Paul Nash, Spring in the Trenches, Ridge Wood, 1917, Public Domain. From a series of WWI and WWII landscapes.

How They Paid for the War

Social democrats should fight climate change the way we fought the Axis Powers

We’re living in an era of escalating crises: pandemic, insurrection, and of course climate. It is long past clear that the political and economic playbooks of the past 50 years won’t cut it. Although the recent Inflation Reduction Act does represent some welcome departures from business as usual, it clearly does not go far enough. And while we do need fresh new thinking, we also stand to gain substantially by returning to ideas from generations passed who also faced great challenges.

Modern Monetary Theory (MMT) has appeared to satisfy some of this need for new thinking.1For something like a definitive intellectual history and overview of MMT – as well as its ancestors in the chartalist family of theories concerning the nature of money – see Part I and Part II of the “History of Chartalism” series by co-editors John Michael Colón and Steve Mann in Strange Matters Issue One (Summer 2022). –Eds. However, in my own research on the U.S. Treasury during World War II,2 Sam Levey, “Modern Money and the War Treasury,” Journal of Economic Issues 55, no. 4 (October 2, 2021): 1034–65. I demonstrate that in many important senses, MMT is also a return to old ways. The gist of the argument is that the worldview of wartime Treasury officials bears striking similarities to that of MMT.

Paul Nash, We are Making a New World, 1918, Public Domain.

I am certainly not the first person to point to wartime mobilization as a model for our response to climate change. Alexandria Ocasio-Cortez made headlines3 Joseph Wulfsohn, “Ocasio-Cortez Calls Climate Change ‘Our World War II,’ Warns the World Will End in 12 Years,”Fox News (21 January 2019). for it within politics, but academics such as JW Mason, Andrew Bossie, and Isabella Weber have also worked to extract lessons from World War II for today.4 See JW Mason & Andrew Bossie, “Public Spending as an Engine of Growth and Equality: Lessons from World War II,” Roosevelt Institute (23 September 2020) and ‌Isabella Weber, “We Have a Powerful Weapon to Fight Inflation: Price Controls. It’s Time We Consider It,”The Guardian (29 December 2021). In my research I zero in on the Treasury, a key nexus of macroeconomic policymaking, and compare and contrast their view specifically with that of MMT.

The method is historical: I dug through various sources, primary and secondary, to piece together the worldview held by Treasury officials. The result is a surprisingly long list of direct quotations that you could easily mistake for having come from an MMT economist.

The Character of the Problem

While we might be tempted to think that the Treasury’s most important task is finding money, officials such as Treasury Secretary Henry Morgenthau Jr. routinely downplayed the difficulty of doing so, and made clear their real concerns lay elsewhere. “Our problem has been something much more difficult than the mere raising of vast sums of money. The nub of the problem has been to raise these sums in such a way as to strengthen, rather than weaken, the national economy.”5 Henry Morgenthau, Jr., “Addresses by Secretary of the Treasury Morgenthau to conferences of war finance workers; Address at New Orleans” (1944). Annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1945. Exhibit 31: 328–334. H.Doc. 409. (Serial Set Vol. No. 11068, Session Vol. No.29), p. 330. Treasury officials implied that even the question was wrong, and that “this kind of ‘Where did they get the money?’ analysis does not constitute a very meaningful explanation of any system of war economies.”6 Oscar Gass, “Inter-Office Communication: Dr. Lewis L. Lorwin’s study of War Finance” (1941). Henry Morgenthau Jr. Papers, 1866–1953; Diaries of Henry Morgenthau, Jr. April 27, 1933–July 27, 1945; Book 394, May 1–4, 1941: 77–80, p. 3. MMTers agree that the financial concern of a major mobilization is not finding money.

