The private sector and government also held million yen in loans to the Chinese government , making Japan the chief foreign lender to its East Asian neighbor. Several smaller Entente partners received credits from London and Paris often sourced through New York to sustain auxiliary campaigns against the Central Powers. Alliances with peripheral European countries had played a role in British imperial containment strategies against continental Great Powers since the Napoleonic Wars.
Greece took both Entente and German loans in before siding with the Allies in June These loans procured the assistance of small armies in the encirclement of Central Europe at relatively little expense, while they further tilted the balance of economic and military power against Germany and its allies. War finance was undertaken by a mix of public and private actors. The war erupted in a world in which the reach and liquidity of private interests in finance, trade, and industry had in many ways outstripped the power of the state to regulate them.
For contemporaries such as John Hobson and Vladimir Lenin this was proof that capitalism had attained an imperialist stage.
The influence enjoyed by the presidents of large financial institutions, holding companies, and industrial conglomerates was certainly enormous. In August , J. As an investment bank, Morgan was not the largest American bank, but it was the most well-connected. The influence of private investment bankers was not unlimited, however. In the fall of , for example, the US government initially barred Morgan from floating French government loans in New York, forcing Paris to look to the City of London for credits instead.
However, by the spring of , France too was funding itself on Wall Street. Once Russia also picked Morgan as the intermediary for its borrowings on the American market, the House of Morgan had become the credit-broker to the entire Entente.
For its services to the alliance it obtained an 8. Thereafter Washington allowed private financing of Entente war credits in the US, but kept a very close watch on this public-private credit relationship. There was considerable tension between the Federal Reserve and the Wilson administration over how generous America should be with its money and credit. Fed chairman Benjamin Strong had personal connections with his European counterparts and was a firm supporter of trans-Atlantic coordination.
American pressure reached a peak when, in late November , Wilson ordered the Fed to instruct American banks and investors to halt foreign currency loans and purchases of foreign securities—a clear counsel against further private lending to London, Paris, and Petrograd. When Washington declared war on Germany in April , private financing of Entente loans in the US was replaced by funding provided directly by the American government.
The reliance of London and Paris on J. Then as now there were, the experts agreed, three basic ways to raise the money: 1 raising taxes, 2 borrowing from the public, and 3 printing money. In the Civil War the government had had simply printed the famous greenbacks.
The government could sell a bond to the newly created Federal Reserve. The Federal Reserve would pay for it by creating a deposit account for the government, which the government could then draw upon to pay its expenses. If the government first sold the bond to the general public, the process of money creation would be even more roundabout.
In the end the result would be much the same as if the government had simply printed greenbacks: the government would be paying for the war with newly created money. The experts gave little consideration to printing money. The reason may be that the gold standard was sacrosanct. A financial policy that would cause inflation and drive the United States off the gold standard was not to be taken seriously.
Some economists may have known the history of the greenbacks of the Civil War and the inflation they had caused. The real choice appeared to be between raising taxes and borrowing from the public. Most economists of the World War I era believed that raising taxes was best.
Here they were following a tradition that stretched back to Adam Smith who argued that it was necessary to raise taxes in order to communicate the true cost of war to the public.
During the war Oliver Morton Sprague, one of the leading economists of the day, offered another reason for avoiding borrowing. It was unfair, Sprague argued, to draft men into the armed forces and then expect them to come home and pay higher taxes to fund the interest and principal on war bonds. Most men of affairs, however, thought that some balance would have to be struck between taxes and borrowing.
Treasury Secretary William Gibbs McAdoo thought that financing about 50 percent from taxes and 50 percent from bonds would be about right. Financing more from taxes, especially progressive taxes, would frighten the wealthier classes and undermine their support for the war. This act increased the personal and corporate income tax rates and established new excise, excess-profit, and luxury taxes.
A huge gap had opened up that would have to be closed by borrowing. Short-term borrowing was undertaken as a stopgap. To reduce the pressure on the Treasury and the danger of a surge in short-term rates, however, it was necessary to issue long-term bonds, so the Treasury created the famous Liberty Bonds.
The first issue was a thirty-year bond bearing a 3. There were three subsequent issues of Liberty Bonds, and one of shorter-term Victory Bonds after the Armistice. In order to strengthen the market for Liberty Bonds, Secretary McAdoo launched a series of nationwide campaigns.
