Woodrow Wilson

Specimen $100,000 gold note bearing the image of Woodrow Wilson. On loan from the curating section, Federal Reserve Bank of New York.

Woodrow Wilson was born in Staunton, Virginia in 1856 to a Presbyterian reverend of Scots-Irish descent. He graduated from Princeton, where his father was a professor, in 1879, then attended law school at the University of Virginia for a year. He did not graduate but easily passed the Georgia bar anyway. Finding little work as an attorney, he entered a Ph.D. program in history and political science at Johns Hopkins University in 1883 and graduated just three years later. He then completed teachings stints at Cornell, Bryn Mawr ($2,000/year), and Wesleyan ($2,500/year) before joining the faculty at Princeton ($3,000/year) in 1890.

In addition to his teaching salary, Wilson in the 1890s earned an average of about $1,500 per year from book royalties (he had penned a political science textbook for D.C. Heath while at Bryn Mawr) and speaking fees. Earning as much as $4,000 extra in one year, however, pushed him to the limit. Wilson was not as frail as he appeared – he played baseball, enjoyed football and even imbibed on occasion – but he did not believe his physical constitution was robust, making the $42,000 he earned from his pot boiler five-volume A History of the American People (Harper, 1902) welcome indeed.

The same year that his magnum opus appeared, Wilson became president of Princeton University, a post that he held, despite creating considerable controversy, until successfully running for governor of New Jersey in 1910. He attributed his success as governor to his experience at Princeton, noting that after academic politics the real thing was easy. Wilson parlayed that success with his Southern roots and political adroitness to win the Democratic party nomination for President in 1912. In a three-way race with President Taft and Theodore Roosevelt, Wilson won less than 42% of the popular vote but 435 electoral votes.

Wilson feared that his presidential salary of $75,000 (over $1 million in 2005 dollars before wartime inflation set in) would prove insufficient, but he ended up saving $250,000 during his two terms in office. He also received $40,000 for the Nobel Peace Prize, awarded in 1919 for his efforts that year at the Paris Peace Conference, and $10,000 from a trust fund set up by wealthy friends. Supporters also paid $100,000 toward the $150,000 townhouse on Massachusetts Avenue in the capital where he planned to live, write and practice law after his presidency. The severe stroke he suffered in late 1919, however, dashed those plans. Incapacitated by the stroke, Wilson served out the balance of his presidency with the help of his second wife, Edith, and cabinet. He died in February 1924.

In 1934, Wilson's image appeared on the $100,000, which was legal tender but was never publicly circulated. Instead it was used to transfer funds between Federal Reserve banks.

Bond coupons from World War I. Courtesy of the Schuffman Family.

During World War I, US government bonds came in three major varieties: discount, registered and bearer coupon. A discount bond made a single payment of its face value to the bearer on its maturity date. Such bonds initially sold for something less than their face value, hence their name. The interest earned was the difference between the purchase price and the face value. Most discount bonds were short-term.

A registered bond, by contrast, credited periodic (e.g., semiannual) interest payments to the account of the registered owner and repaid its face value upon its maturity, years or decades after its issuance. Registration of ownership reduced the chance of loss from theft or loss but made the bonds less easily saleable (liquid).

A bearer coupon bond, by contrast, could be easily and cheaply transferred to a new owner. Interest payments were collected by the holder by clipping and remitting a coupon, like those pictured, when the interest fell due. In June 1930, for example, the bondholder could exchange the bottom right coupon for 88 cents. Like a registered bond, a coupon bond repaid its face value on its maturity date, but due to their bearer nature were more at risk of physical loss.

High levels of inflation during and after the war ate away much of the purchasing power of the bonds. In addition, the US government technically defaulted on many Liberty Bonds, which promised payment of interest and principal in gold, after Franklin D. Roosevelt devalued the dollar from $20.67 to $35.00 per ounce of gold in 1933.