What is it then? Inflation. The amount of government spending necessary to transform the economy on a grand scale simultaneously lays claim to much of the economy’s real resources, at the same time as it puts large pools of financial wealth, as currency and government bonds, into private hands:

The nature of the inflationary pressure inherent in diverting half of the income stream of the country to the government is simple. It is this: The value of all of the production of the country goes to its producers in the form of wages and salaries, rents, interest, dividends, and profits. But only half of this production consists of goods and services which are available to be purchased by these producers. The remaining half goes to the Government for prosecuting the war. The problem is to prevent the people from trying to spend all of their incomes on half of the goods—and so merely bid up prices.7 Henry Morgenthau, Jr., “Summary Report of Secretary Morgenthau to the Congress” (1945). Annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1945. Exhibit 51: 397–431. H.Doc. 409 (Serial Set Vol No. 11068, Session Vol. No.29), p. 408.

That is, workers and employers are being paid from government checks, but they’re also producing goods that (due to the requirements of the war) aren’t available for them to spend those paychecks on. The unsurprising result is households and businesses fighting against each other to get limited supplies.

To some extent, this would be true for a Green New Deal too: a mass mobilization to decarbonize the economy is an undertaking similar in many ways to total war. While workers would be producing more long-term useful products (solar panels rather than bullets), a much larger portion of the economy than normal would be busy producing infrastructure and other investment goods, which would thus not be available for household consumption.

The government’s job then is to fight this inflation, as MMTers have long argued. The mainstream consensus on inflation has been that it’s the central bank’s job: when inflation goes above the desired level, the central bank uses its monetary policy powers to increase interest rates on loans. That reduces the availability and attractiveness of finance for investment projects, and so should reduce total spending, thereby reducing competition for real resources.8 For more on the various dominant theories of inflation, their problems, and a proposed supply-chain view of price rises, see Steve Mann, “Notes Towards a Theory of Inflation” in Strange MattersIssue One (Summer 2022). –Eds. However, like MMTers today, Morgenthau was highly critical of using monetary policy in this way. “To endeavor to control inflation in wartime by raising interest rates is, therefore, like raising a lever which has no machinery behind it.”9 Morgenthau, “Summary Report of Secretary Morgenthau to the Congress” (1945), p. 414. The primary reason for Morgenthau was that the major types of spending in wartime, namely government spending on war materiel, is plainly not sensitive to interest rates, and not something we want to be cutting back on anyway! The situation would be similar for a Green New Deal.

The Planners’ Solutions


For the Treasury then, consideration turns to its other main policy tools, which are taxes and bond sales.10 But these should not be considered the only tools that exist. In fact, Backman (1951, pp. 16–17) lists 30 different policy levers which can impact inflation. In addition to standard tools to control demand (eg. taxation, saving policies, etc.), Backman lists measures that control supply and demand more directly (price controls, rationing, priority orders), measures that better match demand with supply (credit controls, excise taxes, export bans, purchasing cooperation, inventory limits), measures that encourage or create more supply (subsidies, guaranteed minimum prices, government-run factories, standardization of products, recycling) and measures to quell distributional conflicts (wage control, rent control). Taxes were, Morgenthau said, “an essential anti-inflationary weapon that must be used to the utmost.”11 Henry Morgenthau, Jr., “Statement of Secretary Morgenthau before the Senate Finance Committee, July 23, 1942, in support of the Treasury’s program for additional revenue” (1942). Annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1943. Exhibit 80: 406–410. H.Doc. 430. (Serial Set Vol. No. 10889, Session Vol. No.25), p. 407. And furthermore: “The problem of financing the war without inflation is too grave and too pressing to let any major tax proposal be disregarded without the most serious thought and study.”12 Henry Morgenthau, Jr., “Message from Secretary Morgenthau to the American Bankers Association, September 1, 1942, on war financing.”Annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1943. Exhibit 75, p. 389.

Today our situation may be a bit different. While there is substantial uncertainty, analysis suggests that the net resource requirements of a Green New Deal may be only about 1 to 2% of GDP – this is the amount that private spending would need to fall to prevent inflation. This is a lot less than the approximately 30% of GDP the Treasury was trying to allocate!13 Yeva Nersisyan & L. Randall Wray, “Can We Afford the Green New Deal?,” Journal of Post Keynesian Economics, (9 November 2020), 1–21.