Huge rallies were held in which famous actors, such as Charlie Chaplin, urged the crowds to buy Liberty Bonds. The government also enlisted famous artists to draw posters urging people to purchase the bonds. One of these posters, which are widely sought by collectors, is shown below. Louis Raemaekers. Although the campaigns may have improved the morale of both the armed forces and the people at home, how much the campaigns contributed to expanding the market for the bonds is an open question.
The bonds were tax-exempt — the exact degree of exemption varied from issue to issue — and this undoubtedly made them attractive to investors in high tax brackets. Indeed, the Treasury was criticized for imposing high marginal taxes with one hand, and then creating a loophole with the other. The Federal Reserve also bought many of the bonds creating new money. Thus, directly or indirectly, a good deal of the support for the bond market was the result of money creation rather than savings by the general public.
Table 3 provides a rough breakdown of the means used to finance the war. Of the total cost of the war, about 22 percent was financed by taxes and from 20 to 25 percent by printing money, which meant that from 53 to 58 percent was financed through the bond issues.
Source : Friedman and Schwartz , Heavy reliance on the Federal Reserve meant, of course, that the stock of money increased rapidly. The price level GDP deflator increased 85 percent over the same period. Once the contracts for munitions were issued and the money began flowing, the government might have relied on the price system to allocate resources. This was the policy followed during the Civil War. For a number of reasons, however, the government attempted to manage the allocation of resources from Washington.
For one thing, the Wilson administration, reflecting the Progressive wing of the Democratic Party, was suspicious of the market, and doubted its ability to work quickly and efficiently, and to protect the average person against profiteering. Another factor was simply that the European belligerents had adopted wide-ranging economic controls and it made sense for the United States, a latecomer, to follow suit.
A wide variety of agencies were created to control the economy during the mobilization. A look at four of the most important — 1 the Food Administration, 2 the Fuel Administration, 3 the Railroad Administration, and 4 the War Industries Board — will suggest the extent to which the United States turned away from its traditional reliance on the market.
Unfortunately, space precludes a review of many of the other agencies such as the War Shipping Board, which built noncombatant ships, the War Labor Board, which attempted to settle labor disputes, and the New Issues Committee, which vetted private issues of stocks and bonds. Herbert Hoover, who had already won international fame as a relief administrator in China and Europe, was appointed to head it.
The mission of the Food Administration was to stimulate the production of food and assure a fair distribution among American civilians, the armed forces, and the Allies, and at a fair price.
The Food Administration did not attempt to set maximum prices at retail or with the exception of sugar to ration food. The Act itself set what then was a high minimum price for wheat — the key grain in international markets — at the farm gate, although the price would eventually go higher. The markups of processors and distributors were controlled by licensing them and threatening to take their licenses away if they did not cooperate.
The Food Administration then attempted control prices and quantities at retail through calls for voluntary cooperation. Millers were encouraged to tie the sale of wheat flour to the sale of less desirable flours — corn meal, potato flour, and so on — thus making a virtue out of a practice that would have been regarded as a disreputable evasion of formal price ceilings.
Finally, Hoover urged Americans to curtail their consumption of the most valuable foodstuffs: there were, for example, Meatless Mondays and Wheatless Wednesdays. Its main problem was controlling the price and distribution of bituminous coal.
In the winter of a variety of factors combined to cause a severe coal shortage that forced school and factory closures. The Fuel Administration set the price of coal at the mines and the margins of dealers, mediated disputes in the coalfields, and worked with the Railroad Administration described below to reduce long hauls of coal.
The Wilson Administration nationalized the railroads and put them under the control of the Railroad Administration in December of , in response to severe congestion in the railway network that was holding up the movement of war goods and coal. The railroads would remain under government control for another 26 months. Science-Engineering PhDs. Antidumping in Historical Perspective. Investing in Commodity Futures?
Measuring the Growth from Better and Better Goods. The Economics of Derivatives. Alan J. Auerbach, the Robert D.
The credible estimation of causal effects is a central task of applied econometrics. Two tools for this purpose that The war made the Federal Reserve subservient to the Treasury for a time. But it also helped the Fed develop the financial resources and expertise necessary to function as a central bank. After the war the Fed asserted its independence from the Treasury and took measures to bring down the inflation that threatened to stifle economic growth. Top image: American Lithographic Co.
Broz, J. Ithaca: Cornell University Press, Eichengreen, Barry. New York: Oxford University Press, Meltzer, Allan H. A History of the Federal Reserve, Volume 1: Chicago: University of Chicago Press, Rudolph L.
Current Fed leaders.
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