Funding a war is no easy feat and often requires tons of money. Oftentimes, governments may call on investors in a bid to secure money for war efforts by issuing war bonds. This article seeks to examine what war bonds are, how they came about, and the advantages and disadvantages associated with them.
War Bonds: Meaning
A war bond can be categorised as debt security that is issued by a government with the aim to secure funding for military operations that arise during conflicts and times of war. Owing to the fact that war bonds offered a rate of return that fell below the market rate, investments were primarily driven by appealing to the emotions of patriotic citizens who were more likely to lend the government money.
Examining War Bonds with a Microscopic Lens
Defence initiatives can be financed with the aid of war bonds which can be understood to be loans made to the government. Originally, they were called defence bonds and first appeared in 1917 in the form of Liberty Bonds which were used to help finance the American government’s participation in the First World War. The government was able to raise USD 21.5 billion dollars from the sale of these bonds.
When the Japanese attacked Pearl Harbour in December 1941, America entered the Second World War. During this time the name of these bonds changed from defence bonds to war bonds. Over 80 million Americans bought war bonds in support of their government and helped rake in more than USD 180 billion in revenue. These bonds were sold at a price amounting to 50 to 75 per cent of their face value and had denominations that ranged from USD 10 to USD 1,000 keeping in mind the year they were issued.
These war bonds were sold for a price that fell below their face value as investors initially did not pay the entire face value. That being said, they were paid this face value amount once their holdings matured. Since war bonds did not pay interest payments over the course of the year or issue coupon payments, war bonds were understood to be zero-coupon bonds. Investors were able to earn money on the difference that lay between the price they purchased these bonds for and their face value at the time their bonds matured.
War bonds were recognised as baby bonds which implied that their par values were smaller in comparison to standard bonds. As a result, retail investors found them to be comparatively more affordable. War bonds were also categorised as being non-transferable which meant that they could only be redeemed by the person responsible for purchasing them at the time of maturity. Originally, war bonds had a maturity of 10 years which meant they provided a 2.9 per cent return.
The United States government extended the interest that could accumulate on government bonds such that bonds sold between 1941 and 1965 could accrue interest for a period of 40 years. Bonds issued following 1965 were able to accrue interest for 20 years. Following the end of the Second World War, War Bonds came to be classified as Series E bonds which were issued until 1980. In 1980, Series E bonds were replaced by Series EE bonds.
Taking a Look at the History of War Bonds
Apart from the American government, countries like Austria, Hungary, Canada, the United Kingdom and Germany each issued war bonds.
When looking at the United States, the War Advertising Council was responsible for promoting voluntary compliance with the purchase of bonds. These bonds sought to appeal to people’s conscience and patriotism as their rate of return fell below the interest rates that prevailed in the market at the time.
War bonds were advertised over multiple media channels which included newspapers, radio stations, newsreel in theatres and magazines such that American people could learn more about them. Certain Hollywood stars – including Rita Hayworth and Bette Davis, also helped with the promotion of war bonds as they travelled across the country. War bonds could also be saved up for in 25 cent increments. The Girl Scouts helped with this endeavour as well as they helped sell stamps that had 10 cent valuations. Finally, Normal Rockwell also painted several paintings in a bid to advertise the war bonds.
Advantages and Disadvantages Associated with War Bonds
There were a number of benefits associated with war bonds which were as follows.
They could be bought at a price that fell below their face value.
War bonds provided Americans with a sense of pride and patriotism as they helped with the war efforts.
They were guaranteed by the American government owing to which they were safe investments.
The shortfalls associated with war bonds were as follows.
The interest rates paid on war bonds fell below those paid by other securities that prevailed during this time in the market.
Interest payments on war bonds weren’t paid over the course of the bonds being active.
Should war bonds have been sold prior to their maturity they ran the risk of generating a loss.
While war bonds are presently not available for sale, they were a viable tool used by governments in order to secure money to help finance conflicts and wars.