America in 1917 did not fight on a credit card. In 1917, President Woodrow Wilson, with Congress’s support, raised taxes and sold Liberty Bonds to cover costs. Bush, by contrast, had just lowered taxes and underestimated the costs of his military efforts. Borrowing to pay for the war helped lead to the current fiscal crisis.
It was a different story in 1917.
On April 6, 1917, the United States declared war on Germany. Wilson quickly sought help from Congress to raise the war funds.
At first, the question was how: Sen. Furnifold Simmons (D-N.C.) argued, “It has been the custom of this country to pay war bills by bond issues, and I see no reason for a change in that policy.”
Financier J.P. Morgan said up to 20 percent should come from taxes. Treasury Secretary William McAdoo thought raising taxes for half was best, while some members of Congress said taxes the first year should provide 75 percent of war costs.
Eighteen days after the war declaration, Congress unanimously passed the largest bond bill in U.S. history, which authorized sale of $5.5 billion in bonds. The first $2 billion in Liberty Bonds went on sale in May and almost were oversold as 5 million people offered to buy $3 billion worth.
It took five more months to pass the War Revenue Act which was designed to raise $2.5 billion annually. As the Treasury Department noted in a report, “This amount was believed by Congress to be as large as could be levied reasonably and fairly at this time. Every effort was made to distribute the burden of taxation where it could most easily be borne without hardship to the individual or injury to the productive power of the nation.”
More than $1 billion was to come from an excess-profits tax on corporations, individuals and partnerships whose profits “have been increased enormously by war business, or business incident to the war,” Treasury said.
Rates were also raised on corporations and the wealthy, personal exemptions for married and single taxpayers were reduced slightly and excise taxes were raised on liquor and tobacco products. Everyone paid something to support the war.
With the Second Liberty Bonds Act in September 1917, Congress put limits on bonds and certificates of indebtedness (short-term interest-bearing notes such as Treasury bills) in a move meant to give Treasury a better way to manage raising funds. The limit was set above the debt so the government was free to raise funds when needed. For example, in 1919 the debt limit was set at $43 billion when the debt was $25.5 billion.