Liberty Bonds

What are Liberty Bonds?

A Liberty Bond, also known as a Liberty Loan, is historically a war bond issued by the U.S. Department of the Treasury in conjunction with the Federal Reserve in four installments in 1917-18 as a means to finance the U.S.' participation in World War I and the Allied war effort in Europe. These bonds were part of a broader Liberty Bond Act and were crucial in the federal government's strategy to finance World War I.

The U.S. government helped sell Liberty Bonds again after the terrorist attacks in the United States on September 11, 2001—this time, to finance the rebuilding of “Ground Zero” and other damaged areas. This effort was similar to the historical Liberty Bond campaigns, which aimed to raise funds from the general public through patriotic duty and bond rallies. The bonds were also part of broader initiatives by the treasury department and involved significant contributions from financial institutions and volunteer labor.

Liberty Bonds Explained

Liberty Bonds were launched by an act of Congress known as the Liberty Bond Act, later dubbed the First Liberty Bond Act, since there were three subsequent acts to authorize additional bond issues, plus a fifth post-war round. This program allowed Americans to loan the federal government money to help pay for the costs of wartime military operations during the Great War.

Liberty Bonds were part of the “Liberty Loan” program, a joint effort between the U.S. Treasury and the Federal Reserve System, which had been created just three years earlier, in 1914. With this program, investors would receive their money back after a certain number of years, plus interest. The federal government promoted these securities as a way for U.S. citizens to show their patriotic spirit and support the nation and its military.

The Liberty Bond campaign aimed to boost the sale of these war bonds by organizing massive public awareness campaigns. These campaigns utilized eye-catching posters, billboards, endorsements from movie stars, and other promotional tactics to ensure greater success for the subsequent Liberty Loan offerings. This approach was especially necessary after the initial launch in April 1917, which was only moderately successful and led to embarrassment for the Treasury Department.

The second Liberty Loan in late 1917 was more successful due to the increased efforts to promote the bonds, including the involvement of prominent figures such as the Secretary of the Treasury and the President Woodrow Wilson. These campaigns also included the distribution of thrift stamps and war savings certificates, which allowed citizens to contribute smaller amounts towards the war effort. Overall, the Liberty Bond campaign was a significant part of how the federal government raised funds to support the wartime economy and military operations.

Investing In Liberty Bonds

The first issue of Liberty Bonds offered an interest rate of 3.5%, which was lower than that available through a typical savings account at that time. Over the course of several subsequent releases, the interest rate gradually increased slightly, up to 4.25%. Still, the primary appeal of these war bonds was to show patriotic support, and not for financial gain.

Nevertheless, Liberty Bonds offered many "ordinary" Americans their first experience with investing. Up to then, securities were seen as something for the very rich or professional Wall Street traders. But the then-Secretary of the Treasury, William Gibbs McAdoo, envisioned the entire Liberty Loan program as something of a financial educator, as well as a patriotism booster, for the average individual.

Bonds were available in denominations as low as $50. They could also be bought in installments, via 25-cent War Thrift Stamps and $5 War Savings Certificates, which eventually could be turned in for an actual Liberty Bond. McAdoo also set the bonds' interest rate relatively low, to prevent them from being snapped up by the well-to-do and by speculators.

One economic advantage of the first issue of Liberty Bonds was that the interest was exempt from taxes, except for estate or inheritance taxes. Though they had terms of 25 to 30 years, most of the Liberty Bonds issued during the early rounds were cashed in or converted to bonds offering a higher interest rate (they were redeemable after 10 or 15 years). As a result, those bond certificates are rare and valued by collectors. This initiative was part of the broader Liberty Bond campaign and was instrumental in the federal government's efforts to raise money for the war effort.

Liberty Bonds Acts

First Liberty Bond Act

The First Liberty Bond Act, part of the Emergency Loan Act, established a $5 billion aggregate limit on government bonds issued at 30 years with a 3.5% interest rate, redeemable by the federal government after 15 years. This act successfully raised $2 billion, with 5.5 million people purchasing bonds. This was a significant part of the Liberty Bond campaign aimed at supporting the war effort during World War I.

Second Liberty Bond Act

The Second Liberty Bond Act established a $15 billion aggregate limit on government bonds, allowing an additional $3 billion to be offered at 25 years with a 4% interest rate, redeemable after 10 years. This act raised a total of $3.8 billion, with 9.4 million people purchasing bonds. The second liberty loan was instrumental in providing the necessary funds for the federal government to finance World War I.

Third Liberty Loan Act

Enacted on April 5, 1918, the Third Liberty Loan Act allowed the U.S. Treasury to issue $3 billion worth of war bonds at a 4.5% interest rate for up to 10 years, with an individual aggregate limit of $45,000. These bonds were not redeemable until September 15, 1928. This act further supported the war expenses of the United States and was part of a broader Liberty Loan plan involving multiple bond issues.

Fourth Liberty Loan and Victory Loan

The first three Liberty Bonds, along with the Victory Loan, were retired during the 1920s. However, most of the debt from the first, second, and third Liberty Bonds was rolled into the fourth issue due to superior terms. The fourth bond, which included a "gold clause" guaranteeing repayment in gold coin of the present standard value, faced controversy. When the U.S. Treasury called the fourth bond on April 15, 1934, it defaulted on this term by refusing to redeem the bond in gold, leading to significant losses for the 21 million bondholders.

Victory Liberty Loan

The Victory Liberty Loan was a fifth bond issue related to World War I, released on April 21, 1919. This issue consisted of $4.5 billion of gold notes at a 4.75% interest rate. These bonds matured after four years but could be redeemed by the federal government after three years. Exempt from all income taxes, they were referred to as "the last of the series of five Liberty Loans." However, they were also commonly called the "Victory Liberty Loan," as reflected in posters and promotional materials of the period.

The Victory Liberty Loan was part of the broader Liberty Loan plan and the final effort in the Liberty Bond campaign to support the federal government in managing the financial burdens of World War I. This bond issue followed the four previous liberty loans and aimed to provide the necessary capital to settle remaining war debts and stabilize the post-war economy.

The promotion and sale of the Victory Liberty Loan involved significant public awareness campaigns, similar to those used in previous bond drives. These campaigns emphasized patriotism and civic duty, encouraging Americans to contribute to the country's financial needs. The higher interest rate of 4.75% and the tax exemptions made these bonds attractive to investors, further aiding the federal government's goal to raise substantial capital for the country's post-war recovery.