One thing the Treasury had in its favor is that the political climate around raising taxes almost certainly changes once a society moves past full employment, with its usual unpalatability reaching a nadir. At those moments – in fact by definition – people have more money than they know what to do with: that’s where the excess spending problem comes from in the first place. Taxing some of it away, then, does minimal harm – Morgenthau again:

How far we are from the economic limit of Federal taxation is shown by the fact that one of the major economic problems now confronting the country is that of “excess” consumer spending power—i.e., spending power in excess of the available supply of civilian goods at present prices. This “excess” spending power is created by the excess of Federal expenditures over Federal taxes; and constitutes, on the one hand, a threat of inflation and, on the other, an evidence of ability to pay additional taxes.14 Henry Morgenthau, Jr., “Annual Report on the Finances.”Annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30, 1943. H. Doc. 430: 1–158. (Serial Set Vol. No. 10889, Session Vol. No.25)

War Bonds

Bonds as an incentive to saving

That said, for a measly 1% of GDP, other methods are probably preferable. This brings us to the Treasury’s view of government deficits. During WWII, the Treasury helped administer the sale of special Savings Bonds, which we’d commonly call war bonds, in numerous drives and publicity campaigns. We’ve already noted above that the Treasury didn’t view the “finding the money” aspect of its job as particularly difficult. What then was the point of war bond drives, which occupied the energies of armies of officials and volunteers at a time when these were particularly scarce?

Paul Nash, The Menin Road, 1919, Public Domain.

The answer to this question turns the conventional view of government borrowing on its head. As one Treasury official put it – amusingly, in an internally circulated review of Keynes’s How to Pay for the War – “A wartime borrowing program… should aim at stimulating people to save money which they would otherwise have spent for goods and services and to invest this money in government securities.” Furthermore, this passage continues, the second goal is quite optional: “It should be emphasized that it is the stimulation of savings and not the procurement of the investment of these savings in government securities which is essential. If the money is saved, it is only a matter of the niceties of finance that it should be invested directly in government securities by the saver.”15 Henry C. Murphy, “Review of the Book How To Pay For The War by John Maynard Keynes” (1940), Treasury department inter-office communication. Henry Morgenthau Jr. Papers, 1866–1953; Diaries of Henry Morgenthau Jr. April 27, 1933–July 27, 1945; Book 278, July 1, 1940: 67–76, p. 72.

What does this mean? Government spending was placing financial wealth into private hands: when the government buys resources, it pays using money, which adds to the incomes and portfolios of somebody in the private sector. If private actors were to spend this wealth at a moment when goods were particularly scarce and supply chains stretched to the limit, this would likely drive up prices, exacerbating inflation. The Treasury understood this well.

To the extent that total borrowing exceeds the aggregate amount of savings consciously and intentionally undertaken, we are placing liquid assets in the hands of persons who may use them to put added pressure on price ceilings.16 Daniel Bell, “Address by Under Secretary Bell before the Worcester Economic Club, December 16, 1943,  on financing the war and post-war readjustment.” Annual report of the Secretary of the Treasury on the  state of the finances for fiscal year ended June 30, 1944, Exhibit 57. H.Doc. 5. (Serial Set Vol.  No. 10976, Session Vol. No. 23), p. 498.

In other words, citizens were earning substantially more income on account of government war spending, and the Treasury’s main goal on this front was to coax them to save that income instead of spending it. Exactly the form of these savings, i.e. household portfolio allocation, didn’t really matter – the critical factor was abstaining from consumption spending. Or, as I like to say, we can give as much money as we want to people who aren’t going to spend it. This was why the government didn’t singularly demand that citizens purchase war bonds, but also implored saving in a variety of other forms, including cash, savings bank accounts, or even insurance.

