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The Economics of Freedom

they were coerced. It was quite properly everybody’s war at this stage, and inflation of credit was practised in the name of loyalty (just as deflation is now urged in the name of thrift). All this was magnificent, and we were proud of each other; but that is no reason why we should be blind to what was actually happening because of our fluctuating dollar which is immune from inspection or correction by any competent inspector of weights or measures. During the period of inflation, inspired by our Treasury Department, the loyal citizen in modest circumstances pledged his hundred dollars for the common cause, mainly with a fine pride which was the measure of his patriotism. If he had not actually the hundred dollars to lend, his banker validated his intentions, and the Federal Reserve Bank assisted his banker.^[1] This era of good-faith and helpfulness went on for as long as was necessary to raise the money. But, with the validation of so much credit, a flood of purchasing power was released, and prices started to climb, since all these contributions of credit, large or small, were placed in the hands of various government departments by

↑ See pages 62 and 63 of the hearings entitled “Reviving the Activities of the War Finance Corporation,” before the Senate and House Committees on Agriculture, Dec. 3, 1920. The Governor of the Federal Reserve Board there testified as follows:

“The Federal Reserve Board adopted a policy in order to assist in the war financing which was economically unsound. I say this frankly. Congress authorized certain loans. It authorized the Secretary of the Treasury to determine the rates at which the loans should be issued. The Secretary of the Treasury asked the advice of experts and then fixed the rates of interest to be borne by the several issues of bonds, notes, and certificates. During the time we were actually at war, something like $18,000,000,000 of bonds were sold to the people, an amount certainly in excess of the normal investment power of the American people in such a short time, and the only way in which those loans could be financed was through the instrumentality of the banks. The only way the banks could undertake to do it was to get some assistance from the Federal Reserve Banks and at a low rate. The low rate of interest borne by these bonds was fixed with a view of holding down the expenses of the Government as far as possible. Anyway, that is something the Federal Reserve Board has no responsibility for. In order to make possible the floating of these bonds we fixed a rate less than their coupon rate. Some member banks announced that for a period of six months there would be a rate of 4+¹⁄₄ per cent on notes secured by Government obligations. The result was there was no loss to subscribing banks pending the distribution of the bonds to the public. There were successive bond issues. The principal reason why discount rates were not increased earlier than they were in 1919 was on account of Treasury financing.”

[1] See pages 62 and 63 of the hearings entitled “Reviving the Activities of the War Finance Corporation,” before the Senate and House Committees on Agriculture, Dec. 3, 1920. The Governor of the Federal Reserve Board there testified as follows:

“The Federal Reserve Board adopted a policy in order to assist in the war financing which was economically unsound. I say this frankly. Congress authorized certain loans. It authorized the Secretary of the Treasury to determine the rates at which the loans should be issued. The Secretary of the Treasury asked the advice of experts and then fixed the rates of interest to be borne by the several issues of bonds, notes, and certificates. During the time we were actually at war, something like $18,000,000,000 of bonds were sold to the people, an amount certainly in excess of the normal investment power of the American people in such a short time, and the only way in which those loans could be financed was through the instrumentality of the banks. The only way the banks could undertake to do it was to get some assistance from the Federal Reserve Banks and at a low rate. The low rate of interest borne by these bonds was fixed with a view of holding down the expenses of the Government as far as possible. Anyway, that is something the Federal Reserve Board has no responsibility for. In order to make possible the floating of these bonds we fixed a rate less than their coupon rate. Some member banks announced that for a period of six months there would be a rate of 4+¹⁄₄ per cent on notes secured by Government obligations. The result was there was no loss to subscribing banks pending the distribution of the bonds to the public. There were successive bond issues. The principal reason why discount rates were not increased earlier than they were in 1919 was on account of Treasury financing.”

[1]