Franklin D. Roosevelt was born in 1882 to parents who were members of New York’s oldest and wealthiest families. When his father, James, died in 1900, he left Roosevelt a small inheritance, but most of his estate (worth about $600,000) went to his wife, Sara Ann Delano, who also inherited about $1.3 million from her side of the family. Roosevelt remained financially quasi-dependent on his mother for decades thereafter.
In 1905 Roosevelt’s personal estate was only $12,000, $7,000 of which had come from his new wife Eleanor. But that mattered little as the couple lived at the family’s Hudson River estate, Hyde Park, and in its posh Manhattan townhouses. Roosevelt also speculated in local land, purchased automobiles and dabbled in law and politics with the aid of his mother’s money or by borrowing on the informal collateral of her immense estate. In one early election campaign, Roosevelt outspent his opponents 5-to-1 and ended up expending twice the position’s $1,500 per year salary.
In the 1910s, Roosevelt earned about $20,000 per year: $5,000 as assistant secretary of the Navy, $5,000 from renting out his New York townhouse and the rest from investment returns on his trust fund. Yet his expenditures, which included five children in fashionable boarding schools, 10 servants, half a dozen memberships in elite clubs and first-class travel, ran ahead of his income. The solution was a $25,000 per year job at the Fidelity and Deposit Company.
In 1926, Roosevelt sank about $200,000, or two thirds of his personal estate, in a hydropathy spa in Warm Springs, Georgia that helped him to cope with the paralysis of his legs, an affliction that began in late 1921 after an attack of polio or Guillain-Barre syndrome. The added expense of the paralysis and continued inattention to his personal finances kept Roosevelt on Sara’s dole until his inauguration as President initiated a $75,000 per year salary, worth over $950,000 in 2005 dollars. Sara’s death in 1941 finally completely freed Roosevelt from financial dependence on others.
During the Revolution, the Civil War and World War I, inflation ran well into double and at times even triple digits. During World War II, by contrast, inflation was much less of a problem, even though the Federal Reserve monetized (turned into money) 10% of the rapidly growing national debt by buying Treasury bonds en masse to keep their prices up (and their yields down). After jumping 10.66% in 1942, the price level increased only 6.13%, 1.73% and 2.27% during the war’s final three years.
One reason inflation remained relatively tame was due to the success of the government’s quantity rationing program. To lawfully purchase a rationed good, consumers had to pay the purchase price and present a valid coupon for it. Rationed goods included automobiles, bicycles, canned fish and milk, cheese, coffee, farm equipment, gasoline and other fuels, meats, processed foods, rubber and regular shoes, sugar, stoves, tires and typewriters.
Rationing does not work when incentives to trade illegally combine with lax enforcement. During the war, however, most people realized that a few years of modest want were better than a lifetime of fascism. So they played by the rules and made sure that others did too.
During both World Wars, Treasury realized that selling bonds to the poorest Americans was good for the war effort because it helped to reduce inflation and tie the interests of a wide swath of the public to that of the national government.
Bonds helped to reduce inflation by redirecting demand away from consumer goods, most of which were in short supply due to the shift to wartime production and the decreased availability of certain strategic raw materials.
Bonds decreased the likelihood of civil unrest by making the government a debtor to as many people as possible. Bondholders disdain anything that threatens the security of their principal and interest, including everything from Hitler himself to the neighbor trying to circumvent the rationing system. Widespread ownership of bonds also decreased perceptions that the poor were being taxed to support wealthy investors.
Low income Americans rarely had $25 in their pockets with which to purchase a government bond. (In 1942, production workers averaged only 86 cents per hour. Even at the war’s end they averaged only $1.06.) But they often had loose change they could use to purchase a 25 cent stamp which could be pasted into a book like the one shown. Buying 75 such stamps entitled them to a $25 savings bond. If you are thinking 75 times $.25 equals only $18.75, you are right. Savings bonds, like those of the famous Series E, were of the discount variety. In other words, the $25 was the payment made to the bondholder when the bond matured years afterward; the $6.25 difference between the face ($25) and purchase price ($18.75) was the interest.