Bonds as propaganda & volunteerism

Why war bonds and bond drives then? The answer is that these were part of a persuasion campaign: by holding United States Savings Bonds, you could feel proud (and brag to your neighbors) that you were helping out the war effort specifically. And once a person feels they’ve contributed in this way, they’re less likely to later spend down those assets as if they were just regular savings – this is the psychological function of war bonds.

At least when they take the form of liquid assets. For the most popular WWII instrument, Series E bonds, these were indeed quite liquid, as they were redeemable on demand with the Treasury.17 After a brief waiting period. This meant that if you had purchased a war bond but later changed your mind and needed to spend that money instead, you could do so with minimal effort. Why run a savings program in this way? Why not, perhaps, make the bonds harder to cash, to limit household spending? The answer is that key voices in the administration wanted a voluntary saving program rather than an involuntary one.

Throughout, the program has been conducted on a genuinely voluntary, democratic basis. From the beginning, we were resolved to avoid certain high-pressure sales tactics. . . . It was determined that there should be no compulsion, no hysteria, no slacker lists and no invidious comparisons between those who bought bonds and those who did not. There was to be room in this program for the individual with special burdens and responsibilities who could contribute only in very small amounts—and even for the individual who could not share at all.18 Henry Morgenthau Jr.,. “Addresses by Secretary of the Treasury Morgenthau to conferences of war finance  workers; Address at New Orleans.”  (1944),  p. 329

A bit later Beardsley Ruml, known today for being a significant antecedent to MMT for his piece “Taxes for Revenue are Obsolete,”19 Beardsley Ruml, “Taxes for Revenue Are Obsolete.” (1946) American Affairs 8 (1): p. 35–39. (Please note – this American Affairs – a midcentury journal of the National Industrial Conference Board, Inc, a nonprofit dedicated to economic analysis by what one writer described as “the so-called progressive wing of the business community” – has no relation to today’s flagship magazine of the cryptofascist “national conservative” movement which bears the same name. –Eds.) sketched this position well. Ruml argued that making the saving program voluntary would bring many social benefits, including that it would be rapidly adjustable, strengthen the spirit of community, and appeal to religious groups.20 Beardsley Ruml, “Our National Need: Savings.”  (1951) Harper’s Magazine. 203, p. 32-34. On the other hand, another strong contingent argued that relying on voluntary savings simply would not be enough. This group notably included Keynes.21 See J. M. Keynes, How to Pay for the War (1940) London: MacMillan. An involuntary program could instead be implemented through illiquid assets, deferred compensation, or taxes that were refundable after the war.

Arguably, the US actually did a bit of both. While it’s true that household financial wealth was generally quite accessible, it was also the case that strict price controls and rationing policies prevented consumers from truly spending what they wanted, when they wanted.

Green bonds for the Green New Deal?

This is where it seems to me that we have a substantial advantage over WWII policymakers. If we only need to reduce private demand by 2%, this is an excellent candidate for a voluntary saving program. Issue Green Bonds, and ask citizens to patriotically buy them and hold them. People can reduce their spending by 2% if asked. And such a program could even be progressive, whereby the well-off could save a greater proportion than the very poor, if the messaging is clear enough.

Now, I am certainly not the first voice to propose Green savings bonds. In fact, some countries are doing it already.22 Joshua Oliver, “UK Green Savings Bond Sales ‘Underwhelming.The Financial Times (March 24, 2022). But I would like to shout from the rooftops that if we are going to do such a thing, it ought to be for the right reasons. That reason should be to encourage more saving in a full employment economy. Outside of that scenario, these instruments make no macroeconomic sense. They don’t do anything differently compared to the normal process of government spending – and if the programs don’t go well, they are likely to undermine the political will for decarbonization!

What about the national debt?

But assuming we do that, there will then be the problem of what happens to the national debt – that is, the private sector savings which the bonds are a part of. Under normal circumstances, as MMTers like to highlight, we have little reason to fear the national debt: this is just the voluntary savings of households and firms. They might choose to spend them down, which could cause inflation if it’s at an inopportune time, but outside of that, the debt doesn’t do anything on its own.

