Congress could not resist the combined pressure of the press and the President. On April 16, 1917, the United States officially declared war on the Axis powers. Eight days later, Congress dutifully passed the War Loan Act which extended $1 billion in credit to the Allies. The first advance of $200 million went to the British the next day and was immediately applied as payment on the debt to Morgan. A few days later, $100 million went to France for the same purpose. But the drain continued. Within three months the British had run up their overdraft with Morgan to $400 million dollars, and the firm presented it to the government for payment. The Treasury, however, was unable to put its hands on that amount of money without jeopardizing its own spendable funds and, at first, refused to pay. The problem was quickly solved, however, through a maneuver described at some length in chapter ten. The Federal Reserve System under Benjamin Strong simply created the needed money through the Mandrake Mechanism. "The Wilson Administration found itself in an extremely awkward position, having to bail out J.P. Morgan," wrote Ferrell, but Benjamin Strong "offered to help [Treasury-Secretary] McAdoo out of the difficulty. Over the following months in 1917-18 the Treasury quietly paid Morgan piecemeal for the overdraft." By the time the war was over, the Treasury had loaned a total of $9,466,000,000 including
$2,170,000,000 given after the Armistice.
That was the cash flow they had long awaited. In addition to saving the Morgan loans, even larger profits were to be made from war production. The government had been secretly preparing for war for six months prior to the actual declaration. According to Franklin D. Roosevelt, then Assistant Secretary of the Navy, the Navy Department began extensive purchasing of war supplies in the Fall of 1916.2 Ferdinand Lundberg adds this perspective: By no accident all the strategic government posts, notably those concerned with buying, were reserved for the Wall Street patriots. On the most vital appointments, Wilson consulted with Dodge [President of Rockefeller's National City Bank], who ... r e c o m m e n d e d the hitherto unknown [Bernard] Baruch, speculator in copper stocks, as chairman of the all-powerful War Industries Board....
1. Ferrell, p. 89,90.
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As head of the War Industries Board, Baruch spent government funds at the rate of $10,000,000,000 annually.... Baruch packed the War Industries Board and its committees with past and future Wall Street manipulators, industrialists, financiers, and their agents ... who fixed prices on a cost-plus basis and, as subsequent investigations revealed, saw to it that costs were grossly padded so as to yield hidden profits....
The A m e r i c a n soldiers fighting in the trenches, the p e o p l e working at home,the entire nation under arms, were fighting, not only to subdue Germany, but to subdue themselves. That there is nothing metaphysical about this interpretation b e c o m e s clear when we observe that the total wartime expenditure of the United States government from April 6, 1917, to October 31, 1919, when the last contingent of troops returned from Europe, was $35,413,000,000. Net corporation profits for the period January 1,1916, to July, 1921, when w a r t i m e i n d u s t r i a l a c t i v i t y w a s finally l i q u i d a t e d , w e r e $ 3 8 , 0 0 0 , 0 0 0 , 0 0 0 , o r a p p r o x i m a t e l y t h e a m o u n t o f t h e w a r expenditures. More than two-thirds of these corporation profits were taken by precisely those enterprises which the Pujo Committee had found to be under the control of the "Money Trust."
The banking cartel was able, through the operation of the Federal Reserve System, to
exactly as was to be done again in World War II and again in the Big Bailout of the 1980s and '90s. It is true that, in 1917, the recently enacted income tax was useful for raising a sizable amount of revenue to conduct the war and also, as Beardsley Ruml pointed out a few years later, to take purchasing power away from the middle class.
But the greatest source of funding came, as it always does in wartime, not from direct taxes, but from the hidden tax called inflation.
Between 1915 and 1920, the money supply doubled from $20.6 billion to $39.8 billion.2 Conversely, during World War I, the purchasing power of the currency fell by almost 50%. That means
