War Finance and Prices

The American declaration of war on April 6, 1917, dramatically altered the issues surrounding monetary inflation. Massive gold imports ceased abruptly. Instead, the government began financing Allied purchases by granting huge loans. Concerned to maintain abundant bank credit, in September President Wilson prohibited export of gold without approval by the Federal Reserve Board. Changes in aggregate US gold reserves ceased to power inflation, although the hoard already accumulated would underpin expansion of credit and currency from 1917 to 1920. Commitment to the Allies’ victory made price-boosting exports a national priority, and as American military involvement grew, government agencies competed voraciously for supplies. Wilson and his administration gave lip service to concerns about inflation from government borrowing, then mostly downplayed the threat in order to keep money flowing.