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2021 Selling American Values: The Success of World War II Defense Bonds Jacob Bloch
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COLLEGE OF ARTS & SCIENCES
SELLING AMERICAN VALUES: THE SUCCESS OF WORLD WAR II
DEFENSE BONDS
By
JACOB BLOCH
A Thesis submitted to the Department of History in partial fulfillment of the requirements for graduation with Honors in the Major
Degree Awarded: Spring, 2021 Bloch 2
To Chef Ian
Data Analyst, Chef, and Motivator
I am Back
Bloch 3
The members of the Defense Committee approve the thesis of Jacob Bloch defended on April 5, 2021.
Dr. Kurt Piehler Thesis Director
Dr. Randall Holcombe Outside Committee Member
Dr. Jonathan Grant Committee Member
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Table of Contents Introduction ______5 Background ______7 Research Methods ______13 Twentieth Century Bond Literature ______14 Chapter 1: Liberty Bonds ______16 War Financing Background ______16 Civil War Precedent ______19 Financing World War I ______24 Liberty Bond Marketing Campaign ______32 Liberty Bond Civic Engagement ______35 Liberty Bond Structural Failure ______42 Uncontrollable Inflation ______47 Liberty Bond Legacy ______51 Chapter 2: Savings Bonds of 1935-1941 ______53 Successful Framework ______56 Savings Bonds Marketing______60 Lack of Civic Engagement ______64 Advertising Campaign Results ______66 Controlling Inflation ______70 Legacy of Savings Bonds ______74 Chapter 3: World War II Defense Bonds ______76 Successful Structure ______78 Bond Marketing Success ______83 Involvement with Civic Groups ______92 Results of the Sales Campaign ______99 Controlling Inflation ______102 Public Opinion ______108 Defense Bond Legacy ______109 Epilogue: Savings Bonds After World War II ______111 Appendix ______122 Works Cited ______136
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Introduction
Financing a war is one of the most difficult and uncertain tasks for a country.
Oftentimes, countries are more focused on the short run of primarily winning a war, rather than the long run of financing the debt. It is uncertain whether a country will prevail in a conflict or, nevertheless, have the revenue to pay off its future debts. There are four potential ways that a country can raise funds, especially for a war: raising taxes, offering bonds, taking out loans and printing money. The latter two are the most adverse for a nation due to the high inflationary risks. In American history, wars were typically financed through taxation and bonds.
The United States Treasury historically offered government bonds during wartime; however, these bonds were not primarily used to fund the war. War bonds were offered as a vehicle to control inflation and increase public support and participation for the war effort.
Issuing bonds served as a form of patriotic duty that allowed citizens to form a personal relationship with their country and have a stake in the country’s success, without fighting on the front lines.
During war periods, purchasing bonds served as the utmost patriotic act and Americans who did not purchase large amounts of government bonds were shunned from society or pressured into purchasing bonds. In one instance during World War I, “the Comptroller of the
Currency learned that a national bank charter had been granted to six applicants…who had between them bought only $200 worth of Liberty bonds, the charter was revoked.”1 In various parts of the United States during World War I, some Americans painted people’s homes and
1 Hugh Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” National Bureau of Economic Research, Working Paper Series: 10580 (2004), 12. Bloch 6 barns yellow if the homeowner failed to purchase Liberty Bonds.2 War bonds were greatly publicized which created a sense of competition among Americans when it came to purchasing bonds. In certain instances, bond purchasers received different memorabilia to advertise their bond purchase.3 This memorabilia not only advertised the various bond drives but could also guilt other Americans into purchasing bonds.
In order to determine if a government bond issue was a success, the bond campaign must have controlled inflation, provided a return on the investment, and delivered a sizeable level of funds for the government. This thesis will examine the effectiveness of different United States government bonds through the marketing efforts, civic engagement, and financial framework.
Excelling in each of these three factors created an environment for governments to generate significant funds through bond issues. This thesis will determine the achievements of the different twentieth century government bond campaigns by analyzing the inflation rates, the number of bonds purchased and redeemed, government revenue generated, and the advertisement campaigns. The Defense Bonds of World War II were the most successful government bond offering because the campaign met all of the criteria of an effective bond drive; Defense Bonds controlled inflation considerably well for a wartime period, provided a return on the investment through a stable financial foundation, and funded a significant portion of the World War II total war effort by engaging with the American public through various promotions. Other bond issues, including Liberty Bonds of World War I, Savings Bonds of
1935-1941, and post-World War II Savings Bonds, such as Series E, Series EE, and Patriot
2 Kiku Adatto, “Saving for Democracy,” In Thrift and Thriving in America: Capitalism and Moral Order from the Puritans to the Present, (Oxford Scholarship Online, 2012), 10. 3 “United War Work Campaign Pin,” Smithsonian Institution, accessed March 7, 2021, https://www.si.edu/object/united-war-work-campaign-pin:nmah_1317474. Bloch 7
Bonds did not engender the same amount of overall success due to a lack of at least one of the factors outlined.
In order to judge each different bond issue fairly, this thesis will examine the sales of each bond drive as a percentage of GDP. This was done in order to exclude inflation from influencing the comparison between bonds. The data used on the United States’ GDP was taken from the Bureau of Labor Statistics. The GDP data only dated back to 1929, which excluded
World War I from the dataset. This thesis used a monetary factor of 1.138 to discuss the sales of
World War I Liberty Bonds compared to World War II Defense Bonds. The monetary factor was calculated from the Bureau of Labor Statistics to show inflation between December 1919 and December 1946.4
Background
Liberty Bonds of World War I created a significant influence on future bond offerings due to both their successes and failures. While the Liberty Bonds were marketed toward patriotic Americans as a way to support their government, the bonds failed to ensure Americans would receive a stable investment. Liberty Bonds were marketable securities, meaning that they could be bought and sold in secondary markets and their value was subject to interest rates at the time. As a result, some Americans did not receive as large of a return as they anticipated, or in some cases, even lost money. Treasury Secretary William Gibbs McAdoo encouraged civil engagement to Americans through the concept of thrifting as a means to save their money.
McAdoo also encouraged individual investors with little savings to purchase Liberty Bonds, allowing all Americans, regardless of income, to share in their country’s success. McAdoo’s
4 “CPI Inflation Calculator,” U.S. Bureau of Labor Statistics (U.S. Bureau of Labor Statistics), accessed March 7, 2021, https://www.bls.gov/data/inflation_calculator.htm. Bloch 8 encouragement of small savers set a precedent for Treasury Secretary Henry Morgenthau Jr. to create a total-war engagement of society, that included women and children.
While the Liberty Bonds were marketed as a patriotic duty to Americans on the home front, it is debated as to whether the bonds succeeded in the goals outlined earlier. Although advertised as a form of patriotism, some scholars argue that Liberty Bonds were not purchased because of patriotic duty, but due to potential tax benefits the bonds had over corporate and municipal bonds. The goal of controlling inflation is only achievable based on how many bonds are bought. Inflation rates during World War I were dramatically higher than the objective goal of two percent annually. According to the Bureau of Labor Statistics, the rate of inflation grew from 7.9% in 1916 to 18.0% in 1918.5 Inflation rates remained high until a period of contraction began in 1921 to control spending. The Liberty Bonds failed in controlling the rate of inflation by taking money out of the money supply.
One of the main successes of the Liberty Bond drives was their accomplishment in funding World War I. The sale of bonds to finance a war rarely proves to be the most lucrative of the financing options; compulsory taxation generates the most revenue without forcing the government to repay any interest or principal. The Liberty Loans proved to be a successful means of financing the war effort, funding 58% of the total cost of the World War I.6 This is unlike the other bond issues that this paper will analyze and discuss. Secretary McAdoo was successful in generating over $24 billion of the $33 billion necessary through issuing bonds; however, the lack of generating public support, encouraging civil engagement, and controlling inflation would not make the bond drive as successful as World War II Defense Bonds.
