Any Bonds Today?

The US federal deficit soared from $4.9 billion in 1941 to over $54.5 billion in 1943 before dropping back slightly to $47.5 billion in 1944 and 1945. The deficit could be financed in only two ways, by borrowing or by printing money. The latter expedient was dangerous because it could cause hyperinflations like those suffered by the new nation during the Revolution, the South during the Civil War and, more recently, Weimar Germany. So Treasury extended mass bond marketing techniques developed during the Civil War and World War I to sell as many bonds as possible to as many individuals and financial institutions as possible.

Treasury offered two major classes of bonds during the war, one for individuals and the other for institutional investors. The former were composed of bonds like Series E savings bonds (nicknamed “Baby Bonds”), which were discount bonds with denominations as low as $25 that could be purchased with stamps or via a payroll deduction. “We wanted the ownership of America,” Treasury Secretary Morgenthau explained, “to be in the hands of the American people.” By war’s end, over 85 million Americans, out of a population of 140 million, owned a piece of the nation and contributed about a quarter of the money the government borrowed during the war.

The rest of the borrowed funds came from the proceeds of bonds targeted at institutional investors, which took the traditional forms of discount, coupon or registered. To keep its financing costs low and to guarantee returns for institutional investors, Treasury forced the Federal Reserve to buy government debt whenever yields on long-term bonds and short-term notes exceeded 2.5 and 3/8ths percent, respectively. That policy created inflationary pressures by increasing the money supply, but rationing, mass income taxes, restrictions on retail credit and other policies kept inflation in check until after the war.

Bond drive after bond drive raised tens of billions of dollars, each thanks in part to the sophistication of the government’s marketing efforts. Massive advertising campaigns tugged at patriotic heartstrings with slogans like “They give their lives; you lend your dollars” while celebrities like singer Kate Smith (who popularized “God Bless America”) contributed their endorsements and talents to the sales effort. Roosevelt himself pitched in too, leveraging the power of his radio addresses to remind Americans that “every dollar that you invest in” war loans was “your personal message of defiance to our common enemies.”

Treasury’s bond sale program worked well enough to make a proposed forced savings plan, a sort of tax that would be rebated with interest after the war, unnecessary beyond the 5% “Victory Tax” imposed in 1942.

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