The Panic of 1907 The aftermath of the Panic of 1907 caused many financial experts to begin rethinking the need for a central bank in the United States with powers and responsibilities similar to those that had been held by the First and Second Banks of the United States. Legislation in 1913 enabled the formation of the Federal Reserve System, a quasigovernment central bank, created in 1914. The responsibilities of the Federal Reserve Banks were to maintain flexibility in the money supply, to provide a way to rediscount bank loans, and to oversee the functioning of the banking system. Formation of the Federal Reserve System The country was divided into 12 Reserve Districts, which kept the banking system from becoming too centralized, with the New York District playing a dominant role. The Federal Reserve Banks were made the fiscal agents for the Treasury in November 1915. The Treasury kept its working balances in Federal Reserve Banks after January 1916. Treasury deposits in the Federal Reserve System eventually replaced the need for regional sub-treasuries, and the Independent Treasury was eliminated as a legal requirement in May 1920. Treasury Reorganization Prior to the formation of the Federal Reserve System, the Treasury underwent reorganization. The work of the Office of the Register and the Division of Loans and Currency was redistributed according to an order of the Secretary on March 11, 1911. The duties of the Register dealing with individual holders and transfers were given to the Division of Loans and Currency, making it the transfer agent for the Treasury. The Office of the Register kept those duties related to bond accounting. It continued to sign the bonds and ensure that their total did not exceed the sum authorized by Congress. 1 Effects of World War I Much of the initial work of the Federal Reserve System and of the rearranged Treasury Department was done under pressure, for by 1 Baziluik, Public Debt Newsletter, 1973-1975. the time they began operating, the country was starting to feel the effects of World War I. The dramatic beginning of the war, with the assassination of Archduke Ferdinand, set off an international financial panic that eventually caused a small recession in the United States. Soon orders for supplies from the belligerent nations reversed that situation and our exports boomed. This rapid increase in business had to be financed by the American banking system, and by the end of the war, the United States had been transformed from a nation that owed money to the rest of the world to one that was owed. Foreigners held $5.4 billion in American securities in 1914. After the war that figure had declined to $1.6 billion. By the end of 1920 the rest of the allies owed the United States about $9 billion. Starting in 1916 the government prepared for possible entrance into the war by raising taxes and authorizing the Treasury to borrow up to $300 million. When war was declared on April 6, 1917, one of the problems faced by the Treasury was how to make large scale purchases of the necessary materials. William Gibbs McAdoo, Secretary of the Treasury, estimated that the war would cost $8.5 billion in the first year. McAdoo hoped to finance almost 50 percent of these costs from taxes, to keep the demand for goods and services from private sources from interfering with the government's purchasing plans. Whenever a country goes to war, it pays out income to its citizens. If citizens try to spend their incomes at a time when government purchases are high, inflation can result. High taxes could reduce the income available for personal spending, but McAdoo was persuaded that too high a tax rate would hinder the levels of personal effort needed in war work. He soon revised his goal of tax finance downward and resorted to heavier borrowing. The Liberty Loans On April 24, 1917, to start off the war-time borrowing program, Congress authorized the First Liberty Loan of $5 billion and permitted the Treasury to sell $2 billion in short-term certificates to generate operating revenues until bond sales and taxes brought in higher revenue. During the war, large amounts of these short-term certificates were sold to banks through the Federal Reserve System, to be refunded later by the government. Since banks paid for them from their own excess reserves, more money was added to circulation. When the same type of borrowing was used in World War II, these sales did little to reduce private demand for goods and may have added to the problem of inflation. The First Liberty Loan was offered for public subscription on May 14, 1917. The Treasury itself handled the sales, marshalling a campaign that rivaled Jay Cooke's during the Civil War. By relying on the patriotism that the war had fostered, the Treasury was able to secure $3 billion in subscriptions for $2 billion in bonds, more than had been sold during the entire Civil War. Bonds were sold in denominations as low as $50, and purchase on an installment plan was permitted. The Second Liberty Bond Act of September 24, 1917, gave the Treasury authority to borrow, with approval of the President, on the basis of Treasury loans. Previously, Congressional approval was needed for every loan. Congress retained authority over the total amount of debt. During the course of the war, the Treasury sold Liberty Loans and one Victory Loan for a total of $21.5 billion. The Treasury organization handling public debt at the beginning of the war included the Division of Loans and Currency in the Secretary's office and the Office of the Register in the Treasury. These two small offices had sufficed for servicing of normal debt transactions when the debt was fairly constant. It was not adequate for the large issues of the war. In April 1917 the two offices had just over 100 employees. They were both greatly expanded during the war and new procedures were devised to take care of the large number of subscriptions for Liberty Loans and War Savings issues. 2 War Loan Organization Under the direction of the Secretary of the Treasury, a War Loan Organization was set up to conduct the five Liberty Loan Campaigns. The Organization consisted of three branches: sales, speaking, and publicity. Subcommittees of the War Loan Organization were formed using the facilities of the twelve Federal Reserve Districts. These subcommittees extended into individual communities. This entire sales network relied on volunteers who worked in coordination with local banks collecting subscriptions for bonds. Subscriptions were combined by the local banks and sent to Federal Reserve Banks, which in turn combined them further, and sent them 2 U.S. Department of Treasury, The Commissioner of the Public Debt, (Washington, D.C.: Report to the Secretary of the Treasury, December 20, 1940), 4. to the Treasury. Bonds were then delivered to the communities by reversing this system. The Treasury began offering War Savings Certificates, War Savings Stamps, and Thrift Stamps in the Fall of 1917. The Thrift Stamps cost as little as 25 cents each. The purpose of these small denomination issues was to allow persons of little means to help finance the war and to promote savings. A special campaign to sell these issues was organized, with a corps of volunteers forming a network throughout the country. In the case of the stamps, a folder was provided for holding each stamp as it was purchased. Sixteen 25-cent Thrift Stamps would fill a folder, which could then be turned in for a War Savings Stamp worth $5 at maturity, if desired. War Savings Stamps were also sold at a discount in denominations of $5 and 20 of them could be exchanged for a War Savings Certificate. Both types of stamps were sold in every Post Office and were even available through rural mail carriers. Additional volunteer sales agents for the stamps included stores, banks, and manufacturing firms. By October 31, 1918, a total of 233,287 agents had been appointed by the Treasury. The sales of the War Savings Certificates and Stamps functioned independently of the War Loan Organization until late in the war, when both were joined under the Federal Reserve System. Both efforts were very successful. The War Savings plan raised $1.6 billion at a cost of about $10 million, and provided a way to draw loans from persons with low income. Consumer purchasing power was also reduced. The five Liberty Loans raised over $21 billion at a cost of $46 million. 3 Beginning of the Bureau of the Public Debt It was necessary in selling the Liberty Loans to issue almost 100 million certificates, and to process more than 66 million subscriptions. Because of this volume of transactions, the Division of Loans and Currency had expanded its activities during the war; however, further reorganization of its duties was required. Two orders of the Secretary, in 1919 and 1920, placed the Office of the Register and the Division of Loans and Currency under a Commissioner of the Public Debt who headed the Public Debt Service. * The Commissioner of the Public Debt served under the Assistant Secretary for fiscal 3 Commissioner, Report, December 20, 1940, 4. * The details of this reorganization will be described more fully in the next phase. |