5 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet. 6 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 31. Bloch 9
The Great Depression beginning in 1929 dramatically altered the relationship between civilians and the United States government. Millions of Americans lost jobs, savings, and faith in financial institutions. In 1935, democratic philosophy, pioneered by President Franklin
Roosevelt and The New Deal, influenced the Treasury to change the way the United States financed public debt. This new philosophy changed the relationship between civilians, businesses, and government alike. Democratic ideas dictated that Americans needed greater involvement with the United States government, as well as the financial industry required increased regulation. Led by Henry Morgenthau Jr., the Treasury wanted a more democratic and broad way for the debt to be paid back, other than raising taxes. Raising taxes was the most common and effective way for the federal government to raise funds because taxes were compulsory. Morgenthau and the treasury established the first federal government savings bond drive during peace time with the introduction of Series A Bonds on March 1, 1935. The treasury issued different variants of these bonds, known to the public as “Baby Bonds” due to their low price, between 1935 and 1941 to allow every United States citizen, regardless of class status, to have an interest and role in paying back the large governmental debt after years of New Deal spending.
Historians have debated whether the Baby Bonds were a success or a failure. John
Morton Blum maintained that the Baby Bonds failed in the beginning of the bond issue due to a lack of sales.7 Blum argues that much of the failure of these bonds stemmed from a lack of advertising and promotion of the bonds. Blum detailed the 1930s Savings Bond campaign saying, “At first sales lagged, but they picked up gradually under the influence of the Treasury’s
7 Peter Tufano et al. “Reinventing Savings Bonds,” Harvard Business School Working Paper Series: NO. 06-017 (2006), https://www.hbs.edu/ris/Publication%20Files/06-017.pdf, 11. Bloch 10 promotional activities, to which the Secretary gave continual attention.”8 Members of Congress agreed with Blum’s argument and called for the Treasury’s Division of Savings Bonds to lose most of their funding due to their lack of sales.
While the Baby Bonds did not generate the most revenue and were not a major stream of income for the federal government, they were a crucial to the success of the Series E or “Defense
Bonds” of World War II. Unlike the Liberty Bonds of World War I, these bonds did not have a war through which to generate public support. Instead, the Treasury needed to rebuild confidence in the American financial system as a result of the Great Depression. The sale of
“Baby Bonds” were also the first attempt of the United States government to issue savings bonds during peacetime, instead of raising taxes or taking out more loans to repay debt. Henry
Morgenthau and the Treasury learned from their mistakes from the “Baby Bonds” of 1935-1941 and emphasized the advertising of the new Series E Bonds. It was unlikely that without the
Treasury’s bond offering of Series A-D, the Defense Bonds of World War II would not have been as successful.
The Series E or Defense Bonds of World War II was the most successful bond drive of the twentieth century. Treasury Secretary Morgenthau analyzed the failures and successes of
Liberty Bonds and Savings Bonds to create the new bond campaign. Liberty Bonds failed in a strong, financial framework sense due to the financial losses American families had once post- war interest rates rose. Morgenthau continued the successful marketing campaign of World War
II by emphasizing a sense of patriotic duty through bond purchases. Secretary Morgenthau carried over the discount bond framework of the Savings Bonds because it guaranteed
Americans a return on their investment as long as they held the bonds longer than six months.
8 Tufano, 11. Bloch 11
Combining the successful factors of each previous bond campaign, Secretary Morgenthau created the most effective government bond campaign of the twentieth century with Defense
Bonds.
Secretary McAdoo’s advertising and marketing of Liberty Bonds served as a precedent for Morgenthau to strengthen. Both campaigns used posters, celebrities, and encouraged civil engagement with members of society. McAdoo and Morgenthau encouraged all members of society, including women and children, to do their respective part for the war, to engender public support for the war through patriotism. The Defense Bond Program gave every American a chance to take stock in the war; in a 1943 Gallup Poll, 80% of Americans surveyed owned war bonds.9 If every American, regardless of age or sex, had a stake in the American war effort, they would encourage and support American engagement.
The role of marketing and advertising bonds cannot be understated. If the American people do not care about the reason why the bonds are being issued, or even if the bonds exist, sales records will be dismally low. This is proven through the sale of Savings Bonds and Patriot
Bonds after World War II. After World War II, the Treasury continued issuing Series E, and later a savings bond titled Series H, as a way to encourage saving and control inflation. Series E and H were successful campaigns in the early post-war era, led by then Treasury Secretary Fred
M. Vinson. These post-war bond drives were mainly successful around certain dates, including the second anniversary of D-Day, Pearl Harbor, or Independence Day.10 The Treasury continued advertising the sale of bonds through parades, posters, and cartoons; however, these savings
9 Eric Hilt and Wendy M. Rahn, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," The Russell Sage Foundation Journal of the Social Sciences 2, no. 6 (2016), 87. 10 Edmund Linehan, A History of the United States Savings Bond Program (Department of the Treasury, 1991), 32. Bloch 12 bonds had to compete with new financial instruments and appeal to Americans without pertaining to war.
While sales remained high for a peacetime bond offering in the 1950s, sales began to steadily decline over the coming decades. Over the course of the post-war era, the Treasury had to constantly adjust the structure of Series E and H bonds to maintain their financial appeal. The
Treasury attempted to keep these savings bonds relevant to the public until 1980, when the Series
EE and HH were introduced with even greater appeals than the Series E and H, including increased interest payments and a greater discount on the initial purchase. High inflation rates of the late 1970s and early 1980s plagued the success of the new bond campaign, as it was risky and counterintuitive for investors to purchase a bond to hold their savings if their money lost value before the bond matures. Series EE and Series HH had poor sales due to competing investment opportunities, including the 401(K) and employee stock options, which allowed for a more personalized retirement plan.11 As America’s financial system modernized, the desire for government savings bond declined.
The importance of bond marketing was seen through the failures of the Patriot Bonds of
2001. After the attacks of September 11, 2001, the Treasury renamed the Series EE Savings
Bonds into Patriot Bonds as a way to appeal to potential buyers through patriotic advertising.
Congress and the Treasury failed to initiate any advertising campaign to promote the bonds nor did they provide any civic engagement for the general American audience through banks or public groups.12 As a result, Patriot Bonds performed poorly and in early 2003, Congress officially ceased to fund the marketing of savings bonds.13
11 “Individual - The Payroll Savings Plan,” Research Center (Treasury Direct), Accessed March 8, 2021, https://www.treasurydirect.gov/indiv/research/history/history_payroll.htm. 12 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 87. 13 “Individual - The Payroll Savings Plan,” Research Center (Treasury Direct). Bloch 13
The Liberty Loan Drives of World War I and the Savings Bond campaign of 1935-1941 were heavily influential on the success of the Defense Bonds of World War II. Each drive excelled in at least one certain aspect, whether it was marketing, financial structure, or civic engagement. A failure to create a successful marketing campaign correlated with a lack of bond purchases, as seen once World War II concluded. Success in each of the four factors created the perfect environment for Defense Bonds to succeed in increasing public support, keeping inflation low, and funding a sizeable amount of the war costs.
Research Methods
The research for this thesis will combine primary source data with secondary source analysis. The Treasury Department and Bureau of Labor Statistics provided sales data of each respective bond issue, as well as the philosophy behind each bond drive. In 1991, the Treasury wrote A History of the United States Savings Bonds Program, which discussed each of the different Savings Bonds, both before and after World War II. This history provided numerical data of each bond drive, which was critical for creating comparisons between the Savings Bonds and the Defense Bonds, as well as creating sales trends. The Treasury provided details behind the 1930s Savings Bond Program, such as the structure of the different Savings Bonds and how
Savings Bonds were purchased.14 This history was useful to connect the Savings Bonds to
Defense Bonds, as well as outline the shift from Liberty Bonds in World War I to Defense Bonds in World War II.
14 Linehan, 9. Bloch 14
Twentieth Century Bond Literature
Historians typically wrote about war bonds significantly more than peacetime government bonds. World War I Liberty Bonds and World War II Defense Bonds have extensive research conducted on the successes and failures of each bond based on their respective importance to funding a war. Peacetime Savings Bonds, especially those issued between 1935 and 1941, are often overlooked by historians. This thesis aims to show the importance of the peacetime Savings Bonds and their positive influence on the World War II
Defense Bonds.
