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Copyright © 1949, by

D. VAN NOSTRAND COMPANY, Inc.

Published simultaneously in Canada

BY HENRY HAZLITT

Benjamin M. Anderson, Jr., who died on January 19, 1949, was born on May I, 1886, in Columbia, Missouri. At the University of Missouri, from which he took his A.B. degree in 1906, his interests were predominantly intellectual and logical. He was active in the Athenean debating society and soon earned a reputation there for his ability to pounce upon a logical or factual weakness in an opponent’s position. He was one of the four presidents of the society for the year 1905-06.

This book is the outcome of studies which began in 1914 and have been carried through systematically since that date. As Assistant Professor of Economics at Harvard University, the author taught money and banking from 1914 to 1918 and, both in his lectures and in published articles and books, recorded the significant economic and financial developments of the First World War. A summary of these studies appeared in his Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace in 1919.

Chapter 1

The Prewar World, 1913

Those who have an adult’s recollection and an adult’s understanding of the world which preceded the first World War look back upon it with a great nostalgia. There was a sense of security then which has never since existed. Progress was generally taken for granted. It was even necessary at times for scholars in addressing scholarly audiences—as, for example, Leonard T.

Chapter 2

The Outbreak of the War in 1914

The War Came as a Surprise to Most Informed Men. The war came as a great shock, not only to the masses of the American people, but also to most well-informed Americans—and, for that matter, to most Europeans. There had been no first-rate war since the Franco-Prussian War of 1870. Wars of limited objectives there had been, as the Spanish-American War of 1898 and the Russo-Japanese War of 1904-1905. Colonial wars there had been, as the very important Boer War of 1899-1902.

Chapter 3

The War Prosperity

Our Export Balance, 1915-1917. The outstanding fact from the standpoint of the economic life of the United States from November, 1914, until our entrance into the war in April of 1917, was a great and ever growing volume of exports from the United States to Europe, unmatched by a return flow of imported goods—a great and ever growing export balance of trade. Measured in dollars the increase is shown by the following table:

Chapter 4

Our War Economic Policy

The United States entered the war on April 6, 1917. Our war economic policy had to be rather rapidly improvised. Basic in it was the belief in a free economy and a determination to maintain sound money and sound public finances. There was, however, recognition that the ordinary market forces, left to themselves, would not suffice to bring as speedy a shifting from peace activities to war activities as the emergency called for.

Chapter 5

The Federal Reserve System, 1914-1918

The Federal Reserve System, as we have seen, was not in operation when the Great War broke out at the end of July, 1914. The Federal Reserve Board was not organized until August 12, 1914, and the Federal Reserve banks were not open for business until November 16, 1914. It was the Aldrich-Vreeland notes, and the close coöperation of existing banks, clearing houses, stock exchanges, and the Treasury which met the first shock of the war.