Coronavirus Bonds? We Should Look to the Financing of the World Wars as Our Guide

By Philip R. Devlin.

(March 30, 2020) — Increasingly, political leaders in many countries have invoked the language of warfare to describe the worldwide struggle against the coronavirus pandemic. As a consequence, governmental funding of efforts to combat the virus has led to massive spending programs similar to levels reminiscent of spending during the world wars. Perhaps, too, we should consider financing those spending programs in the way we paid for the world wars.

World War I raged from August of 1914 to November of 1918, but the United States got involved actively only in the last 19 months of it, declaring war on April 6, 1917; nevertheless, the financial burden that the Great War placed on the government was historically unprecedented—by far. The country ended up spending more than $22 billion for the war, a paltry sum by current standards, but in the context of the time an absolutely enormous amount of money. Consider the following:

• The cost was 20x the pre-war national debt; the entire federal budget in 1913 was $970 million.
• The American cost of WWI would have been equal to the cost of carrying on the Revolutionary War for over 1,000 years!
• Money spent on the war was almost enough to pay for the entire cost of the U.S. government from 1789-1914!
• The war cost more than $1,000,000 per hour.

How to pay for this stupendous amount of debt? Raise taxes? No. The answer was the sale of war bonds.

Let’s fast forward 22 years to 1940. The same dilemma arose again on the advent of World War II—a war far more costly than WWI. What to do? Deficit spend? Here’s the sobering analysis in 1940 of FDR’s Secretary of the Treasury, Henry Morgenthau, concerning the New Deal’s deficit spending practices of the previous 8 years — practices devised by his own President’s administration—and the centerpiece of contemporaneous Keynesian economic theory: “We have tried spending money. We are spending more than we have ever spent before, and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot.*”

As any economist from any political persuasion will now tell you, it was World War II that eventually pulled us out of the Great Depression, not the New Deal. The money that ultimately stimulated the economy did, in fact, come from private sources but not through raising taxes. It came from bond sales that Morgenthau modeled after the Liberty Loan drives of World War I.

Many members of Roosevelt’s cabinet did want to raise taxes to pay for the war. The sagacious Morgenthau resisted. Instead, FDR’s Secretary of the Treasury started a “Defense Bond” program in the fall of 1940. Series E bonds could be bought in various denominations. (For example, $18.75 would buy you a $25 bond that would mature fully in 10 years.) Morgenthau himself sold the first “E” Defense Bond to FDR on May 1, 1941. After Pearl Harbor on December 7, 1941, and our formal entry into World War II, “Defense Bonds” morphed into “War Bonds,” and sales took off.

The American cost for World War II exceeded that of the Great War by more than 13x—a sum exceeding $285 billion! Yet only 45% of the war was paid for by existing taxes; the rest came from the sale of bonds. Here are the results of the 4 major bond drives:

1st War Bond Drive from November 30, 1942 to December 23, 1942– just over 3 weeks. Goal was $9 billion; over $13 billion raised!

2nd War Bond Drive from April 12, 1943 to May 1, 1943—not quite 3 weeks. Goal was $13 billion; over $18.5 billion was raised!

3rd War Bond Drive from September 9, 1943 to October 1, 1943—exactly 3 weeks. Goal was $15 billion; over $19 billion raised!

4th War Bond Drive from January 18, 1944 to February 15, 1944—almost 4 weeks. Goal was $14 billion; over $16.7 billion raised!

Keep in mind this point too: While patriotism undoubtedly played a role in these sales, only $1.6 billion of the $13 billion raised in the 1st War Bond Drive was purchased by private individuals; corporations and commercial banks bought $11.4 billion!

The economic growth fueled by the successful financing and conclusion of World War II led to a postwar economic boom that has no parallel in history. A graph of this postwar growth looks like a ski slope in its upward trajectory, and guess what? It was financed largely by the voluntary investment of individuals and corporations in their own future through the purchase of bonds, not through increased taxation.

Over the weekend actress Julie Andrews, 84, now a resident of virus-ravaged New York City and a British survivor of World War II cited the wartime parallel: “This is so much, to me, like World War II, in a way. I’m very much reminded of that because I was around at that time…and the sense of unity it provides and the way people do bond and get together is just phenomenal.”

Let’s use that sense of unity to finance the tremendous debt we will incur in fighting this war by selling Corona Bonds!