Economic historian Jarvis Means Morse also wrote on the influence of Savings Bonds on
Defense Bonds in his book, Paying for a World War: The United States Financing of World War
II.15 Morse wrote about the Treasury’s organizational structure, as well as the New Deal philosophy that influenced Secretary Henry Morgenthau Jr. Unlike other historians, Morse researched the Savings Bond campaign in the 1930s and analyzed the limited marketing of the bonds through post offices and direct mail. When analyzing the marketing World War II
Defense Bonds, Morse’s book was extremely beneficial for providing specific advertisements or promotions that ran across the United States.
Historian Hugh Rockoff wrote various papers discussing the effectiveness of the Liberty
Bond and Defense Bond Campaigns. In Rockoff’s paper, “Until It’s Over, Over There: The U.S.
Economy in World War I,” Rockoff detailed the financial background before and during World
War I. Rockoff’s paper outlined the Liberty Bonds in regard to the political and economic climate at the time. Upon conducting his own research between municipal and Liberty Bonds,
15 Jarvis M. Morse, Paying for a World War: The United States Financing of World War II (U.S. Savings Bond Division, 1971). Bloch 15
Rockoff argued that Americans purchased Liberty Bonds due to the tax-exemption benefits, rather than a patriotic duty.16 While the tax benefits provided an added financial incentive, millions of Americans had never purchased government debt before Liberty Bonds were issued, which shows that financial literacy or involvement concerned a majority of Americans.17 During
World War I, households typically spent between 4.5 and 5.5 percent of their gross income on
Liberty Bonds, which is a sizeable amount for individuals who had not previously invested before.18 This thesis argues that the advertising, which focused on civic engagement and guilting the public into purchasing Liberty Bonds, was more effective than the added tax-benefits.
16 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I”, 13. 17 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 90. 18 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 95. Bloch 16
Chapter 1: Liberty Bonds
America had a unique and tumultuous history regarding issues of taxation and war. As a nation, the United States was founded on the principle of “no taxation without representation.”
Before the Revolutionary War, the Stamp Act of 1765 forced colonists to pay for a government- issued stamp on all documents. As a result, Boston colonists rioted and destroyed the house of the stamp distributor. News of these protests inspired similar activities and protests in other colonies.19 To finance the Revolutionary War, the Continental Congress only had the authority to print money or obtain loans.20 Congress primarily relied on printing money, which led to hyperinflation throughout the American colonies.21 Despite lacking the authority to impose taxes, Congress feared that tax creation would alienate the public from supporting the
Revolutionary War. Imposing taxes would also make Congress appear hypocritical to the very cause of the Revolutionary War: opposing unjust taxation. Following the Revolutionary War, the United States government remained hesitant to raise taxes to fund wars due to the innate hatred American culture has for taxes.
War Financing Background
Financing a war can exhibit both inflationary and non-inflationary tactics. Because taxes were compulsory and were not purchasing any goods, they directly decreased the amount of money supply and purchasing power of the public, becoming a non-inflationary option. Offering bonds is another non-inflationary option because people are using their funds to purchase
19 “Parliamentary Taxation of Colonies, International Trade, and the American Revolution, 1763–1775,” Office of the Historian, United States Department of State, Accessed March 8, 2021, https://history.state.gov/milestones/1750- 1775/parliamentary-taxation. 20 “U.S. Debt and Foreign Loans, 1775–1795,” Office of the Historian, United States Department of State, Accessed March 8, 2021, https://history.state.gov/milestones/1784-1800/loans. 21 “U.S. Debt and Foreign Loans, 1775-1795.” Bloch 17 securities that are not stimulating the economy. During war periods, earnings rose for businesses due to war production and consumers had few places to spend money because firms primarily produced munitions. Government bonds were non-inflationary because investing in a government security reduced the amount of bank borrowing, which created new money.22
When a government takes out a loan, the result can be inflationary, non-inflationary, or anti-inflationary. Inflationary lending occurred when the government received loans from commercial banks. When a bank purchased a government bond, it did not transfer any money from existing deposits over to the government’s account, therefore it did not reduce an individual’s purchasing power through any income, savings, or reserves.23 As a result, the bank created new deposits equal to the amount of the loan and the government had new money to spend. Unless offset by the equivalent of savings by citizens, the deposits were added to the overall money supply. This essentially created new money because no individual was losing money and both parties involved in the transaction had money to spend.
Typically, the United States Treasury relied on non-inflationary lending, which occurs when bonds are purchased using the savings of individuals, corporations, associations, and public or private institutions. Bonds were similar to taxes as funds were taken out of the money supply and decreased the available purchasing power. However, government bonds enabled the lender to receive their money back and with interest. Once the economy runs at full capacity, few opportunities exist for people to spend their money, which typically results in investments in
Government bonds.24 The modern United States Treasury offers non-inflationary peacetime
22 Jarvis M. Morse, Paying for a World War: The United States Financing of World War II (U.S. Savings Bond Division, 1971), 20. 23 Morse, 18. 24 Morse, 20. Bloch 18 bonds, where people are using their savings to invest. This tactic was used by the Treasury during World War I and World War II to channel more funds from the savings of investors.
If inflation becomes unmanageable, as witnessed during Civil War, the Treasury can implement anti-inflationary borrowing. Such borrowing is similar to non-inflation borrowing, except anti-inflationary borrowing is generally used to curb the rising incomes from war production during war time. Non-inflationary borrowing draws from the savings and reserves of people, while anti-inflationary draws from the rising incomes. It is uncertain as to whether the
Treasury thought in these terms of borrowing because in Secretary McAdoo’s book Memoirs,
McAdoo does not mention monetary policy in regard to Liberty Bonds.25 Typically, during wartime, the United States government used a combination of both non-inflationary and anti- inflationary borrowing. Rising incomes were caused by an increase in production and capital investment to meet war demands.26 Unless these higher incomes were invested, mass inflation would have occurred. This is why the Treasury offered wartime bonds, such as Liberty Bonds during World War I and Defense Bonds during World War II.
Anti-inflationary borrowing provided many benefits to the Treasury and federal government, other than pure financial gain. To describe the benefits of anti-inflationary borrowing, historian Jarvis M. Morse outlined six purposes of anti-inflationary borrowing during wartime:
1. Reducing the amount of spendable money of individuals. 2. Placing non-inflationary
funds at the disposal of the federal government for war costs 3. Giving the individual
investor a sense of participation in the war effort. 4. Providing a back-log of savings for
25 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 10. 26 Morse, 20. Bloch 19
investors. 5. Sustaining a post-war market of bonds to prevent unemployment and price
instability, and 6. Offering bonds allows Americans to have a stake in their country and
democratic institutions.27
Based on Morse’s assumptions, the Treasury offered bonds during war periods due to a combination of financial and psychological reasons. The federal government needed money to spend on the war, but it also needed to take money away from the American people due to rising incomes. Offering bonds allowed the United States government to gain funds, limit inflation, and increase morale and confidence during war periods.
Civil War Precedent
Bonds were only lucrative if citizens purchase them, as government bonds were non- compulsory. President Abraham Lincoln feared the implications of raising taxes to finance the
Civil War (1861-1865) because doing so could foster an anti-war sentiment. Citizens typically do not want higher taxes, and if citizens were forced to pay for a war directly, it would potentially generate a negative public opinion. One could deduce that if President Lincoln raised taxes on the northern Union, those who were against the war or those who were undecided could have been pushed even further away from supporting Lincoln and the Union’s war effort.
Despite fears of raising taxes, Treasury Secretary Salmon Chase and President Lincoln worked together to slowly raise taxes over the course of the Civil War. Chase utilized excise taxes, internal taxes on specific goods, as the main form of taxation in 1862. Before the excise taxes took effect, Congress passed a property and income tax bill in August 1861 as an attempt to raise funds. In the first year, the property tax raised $20 million and the income tax brought in
27 Morse, 21. Bloch 20 nothing; while in 1862, the property tax was repealed and the income tax generated $2.7 million.28 The Revenue Act of 1862 strengthened the Revenue Act of 1861 by raising the income tax from 3% on incomed above $800 to a progressive tax of 3% on incomes between
$600 and $10,000 and a 5% tax on incomes over $10,000.29 The excise taxes proved to be the most effective because almost everything was taxed, ranging from “sin” items such as cigars and alcohol, to medicines, to raw materials, and manufactured goods.
