Mark Moss charts how the U.S. drove interest rates to near zero in the 1940s to finance massive wartime deficits. The federal deficit spiked after each war while the money supply expanded dramatically. By keeping rates low, the government could print money and borrow huge sums without crushing interest costs.
This goes back here to the World War I, World War II period from 1932 to 1944. And what we can see here, these gray lines, is the deficit as a percent of GDP. And we can see the deficit of GDP spiked really high coming out of the wars. And this monetary base, this blue, is the monetary base as a percent of GDP. So basically how much money they've been printing in this period. And in order to do that, This orange line down here is the short-term interest rate. So they pushed the interest rates down to basically zero and they printed a crazy amount of money. They could do that because interest rates went down to zero. So when they push the rates down, they can print more money without blowing themselves out on interest costs.
