War Bond

Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

What are War Bonds?

A war bond is a government-issued bond sold to finance wars, and it was widely used during World War I and II (WW1 and WW2). The yield of this investment is lower than other commercial bonds, though they’re sold with discounts at face value. They’re often advertised to support the country’s military rather than as investment opportunities.

War bonds appealed to the patriotism of citizens and had clear propaganda backing them up. Initially issued as liberty bonds in the United States, the government raised a lot of money through these bonds to aid its military operations during the world wars.

War Bond

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Key Takeaways

  • War bonds are loans that governments take from their citizens to subside wars. The government issued several bonds during World War I and II (WW1 and WW2).
  • They are not as profitable as other commercial bonds. Therefore people buy them mostly for sentimental reasons. Governments used propaganda to convince people to buy them throughout history.
  • While war bonds are not being sold anymore, you can still find savings bonds that work similarly today. The U.S. currently sells EE bonds online.

How do War Bonds Work?

War bonds are essentially investment instruments made during exceptional times like wars. They have existed since the beginning of the 18th Century. The oldest mention of the term “war bond” dates back to the War of 1812, which happened in the United States. But European nations were getting loans to finance their wars even before that. However, these bonds only rose in popularity during World War I, especially in the U.S.

Over time, war bonds followed different structures, but they had a few characteristics in common. For instance, they all have a fairly low return on investmentReturn On InvestmentThe return on investment formula measures the gain or loss made on an investment relative to the amount invested. The net income divided by the original capital cost of investment. Return on Investment Formula = (Net Profit / Cost of Investment) * 100 read more compared to other bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more in the market. This is because they are instruments to raise money quickly during a need, and they can’t have a very high yield to avoid huge debtsDebtsDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more later.

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What makes them attractive is that they were sold for only a share of their face value. Let’s take, for instance, the war bonds for World War I sold in the U.S.

A $100 bond, for example, was often sold at $75, with a discount of 25%.

Most of the bonds emitted during the two great wars matured in 10 years, but in some cases, they received extensions. Some loan extensions were as high as 40 years old. So, despite the almost nonexistent interest rates, the investors could still profit from them because of the discount when the bonds matured.

After the great wars, the U.S. government started selling E or savings bonds. They worked similarly and kept helping the government raise money, although the money was no longer for wars. Most wars after the 1940s used other finance methods.

The Use of Propaganda to Sell War Bonds

As you can see, war bonds were not the hottest investment at the time, even though governments still needed to convince people to buy them. No rational investor picks up a bad investment. So, government institutions appealed mostly to the sentiments of citizens to persuade citizens to support war efforts.

In the United States, several promotional activities ensured that bonds sell well. They included using celebrities to promote their sale and start “bond drives” in schools and communities across the country. These bond drives were massively popular and influenced the popularity of the program.

#1 – War Bonds in WW1

War bonds first appeared in Austria and Hungary during World War I (WW1). The first bonds had an interest of 5% and a maturity of five years, which is fairly high compared to later versions. Canada and the United Kingdom soon followed similar programs with similar interest rates.

The U.S. only started to sell these bonds when it entered the battle in 1917. At the time, they came in different denominations, such as $25, $50, $75, $100, $200, $500, $1,000 and $5,000. While $5,000 was a lot, and only wealthy investors could get one, prices like $25 made it easier for poor people to buy these and help the country.

There were even some “war stamps” available for a couple of pennies. For example, one could buy them for 10 cents, 25 cents, 50 cents, $1, or $5.

At the time, the government used “Liberty Bonds” to refer to them. The government hired famous artists to hold rallies and draw posters. Names like Charles Chaplin, Ethel Barrymore, Al Jolson, and others tried to convince Americans to buy them.

A famous bond drive happened at the University of California, Los Angeles (UCLA). The football organizers of the university sold bonds before and during a match, offering special seats to whoever bought $5,000 in bonds. Then, at the game, students could purchase bond stamps for a party. It was a huge success. The efforts raised over $2 million in total.

The sale of Liberty Bonds was very successful, and the government could raise $21.5 billion by selling them. The interest of these bonds was 3.5%, which was even lower than a normal savings account at the time. So, they were given discounts to seem more attractive to the population.

#2 – War Bonds in WW2

During World War II (WW2), several countries, such as the United Kingdom, Canada, and the United States, used war bonds. For all these countries, world war II war bonds were instrumental in saving money spent in the war. For example, the Canadian government received over $12.5 billion with its Victory Bonds.

In the beginning, the U.S. didn’t enter the battlefield, but after the attack on Pearl Harbor, the country, which was already using “Defense Bonds” to raise money for security purposes, renamed them war bonds and started a much stronger movement to convince Americans to buy it.

During the war, the country could get over 85 million Americans to buy World War II bonds, which resulted in over $185 billion.

Can You Still Buy War Bonds?

Governments such as the United States are no longer selling these bonds. They were sold by the U.S. government and were redeemable up to 2002. But by 2012, even banks didn’t sell them anymore. So, people can’t acquire new bonds through official channels (although one can theoretically acquire old bonds that no one redeemed if the government still accepts them).

At the moment, you can still acquire EE bonds, though. They are the successors of war bonds that work similarly and are available online. These are very low-risk investments with a maturity of 30 years. However, they are not necessarily used to raise money for wars anymore. After World War II, the U.S. stopped using them as a primary source of funding for wars.

The only recent version of them came with the Series EE Patriot Bond, which was offered a few months after the terrorist attack at the World Trade Center on September 11, 2001, to support the fight against terrorism.

A person can acquire these investments directly from the government by buying them online or purchasing them in secondary marketsSecondary MarketsA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more.

Frequently Asked Questions (FAQs)

1. How do war bonds work?

War bonds are an investment instrument issued by the government to raise money for financing military activities. They were commonly used during World war I and II. They produce comparatively lesser yield than commercial bonds and generally utilize the patriotic sentiments of the public to be purchased.

2. Can you still buy war bonds?

The government does not issue war bonds anymore. Instead, military operations are funded using other financial methods. But people can still purchase EE bonds, which are technically the successors of these bonds.

3. When did war bonds start?

War bonds were first issued by the United States in World war I as liberty bonds. Even though they were around Europe much before that, such bonds became widely popular to fund war during the first world war.

This has been a guide to War Bond and its Definition. Here we discuss the propaganda behind war bonds, how they work, and their use in WW1 & WW2, along with answering the question of whether you can still buy them. You may learn more about financing from the following articles –