Although Lincoln and Chase raised taxes and even instituted an income tax, a first in
American history, these levies did not generate enough revenue to pay for the full cost of the war. According to historian Scott Trask of the Mises Institute, “by the end of the war, the income tax had raised $55 million, customs $305 million, and the internal revenue duties $352 million. However, these substantial sums amounted to only 21 percent of the expenses of the war, the other 79 percent having to be borrowed.”30 These different forms of taxes combined to raise $712 million, which was still less than one quarter of the funds necessary, as the Civil War required almost $3.4 billion.
Inflation serves as the main issue regarding borrowing money, offering bonds, and printing currency. In late 1861, the Southern Confederacy proved to be stronger than the
Northern Union anticipated, and investors realized the war would be more costly than initially anticipated. Banks and investors predicted greater government bond issues, as well as increased printing of government notes; therefore, they ceased to loan or accept specie payments, such as gold and silver.31 This created a major challenge for the Treasury because deposits and loans
28 Scott Trask, “War Finance: Theory and History,” Mises Institute, Accessed March 8, 2021, https://mises.org/library/war-finance-theory-and-history. 29 Library of Congress, "Thirty-Seventh Congress. Session II. Ch. 110-112, 116, 119. 1862," Accessed March 8, 2021, https://www.loc.gov/law/help/statutes-at-large/37th-congress/session-2/c37s2ch119.pdf, 473. 30 Trask, “War Finance: Theory and History,” https://mises.org/library/war-finance-theory-and-history. 31 Trask, “War Finance: Theory and History,” https://mises.org/library/war-finance-theory-and-history. Bloch 21 steadily declined, and the federal government quickly needed money. The federal government was forced to print currency in order to increase liquidity and have funds on hand. As a result,
Congress passed the Legal Tender Act in 1862 to issue $150 million in government currency and
$500 million worth of bonds.32
The obvious problem with printing $150 million in government was rising inflation.
According to economist Murray Rothbard, “the total money supply (currency plus deposits and coin) rose from $745 million in 1860 to $1.7 billion in 1865, an increase of 128 percent, or 18 percent per annum.”33 This hyperinflation made the currency issued by the Union government worthless. This hyperinflation had lasting effects on American banking and finance. This currency, known as Greenbacks, only funded around 15% of the entire war effort, but dramatically increased inflation rates from14% in 1862 to 25% in 1863 and 1864.34 American citizens had a significantly higher cost of living with sticky wages, meaning incomes did not follow the same increasing pace as the cost of living. This hyperinflation not only impacted
American citizens but led to a loss of confidence in the value of government issued currency.
The Union had to finance the war primarily thought Greenbacks and taxes as foreign countries generally ignored the Union’s requests for additional capital.35 Greenbacks ruined American financial credibility globally because American currency greatly depreciated.
President Lincoln and Treasury Secretary Chase’s difficulty financing the Civil War proves how complicated it is to raise revenue and increase liquidity during war time. Lincoln and Chase utilized each of the four methods of generating funds, and still faced unpopular and
32 Trask, “War Finance: Theory and History.” 33 Trask, “War Finance: Theory and History.” 34 “Greenbacks,” Museum of American Finance, Accessed March 8, 2021, https://www.moaf.org/exhibits/checks_balances/abraham-lincoln/greenback. 35 Mira Wilkins, "Foreign Investment in the U. S. Economy before 1914," The Annals of the American Academy of Political and Social Science 516 (1991), 11. Bloch 22 disappointing results. Raising taxes, specifically the excise tax, was the most lucrative of the options, but it produced less than a quarter of the total expenditures. By printing money, the issued bonds and potential for loans became useless because American credit was unpredictable and untrustworthy.
The funding of the Civil War served as a model and precedent for Treasury Secretary
William McAdoo during World War I. McAdoo had a recently developed tool to help facilitate borrowing funds for the war through the Federal Reserve System. World War I broke out in
Europe in 1914, the same year the Federal Reserve was established; once America joined in the war effort in 1917, the Federal Reserve became fully developed and organized.36 After witnessing the decline of American credit and rising inflation as a result of Civil War, McAdoo and the federal government financed World War I using a combination of taxation and borrowing. The federal government’s plan consisted of Congress taxing the general public, generating one-third of the required revenue, and the Federal Reserve offering “Liberty Loans” in the form of bonds, generating the remaining two-thirds.37
Inflation was the primary reason why McAdoo chose not to print money. With a new paper currency, the Federal Reserve note, McAdoo and the Treasury needed to ensure confidence and stability in the currency. During the Civil War, the fiat money that the federal government created hurt the American economy, and thus American morale. Public opinion is the greatest asset that a government can have when entering and financing a war; if the citizens are forced to pay higher taxes, their opinion on the war will become negative. McAdoo said,
“Any great war must necessarily be a popular movement…a kind of crusade.”38 Americans
36 Richard Sutch, “Liberty Bonds,” Federal Reserve History, Accessed March 8, 2021, https://www.federalreservehistory.org/essays/liberty-bonds. 37 Sutch, “Liberty Bonds.” 38 Sutch, “Liberty Bonds.” Bloch 23 would not purchase bonds if they did not support the war effort, and raising taxes only increases anti-war sentiment.
One of the benefits from taxing the general public was curbing inflation if the United
States chose to print money or use loans. Because taxes were compulsory, Americans were forced to pay taxes on whatever the government chose to tax, such as property, specific goods through excise taxes, and the newly introduced income tax in 1913. As a result of these taxes,
Americans had less purchasing power and their overall expenditures decreased, stopping the economy from overheating. As business slowed, a gap of unused resources was created for the government to employ. This solved one of the problems that the Treasury faced when America first entered the war: the lack of available resources.
War profiteering was rampant during the Civil War, which angered Americans and businesses alike. In one such instance, one government contract paid $191,000 for the construction of five forts; of that $191,000, $111,000 was profit.39 This led to the special congressional committees forming both during and after the Civil War to investigate government contracts because Americans became inquisitive about the government’s dealings to produce munitions.40 President Wilson wanted the rich to bear must of the burden of paying for the war by implementing an excess profits tax, as well as raising both income and excise taxes.41 The
War Revenue Act of 1917 created the progressive, excess profits tax, that taxed between 20 to 60 percent of profits greater than the rate of return on capital; this legislation also increased the income tax for incomes start at $50,000 from 1.5% to 18.3% between 1915 to 1918,
39 John P. Frank, "Recapturing War Profits - A Civil War Experience," (1947), Articles by Maurer Faculty, https://www.repository.law.indiana.edu/facpub/1872, 215. 40 Frank, 216. 41 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 11. Bloch 24 respectively.42 The excess profits tax was designed to tax the profits that exceed the rate of return on capital, so no individual or company could keep the increased profits from war production.
Financing World War I
On April 16, 1917, Congress introduced H.R. 2762 which allowed the Treasury to offer defense bonds to the American public. This legislation allowed the debt to be sold for security and defense, not exceeding $5 billion. Liberty Bonds were designed to have interest payments
“…not exceeding three and one-half per centum per annum, as the Secretary of the Treasury may prescribe.”43 Over the course of the war, there were four separate bond drives and one final
“Victory” loan drive, during which interest rates on the bonds fluctuated. These marketable bonds shared similar structure to other bonds offered at the time, which were sold at par value.
This bill also emphasized the need for bonds to be offered to all Americans, rather than wealthy individuals or corporations; “…under such regulations prescribed by the Secretary of the
Treasury as will give all citizens of the United States an equal opportunity to participate therein…”44 This philosophy was shared later by Secretary of the Treasury Henry Morgenthau
Jr. when the Savings Bonds were introduced eighteen years later.
