War Bond

A war bond is a debt security issued by a government to help pay for a war. Like any of the bonds a state sells, it is a promise to repay the money later with interest, but it is marketed with patriotic appeals and often sold in small denominations so that ordinary households, not just banks and investors, can lend to the war effort.

War bonds are a form of government borrowing rather than a separate legal instrument, and their terms vary widely. Some were ordinary tradable government stock, such as the UK's War Loan; others, like US savings bonds of the Second World War, could not be sold on to anyone else. The term is most closely associated with the United States and the United Kingdom, although many countries have raised war loans, before and since.

Suppose a town needs to build a flood wall in a hurry and cannot raise taxes fast enough. The council asks residents to lend it money, promising to pay each lender back with a little extra after some years. Posters go up, neighbours encourage each other, and children save coins to buy small certificates. The wall gets built, and the town pays everyone back once the danger has passed.

A war bond works the same way at national scale. The government gets money now to pay soldiers and build ships, and savers get a safe place to keep their money with a modest reward. Buying one was also a way for people at home to feel they were helping.

Wars push government spending far above what taxes can cover. Governments fill the gap by raising taxes, by creating money and by borrowing. Selling bonds to the public has an extra benefit in wartime: money that households lend is money they do not spend in shops, which eases pressure on inflation when goods are rationed and factories are making weapons instead of consumer products.

Campaigns relied on posters, films, rallies and celebrities. In the United States, workers could buy bonds through a payroll savings plan that deducted a small sum from each pay packet, while children bought savings stamps to collect towards a full bond.

Britain financed the First World War partly through a series of War Loans. The largest, the 5% War Loan of 1917, was converted in 1932 into an undated 3.5% War Loan to cut the cost of interest. That bond stayed in issue for more than eight decades. In December 2014 the Chancellor, George Osborne, announced that it would be repaid, and the remaining £1.9 billion was redeemed on 9 March 2015, closing the last of the UK's First World War debt.

The United States raised money for the same war through four Liberty Bond campaigns in 1917 and 1918, which together raised about $17 billion, followed by a Victory Loan in 1919. Germany's war loans fared worse: they lost almost all their value in the hyperinflation of the early 1920s, while disputes over war reparations strained public finances across Europe.

In the Second World War, the US Treasury began selling Defense Savings Bonds on 1 May 1941, starting with a Series E savings bond sold to President Franklin D. Roosevelt. After Pearl Harbor they became known as war bonds. Series E bonds were a nonmarketable security: registered to the buyer and redeemable only with the Treasury. Britain, Canada and other Allies ran similar campaigns. More recently, Ukraine began issuing military bonds in 2022 after the Russian invasion.

Many war savings bonds, including Series E, were sold at a discount and paid their full face value at maturity. The average annual return is:

• $r$ is the annual rate of return, 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.

A Series E bond with a $25 face value cost $18.75 and matured in ten years. Then $F \div P = 25 \div 18.75 = 1.3333$, and $1.3333^{0.1} - 1 \approx 0.029$, so the yield was about 2.9% a year, modest compared with later interest rates but backed by the US government.

War bonds often paid less than market rates, so savers effectively accepted a lower return out of patriotism. When inflation after a war ran ahead of the coupon, the real value of their savings shrank. Holders of the UK's 3.5% War Loan saw its market price fall far below face value for decades, and German savers lost almost everything.

Economists also note that bond drives did not fund wars on their own: much of the borrowing was taken up by banks and institutions, and taxes and money creation did the rest. Modern governments rarely use the label, preferring ordinary Treasury bonds and retail savings products, although the idea returns whenever a country at war appeals directly to its citizens for funds.

• TreasuryDirect (US Department of the Treasury)
• UK Debt Management Office