Liberty Bond

Last Updated :

21 Aug, 2024

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Edited by :

Collins Enosh

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Dheeraj Vaidya

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Liberty Bond Definition

Liberty bonds are issued by governments for funding their military operations during war. The government encourages its citizens to purchase bonds as an act of patriotism. Introduced during the First World War (WWI), liberty bonds gained popularity during the Second World War.

On April 28, 1917, soon after the US entered World War 1, the Secretary of the Treasury and head of the Federal Reserve, William G. McAdoo, announced the Liberty Loan Plan to sell war bonds. After the attack on Pearl Harbor, US citizens supported the cause by purchasing bonds. Over 84 million American citizens bought it—the US government raised $185 billion. Liberty bonds work like regular bonds; however, the offered interest rate is lower than prevailing market rates. They are also referred to as war bonds.

  • Liberty bonds are issued by governments during wars to fund military operations. One can redeem these old paper bonds, but war bonds are mostly valuable as an collector's items.
  • During WWI, many celebrities and actors endorsed war bonds—Charlie Chaplin created a short film with other actors to support the cause.
  • Printing money is an alternative source of military spending. But it can lead to inflation. Therefore, contemporary governments issue war bonds to keep inflation and money supply in check.
  • Its issuance has multiple uses. For example, the fund collected support war expenses, expanded security market, etc.

How Does Liberty Bond Work?

Liberty Bond

Liberty bonds were first introduced in the US during World War I (WW1). The US issued liberty bonds to American citizens who bought them out of patriotism. Also known as war bonds, they were marketed with slogans—defend your country with your dollars, invest if you can't enlist, or buy a war bond. The bonds were sold not only to wholesale investors but also to retail investors. The US government wanted to raise capital to fund their military operations and warfare.

Usually, liberty bonds were issued at a discount with a low rate of return—the first issuance of liberty bonds was not well received well. As a result, they were re-issued at higher interest rates. The US government remarketed the bonds with a massive campaign. The government employed famous actors and celebrities—Marie Dressler, Al Jolson, Douglas Fairbanks, Elsie Janis, Theda Bara, Ethel Barrymore, Mary Pickford, Fatty Arbuckle, Mabel Normand, Lillian Gish, and Charlie Chaplin. A short film was made, encouraging citizens to buy liberty bonds. The marketing campaign was not a complete success, nonetheless, financial securities were introduced to a large community. Bonds were mostly purchased by wholesale investors and financial institutions. For the most part, retail investors and citizens stayed clear.

For WWII, the US issued war bonds —renamed as Defense Bonds. The bonds were advertised aggressively. It was on the radio, events, sports, and shows; it was everywhere. After the attack on Pearl Harbour, the name reverted to war bonds. The attack woke up US citizens who supported the cause by purchasing bonds—84 million people invested—$185 billion was raised.

Contemporarily, governments fund military expenses by printing more money. But the increase in money supply eventually causes inflation. So to mitigate inflation and reduce the money supply, governments issue bonds.

Example

Almost after 100 years, the UK decided to repay part of  I World War debt. The treasury agreed to part with £218 million to clear the 4% consolidated loan. The UK is redeeming bonds dating back to the 18th century. The debts were caused by the South Sea Bubble crisis of 1720, The Irish potato famine, The Napoleonic Wars, and The Crimean wars.

Approximately £2 billion of First World War debt remains, and the government was looking into the practicalities of repaying it in full. The "4% consols" were issued by Winston Churchill to refinance national war bonds originating from the First World War.

The national war bonds paid out a 5% interest rate and were issued in 1917, funding the I World War. These bonds were sold to private investors in 1917. As a result, most liberty bonds are owned by small investors. Out of 11,200 holders, 7,700 investors hold less than £1000, and 92% holders own less than £10,000.

Uses

War bonds have the following uses.

  • It prepares governments in wartime scenarios and foreseeable turbulent times.
  • Bonds allow borrowing from a nation's population to finance increased military spending, during wars.
  • War bonds work like regular government bonds; however, they offer a lower interest rate than the prevailing market rates.
  • Bonds appeal to the patriotism of citizens and raise capital.
  • The bonds were purchased by banks and financial institutions that seek good investment opportunities.
  • The US government used these bonds to mitigate inflation.
  • The US government utilized it to fight the supply of money.

Frequently Asked Questions (FAQs)

What are WWI liberty bonds?

WWI bonds were issued by the US government to raise capital. This is how they funded their military operations. It was primarily aimed at people who could not enlist. This way, the citizens could fight for their country without training or risking their lives.

What were the problems with liberty bonds?

War bonds have two major issues. First, the provided rate of return was lower than market rates. Secondly, many individuals enlisted in the army or had family members putting themselves on the line. Such families were already sacrificing enough. Therefore, war bond patriotism did not appeal to the majority.

What is the primary purpose of liberty bonds?

The US government issued liberty bonds during WWI to raise capital. The military relied on these funds for their everyday operations. At that time, the bonds were marketed to retail investors—the government hoped that people would buy the bonds out of civic duty.

What was liberty bond propaganda?

The authority used posters advertising the bonds in its promotion. The posters were imprinted with a picture of the Statue of Liberty and the bond certificate illustration. Love for the country and the encouraging words at promotion rallies by Hollywood artists such as Charlie Chaplin, Mary Pickford, and Douglas Fairbanks, who spoke at bond rallies, led Americans to purchase the war bonds.

This has been a Guide to Liberty Bond and its Definition. Here we explain liberty bonds issued by the US during World Wars (WW1 and WW2), along with examples. You can learn more from the following articles –