America entering World War I caused a jumpstart in the American economy. Federal spending reached new heights and the unemployment rate dropped significantly. In 1914, when
World War I broke out in Europe, federal spending was around $65 million per month, or 2.28
42 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 11. 43 “H.R. 2762, An Act to Authorize an Issue of Bonds to Meet Expenditures for National Security and Defense . . . (Liberty Loan Act), April 16, 1917,” U.S. Capitol Visitor Center, Accessed March 8, 2021, https://www.visitthecapitol.gov/exhibitions/artifact/hr-2762-act-authorize-issue-bonds-meet-expenditures-national- security-and. 44 “H.R. 2762, An Act to Authorize an Issue of Bonds to Meet Expenditures for National Security and Defense . . . (Liberty Loan Act), April 16, 1917.” Bloch 25 percent of GDP; by January 1919, federal spending reached a peak of $2,087 million, or 32.43 percent of GDP.45 The federal government needed to expand the military and government defense spending quickly to meet the demands of the war. When soldiers get deployed for war, that leaves job openings for potential workers at home. Between 1914 and 1918, nearly three million servicemen were enlisted in the military and over half a million men were added to government positions.46 According to the United States Census Bureau, unemployment fell from
3,120,000, (7.9% of the labor force) in 1914, to 2,043,000 (5.1% of the labor force) in 1916, and finally to 536,000 (1.4% of the labor force) in 1918.47 The unemployment rate appeared significantly lower than the peacetime average because the military draft removed a majority of young men who would have been searching from their first job from the labor force.48
McAdoo and the Treasury wanted every American to share in the financing of the war.
This can be seen through the cheap denomination of bonds; for as low as $50, an American citizen was able to buy a government bond to help support their country during a time of war.
Between the five Liberty Loan drives, Americans purchased $445.60, on average, worth of bonds; it is also important to note that the average subscription amount was highest during the first two loan drives, averaging $759 and $491, respectively.49 Not only could Americans, even those with little incomes and savings, buy a bond, but they were also able to join a bond installment plan. This accessibility allowed Americans to purchase bonds without having to pay upfront, which was crucial to encouraging poorer Americans to invest. It was possible for
45 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 5. 46 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 6. 47 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 6. 48 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 6. 49 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 91. Bloch 26 someone to purchase a $50 Liberty Bond for only $4 up front, and then pay twenty-three weekly payments of $2.50
Liberty Bonds were primarily marketed toward the small saver, however, McAdoo designed the bonds so every income group was able to purchase them. Experienced investors knew about the importance and yield of bonds, but advertising appealed to the small, new investor. Bond denominations overall ranged from $50 to $100,000, but most investors purchased the smaller denominations. By 1920, the percentage of all outstanding bonds totaled
29.31% for the $50, $100, and $500 denominations; the $1000 bond contributed to 41.49% of all outstanding bonds purchased.51 This means that almost one-third of all bonds purchased were in the three smallest denominations and almost half of all bonds were in the $1000 bond. While
$1000 at the time was a sizeable investment, it was considerably smaller than the $5,000,
$10,000, $50,000, or even the $100,000 bond. Around 70.8% of all Liberty Bonds purchased by
1920 were in denominations less than $1,000, inclusive.52 This proved that the bond campaign worked in convincing the small saver to take stock in their country.
In order to increase the appeal of Liberty Bonds to all potential investors, primarily those in the middle class, McAdoo designed the bonds to have certain tax incentives. According to
H.R 2762, the Liberty Bonds, “..shall be exempt both as to principal and interest from all taxation, except estate or inheritance taxes, imposed by authority of the United States or its possessions, or any state or local taxing authority; but such bonds shall not bear the circulation privilege.”53 Bonds could not be used as a form of currency for deals, however, they could also
50 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 91. 51 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” National Bureau of Economic Research, Working Paper Series: 11919 (2006), 37. 52 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” National Bureau of Economic Research, Working Paper Series: 11919 (2006), 37. 53 “H.R. 2762, An Act to Authorize an Issue of Bonds to Meet Expenditures for National Security and Defense . . . (Liberty Loan Act), April 16, 1917,” U.S. Capitol Visitor Center. Bloch 27 be used as collateral for bank loans.54 Tax exemptions allowed investors, especially the low- income investors, to keep a majority of the profits from investing in the American government.
McAdoo argued that this would generate sizeable amounts of income for the patriotic, individual investor, saying, “If the war continues for a long period and the bond issues increase greatly, there will…come to be a class of people…who are in the enjoyment of great incomes…free from tax burden.”55
It was important for McAdoo to make sure that the Liberty Bonds were financially desirable to the average American compared to other bonds offered at the time. According to
Rockoff, the First Liberty Loan, from May to June 1917, yielded less than the municipal bonds of the time, however, the Fourth Liberty Loan shared similar yields, primarily due to tax exemption changes.56 Rockoff argued that without the added incentives, Americans would have purchased regular corporate or government securities because the returns were similar, if not better. Patriotism was a motivator for Liberty Bonds specifically, however, special enhancements of these bonds encouraged Americans to buy them over other securities.
McAdoo and the Treasury did not want Liberty Bonds selling below par. Bonds selling below par created a bad image for the Treasury, as Americans selling their bonds on the secondary market would lose money. However, almost all of the Liberty Bonds were selling below soon after they were issued. By March 1918, the First Liberty Bond at 3.5% coupon was selling at $97.86 for a $100 bond, while the Second Liberty Bond was selling at $96.34.57
Keeping the bond prices high was the main reason for the tax exemptions mentioned above;
54 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 12. 55 Kenneth Garbade, Birth of a Market: The U.S. Treasury Securities Market from the Great War to the Great Depression, (Cambridge: MIT Press, 2012), 74. 56 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 12. 57 James L. Butkiewicz and Mihaela Solcan, "The Original Operation Twist: The War Finance Corporation's War Bond Purchases, 1918-1920," Financial History Review 23, no. 1 (04, 2016), 6. Bloch 28 buyers would have been willing to pay a premium knowing that the profits from the bonds would not become taxable income. This philosophy worked in theory, however, the Fourth Liberty
Loan, which had the tax benefit, was selling below par at $94 by December 1918.58 Rockoff argued that the decline in Liberty Bond prices was due to rising interest rates and social pressures; once purchasers advertised their Liberty Bond purchase to others, some Americans no longer felt a reason to hold onto the bonds and sold off the Liberty Bonds.59 The Treasury was unable to successfully keep the value of bonds above par.
Over the course of the war and the different loan drives, McAdoo constantly adapted the interest rates of the bonds so they would remain appealing due to changing interest rates.
Between the four loan drives, the interest rate on Liberty Bonds increased from 3.5% to 4.25%.60
Typically, interest rates rise during war time, due to rising wages, spending, and a mean to curb inflation, then fall once the war ends. The maturity on the bonds also fluctuated between 10-and
30-year maturities. Keeping the bonds within similar yields as corporate or municipal bonds was key to the success of the Liberty Bonds. McAdoo preferred creating tax exemptions on Liberty
Bonds rather than raising the interest rates, saying
My judgement, after the experience we had with the first Liberty Bond…is that a 4
percent bond…exempt from United States normal income taxes…will appeal to a greater
number of our people and to a larger amount of the investment wealth of this country
than any other bond we can issue.61
58 Butkiewicz, 26. 59 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 12. 60 Eric Hilt et al., “When Uncle Sam Introduced Main Street to Wall Street: Liberty Bonds and the Transformation of American Finance,” National Bureau of Economic Research, Working Paper Series: 27703 (2020), 30. 61 Garbade, 74. Bloch 29
The Liberty Bonds of World War I were marketable, meaning that their price was decided by outside market forces and interest rates. Families that needed liquidity after previously purchasing a bond would risk losing money if interest rates rose. Bond prices and interest rates were inversely proportional; if interest rates rose, bond prices decreased and vice versa. Many American families lost money when purchasing Liberty Bonds due to the rising interest rates of the late 1910s. Interest rates rose, particularly in 1917, as the United States government borrowed heavily, and economic activity rose due to a wartime demand for munitions.62 As economic activity continued to rise after World War I concluded, interest rates continued to rise into the first half of the 1920s, reaching record levels.63 This spike in interest rates lowered the market price of Liberty Bonds and Americans who needed money were forced to sell the bonds for a potential loss.