In an extension of the same theme, Americans, including schoolchildren, could buy a Defense Stamp for as little as one thin dime.
The US federal deficit soared from $4.9 billion in 1941 to over $54.5 billion in 1943 before dropping back slightly to $47.5 billion in 1944 and 1945. The deficit could be financed in only two ways, by borrowing or by printing money. The latter expedient was dangerous because it could cause hyperinflations like those suffered by the new nation during the Revolution, the South during the Civil War and, more recently, Weimar Germany. So Treasury extended mass bond marketing techniques developed during the Civil War and World War I to sell as many bonds as possible to as many individuals and financial institutions as possible.
Treasury offered two major classes of bonds during the war, one for individuals and the other for institutional investors. The former were composed of bonds like Series E savings bonds (nicknamed “Baby Bonds”), which were discount bonds with denominations as low as $25 that could be purchased with stamps or via a payroll deduction. “We wanted the ownership of America,” Treasury Secretary Morgenthau explained, “to be in the hands of the American people.” By war’s end, over 85 million Americans, out of a population of 140 million, owned a piece of the nation and contributed about a quarter of the money the government borrowed during the war.
The rest of the borrowed funds came from the proceeds of bonds targeted at institutional investors, which took the traditional forms of discount, coupon or registered. To keep its financing costs low and to guarantee returns for institutional investors, Treasury forced the Federal Reserve to buy government debt whenever yields on long-term bonds and short-term notes exceeded 2.5 and 3/8ths percent, respectively. That policy created inflationary pressures by increasing the money supply, but rationing, mass income taxes, restrictions on retail credit and other policies kept inflation in check until after the war.
Bond drive after bond drive raised tens of billions of dollars, each thanks in part to the sophistication of the government’s marketing efforts. Massive advertising campaigns tugged at patriotic heartstrings with slogans like “They give their lives; you lend your dollars” while celebrities like singer Kate Smith (who popularized “God Bless America”) contributed their endorsements and talents to the sales effort. Roosevelt himself pitched in too, leveraging the power of his radio addresses to remind Americans that “every dollar that you invest in” war loans was “your personal message of defiance to our common enemies.”
Treasury’s bond sale program worked well enough to make a proposed forced savings plan, a sort of tax that would be rebated with interest after the war, unnecessary beyond the 5% “Victory Tax” imposed in 1942.
The Roosevelt administration sought to finance fully half the war effort with taxes, but at 45% fell a little short of its goal. Government revenues increased from $14.6 billion in 1942 to $45.2 billion in 1945. The brunt of the first increases were borne largely by corporations. In 1943, for example, corporate taxes accounted for 43% of revenues, income taxes just 30%. (The rest came from tariffs and excise taxes.) In the last two years of the war, however, the biggest gains came from the income tax. In 1945, income taxes accounted for 40% of revenues and corporate taxes just 33%.
Income tax revenues soared because by 1945 the government had expanded the tax base to 60% of the workforce (from just 13% of the labor force during World War I), transforming what had been a “class tax” into a “mass tax” that hit over 42 million Americans by war’s end. The government also increased receipts by increasing marginal tax rates on the rich and by increasing compliance through direct payroll deductions. (Previously, workers paid their taxes quarterly.) The high war profits taxes of World War I were disdained because class tensions had eased as Americans united to fight a two-front war against dangerous foes. At the same time, income taxes on working Americans were encouraged as a means of keeping inflation in check by reducing workers’ net income (the number of dollars in their pay packets).
Money is a lot like oxygen. Too much of it and prices get high. Too little and the economy dies. That is why throughout history, people have proven adept at creating new forms of money when they need to. That is what the various scrips, shinplasters, tokens and other private media of exchange created during the Recession of 1837-1842, the Civil War and other episodes were ultimately about, providing people with a means of making payments when the prevailing types of money (notes, deposits, coins) were in short supply.