Paul Nash, The Mule Track, 1918, Public Domain.

Did the Treasury think this way? On first glance, one might suspect not, owing to statements that often sound little different from the talking heads today, who pontificate about the need to cut the debt. But arguably, the Treasury faced circumstances that were a bit different than those typical of peacetime. This owes to the saving policy itself: the Treasury wasn’t just accommodating unforced private saving desires; instead it was actively manufacturing such desires. That is, the Treasury was convincing people to save who would not otherwise have been doing so. There’s a strong presumption that, at the first opportunity, households were going to spend those savings down. And from my MMT point of view, if this consumer spending coincides once again with a near-full employment economy, it could be inflationary.

Was the Treasury thinking in these terms? Absolutely.

Here’s Morgenthau:

[The] peacetime purpose [of war bonds] is to provide the American people with a backlog of savings that will come in good stead indeed when once again the sword is beaten into the ploughshare.23 Henry  Morgenthau, Jr., “Statement of Secretary Morgenthau, March 22, 1943, prepared at the request  of the United Press for a discussion under the caption ‘The Treasury prepares for post-war problems.’”Annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30,  1943. Exhibit 78. H.Doc. 430. (Serial Set Vol. No. 10889, Session Vol. No.25), p. 395

And here’s Daniel W. Bell, the Undersecretary of the Treasury:

Immediately following the end of the actual fighting, we can probably expect a let down in the willingness of people to submit from patriotic motives to a continued reduction in their consumption. There is likely to be a demand for an immediate end of the direct controls . . . When it is considered that there will be available to be spent currently, in addition to the incomes being received for the production of consumers’ goods, not merely the incomes from work in demobilizing the war effort and reconverting private industry, but also the large liquid resources piled up during wartime, it is easy to conjure up the specter of a post-war inflation.24 Daniel Bell, “Address by Under Secretary Bell before the Worcester Economic Club, December 16, 1943,  on financing the war and post-war readjustment.” Annual report of the Secretary of the Treasury on the  state of the finances for fiscal year ended June 30, 1944, Exhibit 57. H.Doc. 5. (Serial Set Vol.  No. 10976, Session Vol. No. 23), p. 503

In fact, at a deeper level, Treasury officials saw through one key national debt myth we still hear today, that we are borrowing from future generations.

It has come to be generally recognized that the real cost of a war must be paid for while it is being fought. This real cost consists in the labor put forth and the sacrifices endured in order to produce and to use the goods of war. Guns cannot be fired until they and their shells have been made, nor can they be fired with time borrowed from tomorrow. The labor and sacrifice involved in these things must be made today and cannot be postponed. . .25Ibid. p. 496

That is, real resources do not travel through time, so the national debt does not “borrow from our grandchildren.”26Levey makes an excellent point here about how a national debt in that country’s own currency fails to be “borrowing from future generations.” While such intergenerational lending isn’t really possible in terms of domestic finance, however, it’s interesting to contemplate ways in which it might be the case in biophysical terms. It could be argued, for example, that an unsustainable rate of consumption of biophysical resources may be one very real way in which people borrow from their grandchildren – just think about how our future, and that of our descendants, has been foreclosed by centuries of our ancestors’ fossil fuel consumption. In this case, the neoliberals in their stupidity may have misjudged what we really owe to those yet unborn, substituting the frivolous for the essential in a devil’s bargain. –Eds. While we can certainly bequeath them a better or worse world, or a productive or unproductive economy, future generations, like present ones, will in aggregate be able to consume whatever it is that they produce. “[T]he distribution of the real cost of a war in time—between past, present, and future—cannot be affected by the extent to which it is financed by taxation or borrowing.”27 Henry C Murphy, The National Debt in War and Transition (1950): p.61. New York: McGraw-Hill.