Each of the five different Liberty Loan Drives between 1917 and 1919 offered a bond with a different structure. This was meant to keep the bond competitive with other municipal and corporate bonds at the time. When purchasing a bond, investors sought a high coupon rate and a low maturity date; this allowed the investor to get the greatest return on the investment while lowering the risk of interest rate changes or default possibilities. As one would expect, the number of subscriptions for each bond drive increased as the coupon rate rose, and the maturity decreased. McAdoo wanted the bond drives to appear as over-subscribed, noting in his book
Memoirs,
62 Federal Reserve Bank of St. Louis, "Interest Rates, 1914-1965," Federal Reserve Bank of St. Louis., Review (Federal Reserve Bank of St. Louis: October 1965), Accessed March 8, 2021, https://fraser.stlouisfed.org/title/820/item/24375/toc/419701, 5. 63 Federal Reserve Bank of St. Louis, "Interest Rates, 1914-1965," Federal Reserve Bank of St. Louis., Review (Federal Reserve Bank of St. Louis: October 1965), Accessed March 8, 2021, https://fraser.stlouisfed.org/title/820/item/24375/toc/419701, 5. Bloch 30
Suppose hundreds of millions of the bonds were left on our hands? The moral effect of
such a failure would be equal to a crushing military disaster. It would not only dishearten
our own people, but also the nations across the sea whose fortunes were joined to ours;
and it would give our enemies new confidence and courage.64
In this quote, McAdoo proved that the bonds, although designed for financial purposes, served as an American morale booster and sign of strength. If nobody purchased bonds, it would have displayed that the American people had no faith in the American war effort.
Despite the efforts of the Treasury, the rate of over subscription decreased as the war progressed; the First Liberty Loan had an over-subscription rate of 52% while the Third and
Fourth Liberty Loans had rates of 40% and 17%, respectively.65 One may justify this decrease due to an increase in the amount of bonds offered, as increasing the total amount offered gave more people a chance to purchase bonds, therefore, the over-subscription rate would have been lower. However, the Second and Third Liberty Loans both offered $3 billion in Liberty Bonds, but the oversubscription rate decreased from 54% to 40%.66
The difference in the Second and Third Liberty Loan Drives showed the decreasing interest of the public in purchasing Liberty Bonds. This may be a result of poor marketing, the
United States’ performance in the war, or simply Americans purchasing bonds during the First
Liberty Loan Drive beginning June 15,1917. McAdoo needed to keep Liberty Bonds attractive to the investor, as these were marketable bonds and their value depended on market forces. The
Second Liberty Loan began on November 15, 1917, issuing a 4.00% coupon with a 25-year maturity, that was callable in 10 years.67 The Treasury issued $3 billion, while subscriptions
64 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 14. 65 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 66 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 67 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. Bloch 31 totaled $4.6 billion, creating an over-subscription rate of 54%, an increase of 2% from the First
Liberty Loan Drive.
One would expect that if the Third Liberty Bond would become even more desirable than the Second Liberty Bond, sales would have been even higher. This drive, beginning on May 9,
1918, offered bonds with an increased coupon of 4.25%, with a 10-year maturity, which were not callable.68 This means that both the Second and Third Liberty Bonds could both be redeemed 10 years after purchase, with the Third Liberty Bond having a 0.25% increase in coupon rate.
However, this Third Liberty Loan drive would have been less successful in McAdoo’s perspective, as he emphasized the need for over-subscriptions.
The oversubscription of bonds throughout the war showed that Americans were willing to buy them, no matter how America was performing in the war. The bonds gained greater attraction due to their monetary benefit, such as an increased coupon rate; however, it is impossible to know the true reason as to why investors bought the bonds. The fact that all of the bonds were oversubscribed proves that Americans supported the war, whether it was due to patriotism or their personal financial gain. While the rate of oversubscription did decrease during certain loan drives, the amount of bonds subscribed during the final two Liberty Loan
Drives were higher than any of the previous three.69 This decrease in subscriptions startled the
Treasury’s confidence in funding the war because they accepted the total amount of subscriptions, $4.177 billion, the first time the Treasury did so in World War I.70 In the previous two bond drives, the Treasury only accepted slightly above, or the exact amount worth of bonds offered.
68 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 69 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 70 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. Bloch 32
Liberty Bond Marketing Campaign
One of the major successes of the Liberty Bonds was the effective marketing. Secretary
McAdoo centered the Treasury’s advertising efforts around duty and patriotism. McAdoo said after the Liberty Loan Drives that, "We [The Treasury] capitalized the profound impulse patriotism.”71 The advertising of Liberty Bonds took place all over the country and in many different forms. McAdoo realized the importance of engaging with American investors in all civic institutions, including churches and schools. The use of posters, songs, and celebrities helped connect the average American to the war. Secretary McAdoo believed that a passionate and patriotic audience would generate significant bond sales; an aspect of Civil War financing that Secretary Chase failed to create. Secretary McAdoo said that the lack of patriotic marketing was a “…fundamental error…Chase did not capitalize the emotion of the people, yet it was there and he might have put it to work.”72
The Treasury employed thousands of Americans to create McAdoo’s “financial front.”
This was McAdoo’s “army” of Americans who helped fight the war at home through funding;
McAdoo believed, “A man who could not serve in the trenches in France might nevertheless serve in the financial trenches at home.”73 More than 20 percent of the US population bought bonds throughout the war, while over two million Americans helped sell bonds during the third and fourth Liberty Loan Drives.74 Every American, including women and children, had their
71 Gordon Streib, “Idealism and War Bonds: Comparative Study of the Two World Wars,” The Public Opinion Quarterly 12, no. 2 (1948), 275. 72 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 91. 73 Earl Ferdinand Glock, "The Search for a Balanced Economy: The Origins of the Mortgage Market and Bank Bailouts, 1913-1939," Order No. 10478836, (Rutgers The State University of New Jersey - New Brunswick, 2016), https://login.proxy.lib.fsu.edu/login?url=https://www-proquest-com.proxy.lib.fsu.edu/dissertations-theses/search- balanced-economy-origins-mortgage-market/docview/1877537512/se-2?accountid=4840, 119. 74 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 91. Bloch 33 own duty to serve in the war, whether it was fighting abroad, purchasing bonds, or advertising loan drives.
Many of the images used for advertising were reminiscent of old, revolutionary
Americana. Posters showed American soldiers dependent on the workers at home, whether it was for the Red Cross, purchasing bonds, or enlisting to fight. These strong images spoke to the heart of the American public who were now given a public duty to help their country. McAdoo argued that the government needed “…to capitalize on the emotion of the people” to sell bonds and help Americans identify with the war effort.75 Advertising the war effort using patriotism guilted the average American into supporting their country, and once they officially helped, it provided a sense of pride in their work and country.
War advertising became a common aspect of American society during the war. Posters were seen everywhere, from banks to churches to schools. These posters often displayed
American soldiers fighting and marching abroad, with some slogan or tagline asking the viewer to purchase bonds. In one such poster, it showed an American woman waving an American flag in a heavenly manner, looking as if she was an angel guarding the marching American soldiers.76
This advertisement poster for the Third Liberty Loan drive said “FIGHT OR BUY BONDS”; where “FIGHT” was written in red and everything else was written in blue. The use of red alarmed the viewer and connected the word “FIGHT” to danger, fear, and blood. The strong imagery conveyed to the viewer is that they only have two options to help their country, and while most would choose not to enlist, they had to purchase bonds.
75 Glock, 119. 76 Howard Chandler Christy, “Fight or Buy Bonds /Third Loan Liberty Loan,” National Museum of American History, Smithsonian Institution Accessed March 4, 2021, https://www.si.edu/object/fight-or-buy-bonds-third-loan- liberty-loan:nasm_A19990258000.
