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War Bonds are debt instruments (bonds) that are issued by governments to finance military operations and production in wartime. War bonds tend to appeal to the sense of patriotism in individuals, who even see their purchase as a civic duty. Whilst there have been a variety of different structures for war bonds, they tend to be issued at a discount and with returns that are below current market levels. During WW1, war bonds were available for purchase by retail investors and had strong propaganda that accompanied their issuance. They, therefore, exposed a large part of the population to bonds that were probably not aware of them before.
During WW1, the United States government issued Liberty Bonds, which were used to aid in the expensive costs of war. The issuance of the Liberty Bonds was coupled with a strong investment in propaganda to appeal to American’s patriotism. However, most of the bond purchases were done by banks and other financial institutions that saw them as appealing investment opportunities.
In modern times, governments use bonds to mitigate inflation. By issuing bonds, the government is actually reducing the Money Supply and thereby reducing inflation. So, to finance military operations, governments print more money and then use bonds to reduce the amount of money in the economy
War Bond History
World War I
During World War I (WW1), war bonds were made available to retail investors, as well as wholesale investors, with the purpose of raising enough capital to finance the governments’ increased military expenditures. There was a strong propaganda campaign designed to appeal to the nation’s sense of patriotism. Between 1917 and 1919, the US government raised over 20 billion dollars through the issuance of four different Liberty Bonds.
The first issuance of the Liberty Bonds was not well received, and the bonds often traded below their par value. The bonds were later re-issued at higher interest rates in an attempt to solve the bond sales problem. The government also launched a marketing campaign to make the bonds more popular. Famous celebrities, such as Charlie Chaplin, participated in the campaign to try to popularize the bonds with the general public. Although the campaign was not entirely successful, it introduced the notion of financial securities to a large number of people for the first time. In the end, the Liberty Bonds were mostly bought by wholesale investors and financial institutions for their investment opportunity, and not by retail investors as a patriotic civic duty.
World War II
During WWII the United States issued war bonds that were labeled Defense Bonds. They were later relabelled war bonds, after the attack on Pearl Harbor. The war bonds sold in the US helped the government raise about $185 billion. Bonds were bought by over 84 million Americans. There was a nationwide effort to advertise the bonds, ranging from sports events to radio show promotions. The purchase of the bonds was largely linked to patriotism and to people’s feeling of “doing their part” in the war.
Modern-Day War Bonds
One of the mechanisms that governments use nowadays to finance increases in military spending is printing more money. The caveat of printing more money is that this increase in the money supply leads to inflationary pressure. To mitigate the effects of inflation, the government issues bonds, which then reduces the money supply and reduces inflationary pressure. This improves the speed that the government has capital readily available for military spending.
How War Bonds Work
There is never enough time or preparation for wartime. Generally, in times of crisis, governments need quick access to large amounts of capital. War bonds are a way for the government to borrow from their population to finance the increased military spending during wartime. Hence, they are popular financial instruments during wartime, which tends to be correlated with inflationary periods, due to increased spending.
War bonds work just like a regular government bond; however, they sometimes offer a lower interest rate than the prevailing market rates. A bond is a fixed income debt security, with recurring payments of interest, for a predetermined period of time. Once the predetermined period of time gets to its end, the bond reaches maturity and the bondholder then receives back the principal amount that they originally paid for the bond.
To learn more about fixed income concepts, check out the fixed income fundamentals course below and CFI’s many additional resources to enhance your financial knowledge:
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