To tax or not to tax was not the question; who and how much to tax was.

The major political battle over wartime finance was the portion of the war costs to be funded by taxes and the portion through borrowing. Democrats tended to favor taxes and Republicans borrowing. Both parties realized that both taxes and borrowing had to be resorted to, but they differed over whether taxes should account for 20%, 33% or even 50% of the burden. Too much borrowing could create inflation, but too much taxation could reduce incentives to put the economy on a wartime footing. In the end, taxes financed a third of the war effort.

The best types of taxes to implement were also hotly debated. The national income tax was dropped after the Civil War in favor of reliance on tariffs. The Supreme Court ruled federal income taxes unconstitutional, but in 1909 under President Taft the political stars realigned and a constitutional amendment (the 16th) allowing imposition of an income tax was sent to the states and ratified by the necessary number (then 36) in 1913. Soon after, Congress enacted an income tax into law. About 15% of American households helped pay for the war with their income taxes, but most of the tax burden fell on corporations in the form of an “excess profits” tax. Estate taxes were also considerable.

To some extent the government also taxed interest payments on its own bonds as detailed in the accompanying document. Its evolving goal was to increase government revenues and reduce class antagonisms by taxing only the wealthiest bondholders, those subject to the highest income, estate and excess profit taxes. Tax exemptions had to be expanded, however, to attract more middle class bond investors caught in the tax “bracket creep” created by double digit wartime inflation.

William McAdoo, Secretary of the Treasury (March 1913 to December 1918)

William Gibbs McAdoo was the first of three Treasury Secretaries appointed by President Woodrow Wilson. Born near Marietta, Georgia in 1863, McAdoo graduated from the University of Tennessee, where his father was a professor. He was admitted to the Tennessee bar in 1885 and practiced law there until moving in 1892 to New York City, where he was a partner in an investment firm until returning to Tennessee in an unsuccessful attempt to run a streetcar company in Knoxville. After returning to New York, he served as president of the Hudson and Manhattan Railroad Company, which successfully completed its subway from New Jersey to Manhattan in 1908. (The lines are still in operation today as part of the PATH system.)

McAdoo was vice chairman of the Democratic National Committee in 1912 and, despite the death of his first wife in February of that year, was active in the Wilson campaign. Wilson appointed McAdoo Treasury Secretary in 1913 and the following year allowed him to marry his daughter, Eleanor, without seeking his resignation.

As Treasury Secretary, McAdoo played a pivotal role in the establishment of the new Federal Reserve System, which just started operations as Europe found itself embroiled in what would soon be called the Great War (World War I). After the US entered the conflict in 1917, McAdoo was directly responsible for financing the government’s growing budget, which jumped from $.7 billion, or about 1.5% of GDP, in 1916 to almost $12.7 billion, or almost 17% of GDP, in 1918. About a third of the funds came from taxes, especially estate taxes and “excess profits” taxes on corporations, while borrowing covered the other two-thirds. Despite his best efforts to combat it, however, inflation ran at an average of about 15% from 1916 to 1920.

McAdoo resigned about a month after the November 1918 armistice. He returned to his law practice, made two unsuccessful bids for the presidency, and served California in the Senate for one term. He divorced Eleanor in 1934, soon after married a much younger woman, and died in 1941.

Carter Glass, Secretary of the Treasury (December 1918 to February 1920)

Carter Glass, the second of three Treasury Secretaries appointed by President Woodrow Wilson, was born in Lynchburg, Virginia in 1858. He received little formal education but while still in his early 20s was able to buy and run a Lynchburg newspaper. The successful business piqued his interest in politics and later served as a platform for his own political aspirations, which led him into the Virginia legislature and constitutional convention of 1901-2. In 1902 he was elected to the House of Representatives. He became chairman of the House Committee on Banking and Currency in 1913 and played an important role in the bill creating the Federal Reserve.