And yet, government liabilities do play a special role here:

Borrowing affects rather its distribution among persons. It, in effect, gives certain persons “recoupment certificates” for a portion of the costs which they have incurred or the satisfactions which they have agreed to forego during the war, and so permits the aggregate cost of the war to be distributed and redistributed in future years.28 Ibid. p.61

In other words, those people who choose to save more than they otherwise would have (or were forced to through draconian measures) still have those savings, and can choose to ‘make themselves whole’ again later by spending that money. Thus, like during the war, the true danger for the Treasury to manage is inflation. The same could be true of savings built up during a Green New Deal.


Let me close with some call for optimism. Even in the time since I began this research project, we have seen the major impact that appropriate fiscal policy can have: increases in real wages for the lowest-paid workers, drastic reductions in child hunger, a tending for our infrastructure needs, and more. Will we apply these lessons to build a better future? If the CHIPS Act and Inflation Reduction Act are an indication, the politics around government spending to make the economy more resilient are opening up in ways that seemed impossible even five years ago. And I think this will continue. Once people learn the secret that a better world is possible–that we have all the financial resources we need in this country to right ourselves biophysically in the face of climate change–they are unlikely to forget it.29We hope Levey’s right in his optimism about the return of the planned economy. We expressed a somewhat gloomier view of things in our editorial “Socialism With an Anarchist Squint” in Strange Matters Issue One (Summer 2022): “Since the coronavirus crisis, governments across the world – from Washington to Beijing, regardless of their conscious ideological orientation or the party in power or the political system within which they operate – have been embracing forms of economic planning and direct intervention into the economy that would have been unthinkable all through the neoliberal period. This change is coming about piecemeal, at radically different speeds in different places, and altogether too slow overall; but that it’s coming, there can be no doubt. The rediscovery of indicative planning, dirigisme, developmentalism, industrial policy – whatever you want to call it – is a rupture of world-historical importance. It is a precondition for solving the ecological and economic crises, and indeed needs to be rapidly accelerated and deepened in order to meet this goal. But it also potentially deeply empowers the nation-state in a way our generation simply hasn’t seen, even in the surveillance states of our lifetimes. The ruling class’s control over the new planning process would not just help them consolidate their class rule into an even tighter dictatorship; it also risks magnifying the potency of nationalism in a country’s politics, potentially driving forward ever more violent great power conflict between imperial rivals. The way in which the increasingly obvious necessity of planning in the 2020s is already beginning to empower the state has led the Marxist sociologist Paolo Gerbaudo to declare that neoliberalism is being replaced by a new dispensation, which he dubs neostatism.” –Eds.

Perhaps the greatest lesson of the economic mobilization during WWII was just how much reserve capacity we truly have, not just in our factories, but in our might, brainpower, and will. Journalist Walter Lippmann captured this well at the time:

What we are seeing, therefore, for the first time, is how far any American has been from realizing the true potentialities of the country once there is a determined effort to draw upon its hidden, neglected and unrealized reserves . . .

A dog which suddenly grew to be as big as a horse would no longer be treated as a very big dog, and its proud master would find he had to change his ideas and his feelings about dogs. 

We shall find that in the presence of this demonstration of American productivity, the change of scale, the new order of the magnitude of things, will compel us to reexamine almost all our common assumptions on such matters as taxes, the national debt, tariffs, international commerce, finance, imports, exports, and investment.30 Walter Lippmann,  “Today and Tomorrow: A New Order of Things.” The Washington Post (January 14, 1943), 11.  

The same is likely true today. The problem then is to build the political will to mobilize the reserve capacity of resources and human talent which have laid dormant and underemployed for several decades – and to mobilize it strategically, to increase the standard of living while preparing ourselves for the ecologically precarious future.


  • Sam Levey

    Sam Levey is a doctoral candidate in Economics at the University of Missouri - Kansas City with a co-discipline in Public Administration, and a research fellow with the Global Institute for Sustainable Prosperity. His work looks at how Modern Monetary Theory can be extended and modeled, and how the economics of wartime mobilization can inform rapid decarbonization.

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Strange Matters is a cooperative magazine of new and unconventional thinking in economics, politics, and culture.