The financing of World War II was a repeat performance of the financing of World War I, but on a much larger scale. In World War II half the average annual production was used to prosecute the war compared with 25 per cent in 1917-1918. However, the costs of World War II were paid entirely out of increased production which, because of a great expansion in labor force and plant capacity, was twice as high as in 1939, whereas the costs of the other war had to be met in part by curtailing civilian consumption.
World War II required much more complicated and sophisticated financing. In the organization of this financing, the lessons of the other war and of the depression of the 1930's were heeded. Nevertheless, some of the same mistakes were made, particularly by Congress.
Controls over the economy (price ceilings, rationing, priorities, etc.) were instituted much more quickly than in World War I, but they were not exerted equally in all segments of the economy. Although 46 per cent of total war costs, the highest percentage in the history of American war finance, was covered by taxes, this was not so much as was possible or desirable. In its loan operations the Treasury relied much too heavily on bank financing. In World War II 40 per cent of the increased government debt was absorbed by the banks, compared with 17 per cent in World War I. Repeating the mistakes of Chase and McAdoo, the Treasury followed an extreme easy-money policy, and put too much emphasis on low interest rates. In addition, it not only instituted a policy of controlling long-term market interest rates, but it attempted to maintain a differential between long- and short-term rates. However, it did avoid the deplorable "borrow and buy" policy of 1917, and it was much more successful in tapping the potential spending power of the vast mass of consumers.
Supplying the Democracies and Arming for Defense . When the war broke out in September, 1939, the United States had the potential power to supply vast quantities of arms and materials of war. Emerging from a severe and prolonged depression, she had vast unused plant capacity, a labor reserve of 8 million unemployed, and a huge reservoir of idle capital funds. Politically, however, the majority of the people, as in 1914, wanted to keep out of the war. Reflecting this sentiment, the President