Bureau of Engraving and Printing. A Treasury official noted at the time, "It is hardly necessary to describe in detail the many disadvantages and inconveniences which arise as a consequence of this wide separation of forces." 4 It was further hoped that some day the operations would be assembled in one building. The total work force for the Service was 3,061 persons at this time, and during the fiscal year ending June 30, 1920, $46.3 billion in securities had been handled and nearly six million interest checks had been issued. 5

Savings Bond Operations

Operations proceeded smoothly for the next decade, with the total debt declining slightly throughout the boom decade of the 1920s, and increasing at a slightly quicker pace during the depression decade of the 1930s. The United States Savings Bond program was inaugurated in 1935, with the first "Series A Bond” being issued on March 1. Bonds were issued in denominations of $25 to $1,000 carrying interest at 2.9 percent. The idea was to reactivate the World War I strategy of tapping the resources of small savers, which this time would help to fund programs to reduce unemployment. Cumulative sales of Series A, B, C, and D Bonds were about $4 billion through April 1941; sales and publicity efforts for the Bonds were conducted through a Division of Savings Bonds in the Office of the Secretary. The recording of all transactions was handled by the Public Debt Service, which in the fiscal year ending June 30, 1936, had 2,458 employees with salaries and wages totaling $3,702,548, including $7,470 for the Commissioner. 7

6

Reorganization Act of 1939

Congress began considering legislation to reorganize the executive branch of the Federal government in the late 1930s, at the request of President Franklin Roosevelt. As one senator put it, "Reorganization of the Federal Government for economy, simplification and

4 U.S. Govt., Public Debt Service, 43-44.

5 U.S. Govt., Public Debt Service, 43-44.

6 U.S. Treasury Department, A History of the United States Savings Bond Program, (Washington, D.C.: September 1984).

7 U.S. Government, Department of the Treasury File D100.4 Subject: Treasury Department, (Washington, D.C.: 1936).

efficiency is one of the most urgently needed responsibilities confronting the Congress, the Executive, and the Nation as a whole." 8 The legislation was duly enacted on April 3, 1939, as the Reorganization Act of 1939.

The President created the Fiscal Service of the Treasury to be headed by the Fiscal Assistant Secretary under Reorganization Plan III of the Act, as transmitted to Congress on April 2, 1940. As part of this plan, the Public Debt Service was redesignated the Bureau of the Public Debt and was made part of the Fiscal Service. Effective June 30, 1940, under the direction of the Commissioner of the Public Debt, the reorganization began affecting the previous operations of the Public Debt Service, the Division of Loans and Currency, the Office of the Register of the Treasury, the Division of Public Debt Accounts and Audit, and the Division of Paper Custody, with the addition of the Division of Savings Bonds. The total public debt was $50.7 billion at that time, but with the advent of World War II, that figure and the operations of the Bureau would be greatly altered again.

8 Senate Report No. 142, Reorganization Act of 1939, 76th Congress., (Washington, D.C.: 1939). See also House Report No. 120, 76th Cong., 1939 on the same topic. 9 Franklin D. Roosevelt, Third Plan on Government Reorganization, (Washington, D.C.: House Document No. 681, 76th Congress).

Chapter Fourteen

Expansion During World War II

Nothing in our nation's history could have prepared the people and government for those activities entailed in the massive effort to achieve victory in World War II. It has been estimated that total government expenditures during the war were $323 billion, about forty percent of the gross national product during that period; in comparison, it was estimated that World War I expenditures were only one-quarter of the gross national product during that time span. 1 The effort to fight the war required a total mobilization of our financial resources. It is doubtful that any citizen of the country was untouched by the handling of the financing for the war effort. This capitalization put great pressure on the fiscal agencies of the government.

The government and industry were not totally unprepared for the war. Many industries had already been selling material to England and France, and the United States Government began increasing its own defense expenditures during 1939-1940, particularly after the fall of France. Fortuitously, Selective Service (the "draft" for the armed forces) was in effect before our entrance into the war, and plans were made for purchasing strategic materials. Fifteen percent of the nation's industrial production was geared toward the military. This was only a small amount of what would be needed. Total output in the economy increased by 70 percent during the war, with the government's share rising to 25 percent. This meant that by 1945, defense expenditures would be 15 times what they were in fiscal year 1941. Approximately $211 billion of the estimated $323 billion spent in fighting the war was borrowed.

1 Secretary, Annual Report, 1945, 81-82.

Financing World War II

Efforts were made to pay for a portion of the war through increased taxes. The first in a series of tax increases went into effect on June 25, 1940. Individual personal exemptions were lowered and the tax rates were raised. This trend continued through 1944, and by the end of the war, revenue from the personal income tax had increased twentyfold. Personal income tax withholding deductions from wages were introduced during the war, under the Current Tax Payment Act of 1943. Corporate taxes were increased and an excess profits tax was added; estate and gift taxes were also increased. However, despite all of these tax increases, taxes paid for only 46 percent of World War II as compared with 55 percent in World War I. 2 The rest had to be borrowed.

An overall plan for managing this borrowing, with an eye toward minimizing its impact on the economy, was established at the Treasury. Treasury officials had always been sensitive about the effect which their financial policies had on money markets. This massive spending program meant that they had to be concerned about avoiding inflation, maintaining reasonable rates of interest and attaining a widespread ownership of the public debt. Each of these complex technical problems will be considered in turn.

It is doubtful that a war has ever been fought without inducing some inflation. The problem is that through its expenditures the government creates income for individual consumers and businesses, money which they would like to spend. However, the government's purchases reduce the available supply of goods and services. Therefore, when consumers and businesses attempt to use their rising incomes for purchases, demand becomes greater than supply, resulting in upward pressure on prices. Economists call this condition an inflationary gap: one goal of debt management is to eliminate this gap.

During the war the total income in the economy was $833 billion. The Federal government spent $323 billion of that income, with all but $16 billion going to fighting the war. This figure, $323 billion, represented the inflationary gap which needed to be eliminated. If the government could have taxed away the entire amount of the inflationary gap, there would have been no reason to fear inflation. However, taxes accounted for only $133 billion of the gap, still leaving

2 Myers, A Financial History, 345-349.