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Financing the War: Definition and Context
When World War II began, the United States did not have anywhere near the size of its military today. Technological advancements since World War I have also made many of the nation's weapons obsolete. As a result, the United States desperately needed guns, ammo, ships, airplanes, and tanks. The government set out on a mission to expand the defense industry to meet these demands.
With the expansion of the defense industry, the nation recovered from the Great Depression exceptionally fast. Unemployment dropped, and wages rose. Americans now had money to spare daily, and the government wanted to target this newfound wealth to fund the war effort.
Financing the War Facts
There were two significant ways in which the United States government funded the war: taxation and domestic borrowing.
Fig. 1 - propaganda poster for the income tax and liberty bonds
Financing the War Facts: The Income Tax
Before World War II, only the wealthiest Americans had to pay income taxes. But, during World War II, the income tax expanded to cover middle and lower-class Americans. This was plausible as much of America had rebounded from the Great Depression as a result of the expansion of the defense industry. To ensure an immediate effect, the federal government introduced a program where taxes would be taken out of each paycheck rather than quarterly.
During World War II, approximately 40 million Americans paid an income tax for the first time.
Financing the War Facts: Liberty Bonds
Another significant way the United States government funded the war was the sale of liberty bonds, a form of domestic borrowing. Every day Americans could buy these bonds with the promise that the government would pay them back at a later date with interest. There were inexpensive options available to make the purchase of liberty bonds more attractive. Most liberty bonds bought were valued at $25 or less (approximately $500 today).
The government asked the Federal Reserve to lower interest rates to keep the cost of war reasonable.
Financing the War Facts: Preventing Inflation
Inflation becomes a real threat when there is an increased money supply in conjunction with fewer goods. The federal government tried to prevent this in several ways. For example, the income tax helped limit the amount of money in circulation. Additionally, the government collaborated with industry leaders to regulate and restrict the prices of goods and workers' wages. The Office of Price Administration (OPA), founded in response to the war, oversaw consumer prices.
Inflation
An economical process in which prices rise and the value of money decreases
There was also a rationing program for scarce commodities, which helped counteract the typical process of supply and demand. (Normally, the scarce supply of a particular good would lead to increased demand for the good and, therefore, a higher price.) Rationed goods included sugar, coffee, meat, tires, and gasoline.
Fig. 2 - propaganda poster for rationing
The Rationing of Gasoline
To keep gasoline consumption low in the United States, the government imposed rationing on gasoline. In this system, drivers needed to display tags on their windshield that identified their given ration. For example, the average driver had an 'A' tag that allowed them four gallons a week. In contrast, business owners had a 'B' tag that allowed them eight gallons a week. The government also set a nationwide speed limit of 35 miles per hour and appealed to Americans not to drive for pleasure. As with other industries, the gasoline ration led to a thriving black market.
Financing the War Propaganda
Fig. 3 - propaganda poster for liberty bonds
You might have noticed a common theme in the images in the article–they are all World War II-era propaganda posters. The government distributed many such posters to promote the sale of liberty bonds, the rationing of goods, and the payment of income taxes. But posters were not the only form of marketing or propaganda.
Each of the twelve Federal Reserve Banks created Victory Funds to strategize campaigns in coalition with commercial banks, businesses, and volunteers. In addition to propaganda posters, they used pamphlets, patriotic rallies, and the newly popular radio. The ultimate goal was to popularize contributing to the war effort on the home front.
Financing the War Propaganda: The Entertainment Industry
Between World War I and World War II, radios exploded in popularity, and by the start of World War II, most American families had a radio in their homes. On the airwaves, Americans heard the pleas of famous performers and could tune into the Federal Reserve's variety show, The Treasury Star Parade, which was ripe with propaganda. This is not to say the film industry did not get involved. For example, Disney produced a short film, The Spirit of '43, featuring Donald Duck paying his income taxes.
During the war, Oscars were made of plaster, rather than their typical bronze with gold plating, to support the rationing of scarce commodities.
Financing the War Propaganda: Slogans
Propaganda used memorable and impactful slogans to mobilize the public. Often, they painted a picture of a unified America rallying against the evil Axis powers.
Financing the War: After the War
But what happened with America's large military after World War II? Well, America entered another war known as the Cold War. Although there was never any direct military conflict, the Soviet Union and the United States were desperate to prove their military's dominance. As a result, both countries worked hard to expand their military's capabilities, including in the arena of nuclear warfare. So, even though World War II was over, America continued to expand and fund the military, strengthening the military industrial complex.
Financing the War - Key takeaways
- World War II was the most expensive war that America had ever fought. To finance the war, the government turned to the general populace, which had significantly recovered from the Great Depression.
- The government used two significant methods:
- instituting a new income tax that includes middle and lower-class Americans
- marketing and selling liberty bonds
- Inflation was a concern because of the increased money supply and fewer goods. The government counteracted this by working with industry leaders to regulate prices and wages. There was also a rationing system for scarce commodities.
- The government used propaganda to popularize financially contributing to the war effort.
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Frequently Asked Questions about Financing the War
How did the government finance the war?
The American government financed World War II through taxation and domestic borrowing.
What does financing the war effort mean?
During World War II. financing the war effort meant collecting enough funding to assure American military dominance.
Who financed World War II?
The American public financed World War II via government programs.
How was the war financed?
The war was financed via the income tax and liberty bonds.
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