"The Treasury was girding for war. Memories of World War I were still fresh. Tax revenues had financed less than one-third of total government spending during that war, borrowing, the rest. And much borrowing was a concealed form of printing money. Commercial banks that were members of the Federal Reserve System were encouraged to lend money to their customers to finance the purchase of government bonds. They obtained the reserves required to back the resultant increase in deposits by discounting the loads at the Federal Reserve – i.e., borrowing from the Federal Reserve on the security of loans for which government bonds served as the collateral. As a result, while high-powered money – currency and deposits of the Federal Reserve – increased by $2.5 billion (or 60 percent), only about a tenth of that represented direct purchase of government securities; the remainder consisted of credit extended to member banks.

The end result was an increase in the money supply of about 50 percent, which led to a more than doubling of the price level. That, in turn, was followed by a sharp postwar contraction from 1920 to 1921, during which prices fell sharply – wholesale prices by 44 percent. The powers that be at the Treasury Department were determined to do better this time.

Taxing to Prevent Inflation, the study that Carl Shoup had persuaded the Carnegie Foundation and the Institute of Public Administration to finance, was one result of this determination." –excerpt from Two Lucky People, p. 107