When Uncle Sam Introduced Main Street to Wall Street: Liberty Bonds and the Transformation of American Finance

We study the effects of the liberty bond drives of World War I on financial intermediation in the 1920s and beyond. Using panel data on U.S. counties we find that higher liberty bond subscription rates led to an increase in the number of investment banks, stronger local competition between investment banks and commercial banks, and a relative contraction in commercial bank assets. We also find that individuals residing in states with higher liberty bond subscription rates were more likely to report owning stocks or bonds in the late 1930s. Finally, we find that this shift in financial intermediation away from commercial banks was correlated with slower growth in the number of manufacturing enterprises and farms at the county level. Although they were conducted to support the American effort in World War I, the liberty loan drives reshaped American finance.