During the Great Depression, the money supply dropped significantly because thousands of banks failed, wiping out deposits. The remaining banks cut back on loans, not that businesses battered by the unprecedented downturn wanted to borrow much anyway. And the Federal Reserve was more interested in maintaining the nation’s gold reserves than in replacing the lost deposits by lowering interest rates or buying government bonds. The result was a large deflation (drop in the price level), over 25% all told, between the beginning of 1930 and the end of 1933.
Private companies, bank clearinghouses and municipalities stepped in to fill some of the monetary void left by the banks and the national government by issuing money substitutes like the ones illustrated here. While such substitutes were often successfully used to make local payments, most were illiquid or even worthless outside of the limited geographical region where they had been issued. Moreover, they were also subject to nontrivial default (nonpayment) risk that limited even their local circulation.
Local scrip exist to this day, but none date to the Depression and all are of small circulation.
William H. Woodin was the first of two Treasury Secretaries to serve Frankin D. Roosevelt. Born in 1868, he graduated from Columbia University in 1890. He then served as general superintendent and later president of Jackson and Woodin Manufacturing Company, a railroad freight car manufacturer founded in 1840 with headquarters in Berwick, Pennsylvania. When it merged with 12 other companies as the American Car and Foundry Company in 1899, it was suddenly part of the largest manufacturer of its type in the eastern US. Woodin became its president in 1916. From 1927 through 1932, he was a director in the Federal Reserve Bank of New York.
A good friend of Roosevelt, Woodin helped the President to bring the nation out of the Depression by restoring confidence in the banking system following the March “Bank Holiday” and the establishment of the Federal Deposit Insurance Corporation (FDIC). He also played an important role in the formulation of the Gold Reserve Act of 1934, which devalued the dollar from $20.67 to $35 per ounce of gold and nationalized all gold within the country except for that used in jewelry, rare coin collections and dentistry.
Woodin resigned due to ill health and died in May 1934, just a few months after leaving office.
Henry Morgenthau, Jr. was the second and final Treasury Secretary to serve under Franklin D. Roosevelt. The son of a prominent Jewish real estate mogul and diplomat, Morgenthau was born in 1891 in New York City. He studied at Cornell University, befriended Roosevelt in 1913 and afterwards operated a Christmas tree farm near Hyde Park. During the Great War he worked for the Farm Security Administration and after it ran American Agriculturalist magazine. He chaired the New York State Agricultural Advisory Committee during Roosevelt’s term as governor of that state.
After his election to the presidency, Roosevelt naturally turned to Morgenthau to head the Federal Farm Board and tapped him to take over at Treasury following Secretary William Woodin’s resignation. As a fiscal conservative, Morgenthau favored balanced budgets over the fiscal stimulus program advocated by British economist John Maynard Keynes and his followers. Nevertheless, continued economic weakness and anemic government receipts combined with hefty New Deal expenditures to create chronic deficits that averaged almost 4% between 1933 and 1940.
By 1941, the economy was humming, but government receipts could not keep up with wartime expenditures. Revenues increased from $8.7 to over $45 billion between 1941 and 1945, but expenditures soared from almost $13.7 to $92.7 billion over that same period, leading to deficits greater than 20% of GDP in 1943, 1944 and 1945 that Morgenthau financed through the sale of bonds to individuals and institutional investors like banks and insurers.
In 1944, Morgenthau chaired the Bretton Woods Conference that created an international monetary system that established the World Bank and the International Monetary Fund and that enshrined the US dollar as the free world’s postwar international currency.
Morgenthau resigned from the Truman administration just months after Roosevelt died, and soon after published a book calling for harsh postwar treatment of Nazis and the deindustrialization of Germany. He also became active in Jewish philanthropies and was a financial advisor to the new state of Israel. Morgenthau died in 1967 in Poughkeepsie, New York.
Checks & Balances
George Washington
Andrew Jackson
Abraham Lincoln
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Franklin D. Roosevelt