Bloch 34
Along with the divine, Americana imagery, Liberty Bonds instilled a sense of American pride and duty through their name itself. Patriotism was the primary marketing tactic and the bonds needed to appeal to every American. Proud of their heritage and their national ideals, the name “Liberty Bonds” made the average investor feel as though they were investing in democracy. In the Civil War, bonds were named based on when they were callable and when they were redeemed, such as the common 5-20 bond.77 If the bonds had a generic name,
Americans would not have felt a personal or patriotic connection to it. Wilsonian philosophy dictated that America was “making the world safe for democracy,” and when Americans purchased bonds, the marketing displayed that they were directly supporting that goal.
Once World War I ended, the Fifth Loan Drive renamed the Liberty Bonds to “Victory
Bonds.” The change in name shifted the goal of purchasing the bonds from encouraging democracy to praising the United States’ victory. The sales of this final loan drive decreased from the previous drive because the threat had disappeared. Americans wanted to help their country win the war, and once that goal was accomplished, there was no need to buy the bonds.
Savvy investors knew of the tax benefits compared to other bonds offered; however, the average
American who was influenced by patriotic marketing had less desire to purchase the bonds. If purchasing bonds was equivalent to fighting abroad, as the marketing dictated, once soldiers stopped fighting, Americans at home stopped doing their duty as well.
In order for the advertising effort to succeed, the Treasury called on the Federal Reserve to act as the head organizer for the loan drives. Liberty Loan committees were formed under the leadership of the Federal Reserve, which then created state-wide Liberty Loan committees, which established their own communities based on their own rural and urban areas.78 These
77 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 12. 78 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 91. Bloch 35 local committees were led by the heads of each respective community, from business organizations to bankers to newspaper writers. This allowed the Treasury to provide each community their own personalized form of advertising based on the values of each community, whether it was through church or business or government.
One underlying benefit of patriotic advertising was creating a sense of shame for
Americans who did not purchase Liberty Bonds. When an American purchased a bond, they were able to advertise that information to everyone. Similar to the “I Voted” sticker seen today during elections, Americans were given pins that showed that they purchased bonds. One such pin, with the red, white, and blue colors, stated “I gave for the boys, did you?”79 This pin not only gave the holder a sense of pride, but it also shamed those who did not purchase bonds. A communal sense of guilt for those who did not purchase bonds would have been a driving factor for one to purchase a bond. While there was a lack of public opinion polls that showed the reason why investors purchased Liberty Bonds, one can infer that peer-pressure from one’s community would persuade at least some Americans to buy bonds.
Liberty Bond Civic Engagement
The marketing tactics Treasury Secretary McAdoo were influenced by Progressive Era ideals, such as organizing, voluntarism, and education. A major aspect of the marketing successes was done through the use of public institutions. Engaging in all aspects of life reminded people about the bond drives and helped promote the war efforts. It also establishes an ethos for the loan efforts if a certain group endorses it. As a way to appeal to kids, the Treasury sought out the aid from the Boy Scouts of America. In May 1917, President Wilson called on
79 “United War Work Campaign Pin,” Smithsonian Institution, accessed March 7, 2021, https://www.si.edu/object/united-war-work-campaign-pin:nmah_1317474. Bloch 36 the Boy Scouts to help sell bonds and promote the American war effort. Over the course of the five loan drives, the Boy Scouts generated over $10 million worth of bonds purchased.80
The use of the Boy Scouts illustrates the grassroots mentality behind the Liberty Loan
Campaign. The Treasury established an ethos in American culture through values, youth, and civic organizations rather than through businesses and corporations. McAdoo traveled across the country preaching the benefit of Liberty Bonds. In one address to a high school, McAdoo illustrated the patriotic appeals of the Liberty Bonds to the American youth.
Every boy and girl in this room can do a noble part. The Boy Scouts and the Girl Scouts
of this country have been doing splendid work. Let everyone be animated by the thought
that every penny you save that you would otherwise spend upon pleasure of any kind-
pleasures of dress or of appetite — everything that you save of that character and put
away for the purpose of investing in these bonds of your Government is a direct help to
every soldier and sailor who is risking his health and all that is dearest to him in this
conflict. You can all do that much.81
School addresses generated local support because the Treasury legitimized the local area and organizations by visiting and acknowledging the help the various regions gave.
Posters were also targeted toward children to teach them about bonds and the war. In one specific poster, it showed two children, a boy and a girl, holding hands and looking up at an old,
American soldier; above them the poster read “Help him win by Saving and Serving.”82 The goal of the poster was to show children that they are directly helping American soldiers and that
80 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 92. 81 William Gibbs McAdoo, “Address by Hon. W. G. McAdoo, Secretary of the Treasury: at Madison High School, Madison, Wisconsin, October 3, 1917,” Library of Congress, Accessed March 8, 2021, https://archive.org/details/addressbyhonwgmc01mcad/page/n1/mode/2up. 82 John Joseph Pershing, National Portrait Gallery, Smithsonian Institution Accessed March 4, 2021, https://www.si.edu/object/john-joseph-pershing:npg_NPG.84.79. Bloch 37 soldiers depend on them. The fact that the poster illustrated an older American makes the poster feel more nurturing and family friendly, as if the children were helping their grandparents.
Legitimizing the children’s efforts encouraged them to sell bonds and save their money to purchase stamps. It also encouraged the children to serve their country if their country called on them, which it would eventually do around twenty years later.
Separate states encouraged children to sell and advertise bonds in their own way.
Michigan, students in English classes were allowed to work on the Liberty Loan drives by writing themes, speeches, and posters.83 Local towns and communities used these posters and advertisements to persuade potential buyers, which not only increased sales but encouraged and legitimized the children’s efforts. The school children of Michigan sold over $1.5 million worth of Liberty Bonds alone.84 Illinois had a similar approach of engaging with children, where each school in the state competed to sell the most bonds; the top three schools who sold the most bonds per capita of enrollment were awarded a flag to display. Students competed with one another to sell the most bonds by making cards and posters. This was an effective from of marketing, as the children of Chicago alone sold over $2,130,350 worth of bonds.85
Not only was working with children groups beneficial for sales, but it also instilled patriotic values in the youth. McAdoo wanted all members of American society to be part of his
“financial front,” including children. Children did not have any money to purchase bonds, but that does not mean that they were incapable of helping persuade others to purchase bonds, as seen through the Boy Scouts. American children were also able to purchase War Saving Stamps
83 National Woman's Liberty Loan Committee (U.S.), Report of National Woman's Liberty Loan Committee for the First and Second Liberty Loan Campaigns 1917,1918, Accessed on March 8, 2021, https://fraser.stlouisfed.org/title/841, 32. 84 National Woman's Liberty Loan Committee (U.S.), Report of National Woman's Liberty Loan Committee for the First and Second Liberty Loan Campaigns 1917,1918, 32. 85 National Woman's Liberty Loan Committee (U.S.), Report of National Woman's Liberty Loan Committee for the First and Second Liberty Loan Campaigns 1917,1918, 32. Bloch 38 for twenty-five cents that could eventually be exchanged for a “war savings certificate”; a patriotic marketing technique that Secretary Morgenthau would later adopt.86 This allowed every child to follow in their parents’ footsteps, support their country, and keep morale high.
While the program was designed for purely patriotic means, it generated $0.93 billion, or 3.5%, of all bond sales.87 Less than five percent of sales may not appear as a financial success, but considering children, with no money, power, or organized structure, were able to sell almost $1 billion, the civic engagement must be viewed as a success.
Liberty Loan advertising also marketed towards women. In order to appeal to women,
Secretary McAdoo’s wife, Eleanor McAdoo, created the National Women’s Liberty Loan
Committee in May 1917.88 The National Women’s Liberty Loan Committee worked with other women’s groups to attract volunteers for bond drives. Hundreds of thousands of women from many different groups, including the Daughters of the American Revolution, the National
Grange, the Women’s Suffrage Association, and the Young Women’s Christian Association, joined the committee. While the original goal of the group was to promote the bonds, their influence became greater than anticipated and the group focused on directly selling the bonds.
