FISCAL POLICY AND INFLATION, 1917-19
"IT is our duty, I most respectfully urge, to protect our people so far as we may against the serious hardships and evils which would be likely to arise out of the inflation which would be produced by vast loans."
This sentence from President Wilson's message to Congress in April, 1917, is expressive of the attitude which was prevalent at the time of our entrance into the War. Not only economists, but Treasury officials and bankers were aware of the dangers inherent in a policy of extensive borrowing. On the other hand, there were probably very few people who really believed that the whole War could be financed from the beginning without some recourse to borrowing. The chief topic of the debate among economists and others outside the Treasury concerned the proportions in which bonds and taxes should be used. The accepted opinion on this subject before our entrance into the War is seen in a treatise on taxation published in 1906:
It seems, then, that an adequate policy for the management of war finances is a tax policy assisted by credits rather than a credit policy assisted by taxes.1
An expression of this theory is seen in the petition of a group of economists to Congress, urging a great measure of taxation, and containing the following statement:
It may be necessary for a month or two at the outset to issue a limited amount of bonds, pending the collection of increased taxes, but beyond these, which might well be made repayable within a year, no necessity for bonds exists.2