Liberty Bond

A Liberty Bond was a long-term debt security issued by the United States Treasury in 1917 and 1918 to finance the country's part in the First World War. The bonds were sold to banks, companies and millions of ordinary households in four national campaigns called Liberty Loans, and a fifth campaign in 1919, the Victory Liberty Loan, sold shorter notes to cover the remaining cost of the war. The program is the best-known American example of a war bond.

Liberty Bonds were ordinary marketable bonds: they paid a fixed coupon every six months and could be resold to other investors at whatever price the market offered. That sets them apart from the Series E Savings Bond of the Second World War, which could only be cashed in with the Treasury. The term is specific to the United States, although Britain, France, Germany and Canada ran similar wartime loan drives.

A Liberty Bond was an IOU from the federal government. A family handed over $50 or $100 and received a printed certificate promising that the government would pay a small amount of interest twice a year and return the full sum many years later. The money went straight into paying for soldiers, ships and supplies.

Think of a town asking its residents to chip in for a new bridge and promising to pay everyone back, with a little extra, once the tolls come in. The difference was scale and pressure. Posters, parades, film stars and neighbours all pushed people to buy, and owning a bond became a public sign of loyalty as much as a way to save.

The United States declared war on Germany on 6 April 1917. Congress passed the first enabling law, often called the Emergency Loan Act or First Liberty Bond Act, on 24 April 1917. Treasury Secretary William Gibbs McAdoo wanted roughly a third of the war paid from taxes and two thirds from government borrowing, and he chose to borrow from the whole population rather than from a few large banks.

• The First Liberty Loan, launched in spring 1917, offered $2 billion of bonds at 3.5% and was oversubscribed.
• The Second Liberty Loan, which closed on 15 November 1917, offered $3 billion at 4%.
• The Third Liberty Loan, in April 1918, offered $3 billion at 4.25%.
• The Fourth Liberty Loan, in October 1918, sought $6 billion at 4.25% and was the largest of the drives.

The armistice of November 1918 did not end the bills, so the Treasury ran the Victory Liberty Loan from April 1919, selling $4.5 billion of notes at 4.75% with a life of about four years. According to the Federal Reserve, the four Liberty Loans raised more than $17 billion and about 20 million individuals bought bonds; with the Victory notes, the total came to roughly $21.5 billion.

The first issue ran for 30 years and could be called after 15, and the smallest denomination was $50, low enough for wage earners. Most bonds were issued in bearer form, so whoever held the paper could clip the coupons and collect the interest. Interest on the first issue was exempt from income tax, an advantage later issues gave only in part. Because the 3.5% rate soon looked low, buyers of the first loan were allowed to convert into the higher-rate later issues.

The national banks and the new Federal Reserve Banks, created only in 1914, ran the distribution, taking subscriptions and acting as the Treasury's fiscal agents. Savers too poor to buy a full bond could build up to one with 25-cent War Thrift Stamps and $5 War Savings Stamps.

The drives were run like political campaigns. The Committee on Public Information, led by George Creel, produced posters and speeches; Charlie Chaplin, Mary Pickford and Douglas Fairbanks toured bond rallies; and volunteers, including tens of thousands of women recruited for the second drive, canvassed factories and homes. Buyers received buttons and window stickers to display, and in many towns people who did not buy faced open suspicion. The campaigns turned government debt into a mass retail product for the first time in the United States.

The bond drives did not prevent wartime inflation. Many buyers paid with bank loans, and Federal Reserve Banks offered favourable terms on loans backed by government securities, which expanded the money supply in a way close to monetary financing. After the war, with interest rates rising, Liberty Bond prices fell below their face value in 1920, and many small holders who sold early took losses; economists Eric Hilt and Wendy Rahn later linked that fall to a swing against the governing Democrats in counties where ownership was high.

The program left two lasting marks. The Second Liberty Bond Act of September 1917 gave the Treasury broad authority to issue debt within an overall ceiling, the origin of the modern federal debt limit. And the experience of selling to millions of households shaped the design of the later Payroll Savings Plan and of the nonmarketable savings bonds that replaced tradable war debt in the Second World War, partly because their redemption value could not fall in the market. The bonds also stayed on the national debt long after the fighting: the first issue was not due to mature until 1947.

• Federal Reserve History: Liberty Bonds
• U.S. Department of the Treasury