As Treasury Secretary, Glass helped to consolidate the government’s debt, which had soared from about 2.5% to 32.5% of GDP between 1916 and 1919, by successfully marketing $5 billion worth of Victory Liberty Loan bonds.

But Glass is most famous for his career in the US Senate, which spanned from February 1920 until his death in May 1946, especially his role in New Deal banking reform legislation like the Banking Act of 1933. That law established the Federal Deposit Insurance Corporation (FDIC) and a section of it, commonly known as the Glass-Steagall Act, separated commercial banking (taking deposits and making loans) from investment banking (helping issue corporate securities and arrange mergers) until its repeal in 1999.

David Houston, Secretary of the Treasury (February 1920 to March 1921)

David Houston, the last of three Treasury Secretaries appointed by Wilson, was born in Monroe, North Carolina in 1866. He earned his undergraduate degree from the University of South Carolina in 1887 and his masters in political science from Harvard in 1892. In 1896, he published A Critical Study of Nullification in South Carolina and, like Wilson, was a college professor and president. Houston served as Wilson’s Secretary of Agriculture from 1913 until joining Treasury after Wilson turned to him to replace Carter Glass, who left the treasuryship after being elected to the US Senate.

During his short tenure as Treasury Secretary, Houston enjoyed considerable policy discretion due to the devastating effects of Wilson’s late 1919 stroke. Houston tried to rein in inflation, which had run in the double digits each year since 1917, by urging the Federal Reserve to increase its discount rate, the rate at which it lent to member banks. A large deflation and recession resulted, with the latter lasting until July 1921.

After leaving office with Wilson in early 1921, Houston became a corporate executive and director for AT&T, United States Steel, Mutual Life Insurance Company of New York and several other companies. He died in 1940 in New York City.

Liberty Loan Bond, 1917. Courtesy of the Schuffman Family.

To help finance the war effort and build patriotism, the US Treasury issued securities termed “Liberty Bonds” in June and October 1917 and in May and October 1918. A fifth and final issue, termed the Victory Liberty Loan or Victory Loan, was issued in May 1919 to consolidate short-term debt issued during the war.

The promised rate of interest on the first Liberty Bond issue, 3.5%, was too low for market conditions, so subscription books were slow to fill. Instead of allowing the bonds to sell below par, the government put on a massive bond sales campaign replete with celebrity endorsements, air shows, sensationalistic posters (like one showing Manhattan ablaze and German bombers overhead), window stickers and buttons. Those tactics, plus larger interest payments and liberalized tax exemptions, increased demand for subsequent issues.

Treasury sold large denomination bonds to financial institutions and bonds with face values as low as $50 directly to individuals. In December 1917, Treasury offered War Savings Certificates and Stamps to entice low-income Americans to invest in the war effort. The 25 cent stamps could be collected in books and exchanged for $5 savings certificates, the lowest denomination offered. Treasury Secretary William McAdoo stressed the importance of retail sales as a means of combating inflation, increasing support for the war (and the national government a la Alexander Hamilton), and defusing claims that poor men did all the dying and working to support a few wealthy bondholders.

It was the brokers and banks, however, that handled most of the retail sales, reprising the role that Jay Cooke’s network of agents handled during the Civil War. Financing the war was greatly simplified by the Federal Reserve, which lent freely to banks at low interest rates. The banks, in turn, bought higher yielding government bonds or lent to borrowers who then bought the bonds. In the end, about half of all American families bought war bonds, most between $5 and $100 worth, but half of the total sum sold were purchased by financial institutions for their own account in $10,000 increments.

Liberty Bond storage envelope from World War I.

As a convenience to customers and a sort of advertisement for their services, many bond distributors had storage envelopes or sleeves like the one displayed printed up, some with more, some with fewer information blanks for holders to fill in.

Posters like this were part of the US government’s massive publicity campaign to induce Americans to support the war effort through the purchase of Liberty Bonds.

President of the United States (1913-1921)

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