Series E Savings Bond

The Series E Savings Bond was a United States government savings bond sold to individuals from May 1941 until 1980. It was bought at a discount to its face value, earned interest by growing in value rather than by paying coupons, and could be cashed only with the Treasury. Introduced as the "Defense Savings Bond" before the United States entered the Second World War, it became known as the war bond after Pearl Harbor, and the classic $25 bond sold for $18.75.

The Series E was a nonmarketable security: it was registered to a named owner and could not be sold to anyone else. That separates it from the tradable Liberty Bond of the First World War and from marketable Treasury bonds. It was replaced by the Series EE bond in 1980. The product was purely American; Britain's nearest equivalent was the National Savings Certificate.

Buying a Series E bond was like handing the government three-quarters of a sum today in exchange for a promise of the whole sum later. You paid $18.75, put the certificate in a drawer, and after ten years the government would give you $25. Nothing arrived in the meantime; the value simply grew in the background, a little each half-year.

A good comparison is a gift card that slowly tops itself up. You cannot sell it to a friend, and nobody else can use it, but its balance never goes down and you can always take it back to the shop that issued it. That safety, together with patriotism, is why tens of millions of American families held these bonds.

The Treasury had sold small "baby bonds" (Series A to D) from 1935. In 1941, with rearmament under way, it launched Series E alongside two larger bonds for wealthier buyers, Series F and G. President Franklin D. Roosevelt bought the first Series E bond from Treasury Secretary Henry Morgenthau Jr. on 1 May 1941. After the attack on Pearl Harbor in December 1941 the bonds were marketed as war bonds, and much of the buying went through the Payroll Savings Plan, which took a fixed amount from workers' pay each payday. Bonds were sold at banks, post offices and workplaces, and children saved for them with savings stamps.

Series E stayed on sale after the war, becoming the standard American savings bond for nearly four decades. Over-the-counter sales ended on 31 December 1979, and from 2 January 1980 the Treasury sold Series EE and HH bonds instead; payroll sales of Series E were wound down by 30 June 1980.

A Series E bond was an accrual, or discount, security. It was sold at 75% of face value and its redemption value rose on a fixed schedule every six months. The annual rate implied by the purchase price and the value at maturity, compounded semi-annually, is:

• $r$ is the annual yield, written as a decimal.
• $F$ is the face value paid at maturity.
• $P$ is the purchase price.
• $n$ is the number of years to maturity.

For an early Series E bond, $F = 25$, $P = 18.75$ and $n = 10$. The ratio $F \div P$ is $1.3333$; raising it to the power $\frac{1}{20}$ gives $1.01449$; subtracting 1 and doubling gives $0.0290$, about 2.9% a year. The Federal Reserve's published terms confirm that bonds issued from May 1941 to May 1949 yielded 2.90% if held to maturity. Cashing early returned less, because the redemption schedule rose slowly in the first years, much as early withdrawal from a certificate of deposit carries a penalty.

When a Series E bond reached its original maturity, it did not stop earning. The Treasury granted automatic extensions, usually of ten years, so holders could keep the bond and keep accruing interest at rates the Treasury reset over time. Bonds issued up to November 1965 earned interest for 40 years in total; those issued from December 1965 earned for 30 years. The last Series E bonds, issued in mid-1980, stopped earning in 2010, so no Series E bond earns interest today, though all can still be redeemed for their final value.

Interest was exempt from state and local income tax but subject to federal income tax, which owners could defer until they cashed the bond. Because inflation in the 1970s often ran above the bond's fixed rate, the real return on Series E holdings in that decade was frequently negative, a weakness the later market-based EE rates and inflation-linked I bonds were designed to address.

Series E bonds served two aims at once. They raised money for government borrowing directly from households, and they took spending power out of a wartime economy short of consumer goods, helping to contain price pressure alongside rationing and higher taxes. Unlike bank purchases of government debt, household saving of this kind did not expand the money supply. The bonds also became a habit: for decades they were a common gift for births and graduations and a first savings product for many Americans. They are the best-known instance of the broader war bond, and their discount design echoes Treasury bills.

• TreasuryDirect: Timeline of U.S. Savings Bonds
• TreasuryDirect: U.S. Savings Bonds