The structure of the entire group was similar to the federal reserve’s selling structure at the time: each state had their own respective chairwoman responsible for the organization and engagement of their state, while there were twelve federal chairwomen based on each federal reserve district to organize national sales.
The National Women’s Liberty Loan Committee generated more sales than anyone expected and enlisted more women than anticipated. In the Second Liberty Loan, over sixty-
86 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” 23. 87 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” 23. 88 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 92. Bloch 39 thousand women sold bonds totaling $1 billion.89 Once word of their success and influence went through the different groups, more women enlisted into the committee to help sell bonds. Only seven months after the Second Liberty Loan, the Third Liberty Loan had over five-hundred- thousand women volunteering to sell bonds, where again women were credited as selling more than one billion dollars-worth of bonds.90 The massive increase in volunteers proved that
McAdoo’s civil engagement with women’s groups helped maintain a positive public opinion of the war. The Treasury later thanked women for their volunteer efforts:
No mere recital of results achieved can show the extent of the service which women have
given to the Nation through their participation in war finance. That hundreds of thousands
of women assumed the burden of a new kind of labor, not for themselves but for their
country, is one of the most striking and characteristic facts in relation to the women of
America that the war has developed. The Liberty loans have afforded a new proving
ground where the women of the Nation have accepted the opportunity to demonstrate
again their patriotism, their ability, their consciousness of the obligations of citizenship,
and their steadfastness of soul in the great and terrible crisis which our country has met.91
The committee remained dedicated to the patriot cause of selling bonds that after the final
Victory Loan concluded, the group vowed to remain mobilized and connected in case the
Treasury called on them once again.
89 United States. Department of the Treasury, "Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1918, with Appendices," Annual Report of the Secretary of the Treasury on the State of the Finances (Fiscal Year Ended June 30, 1918), Accessed on March 8, 2021, https://fraser.stlouisfed.org/title/194/item/5564, 67. 90 United States. Department of the Treasury, "Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1918, with Appendices," 67. 91 United States. Department of the Treasury, "Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1918, with Appendices," 67. Bloch 40
Churches were also used as a way for community members to get informed about the
Liberty Loan Drives. Knowing that most Americans are religious and community oriented, engaging with churches was an effective way to reach out to every community member, regardless of class. The Federal Reserve developed pamphlets and handbooks for clergymen to teach the American public about the importance of Liberty Bonds and encourage purchasing them. The Seventh Federal Reserve district, centered around the Midwest, titled their handbook
Suggestions for Liberty Loan Sermons.92 Clergymen delivered these sermons to the public on
“Liberty Loan Sundays” all over the country. Available bond sales data suggested that the
Seventh Federal Reserve district was successful in their bond advertising efforts, as the upper
Midwest had the highest rate of subscriptions; Iowa and Minnesota counties had some of the highest rates in the country, “places with…strong civil society institutions…”93
The Treasury also published handbooks for traveling speakers who gave speeches across the country about the benefit of Liberty Bonds. These books instructed speakers how to engage with different communities and what points should be emphasized. One of the persuasion tactics that these handbooks emphasized was the use of slogans and repetition.
In order to get the benefit of repetition these ideas should, so far as possible, be played up
in every from of publicity-oral, printed and pictured- that is used. If, for instance, we
adopt as a dominating idea ‘finish the job,’ this thought should be brought out in speech,
advertisements, posters, cartoons, and pamphlets…There are two parts to every
successful Liberty Loan campaign: Publicity, which sows the seed, and Personal
Solicitation, which reaps the harvest.94
92 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 92. 93 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 97. 94 United States Treasury War Loan Department, Victory War Loan: Handbook for Speakers (Treasury Department War Loan Organization, 1919), 42. Bloch 41
These handbooks outlined how the traveling advertisers should interact with different communities based on what they value. Each speaker would go to different areas and talk to their local Liberty Loan committees about how they should function. It was the speaker’s duty to make sure that each community was properly advertised and marketed, as well as engage with the constituents directly. The Treasury encouraged civic engagement through patriotic bodies, churches, trade and labor organizations, women’s organizations, and prominent society members.95 It was not the speaker’s job to lecture the American people into buying bonds, but to hold meetings with music, organizations, food, and a positive atmosphere; the winning,
American spirit would convince people to help their country win the war.
It is difficult to measure how the influence of the bond drives on public support for the war. There were no available Gallup Polls or other measures on public opinion of World War I.
In this paper, popular support for the war is illustrated through the sale of bonds. Historians, such as Hugh Rockoff, argued that patriotism was not a major factor in the success of Liberty
Bonds and that it was the appeal of tax-free incentives. While Rockoff’s argument does have merit, the marketing and advertising of the Liberty Bonds appealed to Americans and brought new investors into the market. Very few Americans, especially those in the lower classes, had any investments; Liberty Bonds provided an entry into the securities market. The experienced and knowledgeable investor would know how Liberty Bonds compared to municipal bonds at the time, but the average, small saver would have purchased Liberty Bonds to support their country.
Without the extensive advertising, the average American would have little care or knowledge about the bond drives.
95 United States Treasury War Loan Department, 45. Bloch 42
Liberty Bond Structural Failure
The main failure of the Liberty Bonds was their financial structure. The value of these marketable bonds depended on interest rate changes and inflation rates as the bond matured.
While marketable bonds were not a new phenomenon, new investors, especially those which
McAdoo hoped would purchase bonds, were surprised to see how their bond’s value would potentially decrease once the war ended. This is due to rising interest rates to counteract the rise in consumer spending due to increased incomes and production to meet war demands. Rising interest rates mean that bond prices decrease because the bond has less value as investors can purchase a bond with a higher coupon rate; the price in the bond must decrease to be considered a valuable investment.
The Treasury sold Liberty Bonds as a way to curb inflation by having every citizen invest their money in a long-term security instead of over-stimulating the post-war economy. The main issue with long-term investments is, as one would expect, centered on the time to maturity.
Investors who needed increased liquidity were forced to sell off their investments before maturity, risking the principal of the bond and all future interest payments. Poorer Americans who purchased Liberty Bonds would have an increased desire for liquid money than rich
Americans who typically have an excess amount, particularly emergencies.
Americans primarily pursued manufacturing jobs due to the high wartime demand of goods and munitions. Engineers, welders, and draftsmen, and foremen were some of the most valuable positions because factories prioritized military over civilian production. Farmers were another vital job that Americans took up in order to meet food demands in Europe before
America entered World War I. According to Rockoff, 41,000 Americans joined the farming sector between 1914 and 1916, but this number declined over time with Americans leaving the Bloch 43 sector to join the war effort; there was a 291.42% increase in military personnel while there was a 1.40% net loss in the farming sector, between 1914 and 1918.96 Farming and producing war munitions for Europe helped the United States economy end a period of contraction in 1914 and enter a period of expansion in 1915. America was able to transform from a net debtor on international investments of $3.7 billion in 1914 to a net creditor of the same amount in 1919.97
Once World War I ended, Americans began redeeming their bonds. One would expect that redeeming a bond prior to maturity was due to liquidity needs. One of the greatest successes of the Liberty Bonds was the extensive marketing; however, in doing so, it assured the new investor about the credibility and security of their new investment. Henry J. Kaiser, a major figure during World War I defense production, believed that the United States government displayed too much confidence in the investment, especially toward new investors, which created a false sense of security about the value of the bonds over time; Kaiser acknowledged that using these bonds as a form of acceptance for purchases, “…will…give…tremendous impetus to the government’s present financing efforts by stimulating to the citizen to think that his War Bond has become the down payment on his new home, or perchance, that his accumulated War Bonds have purchased his new home.”98 Americans believed that this new investment was guaranteed to generate a profit for them and that the bonds will always contain value; why would the government lie to the American people?
Redemption rates quickly outnumbered sale rates once the war ended. Americans continued purchasing Liberty Bonds, particularly the Victory Bonds during the fifth and final
96 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 30. 97 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960, (Princeton University Press, 2008), 199. 98 Herbert Spero and John A. Leavitt, "Inflation as a Post-War Problem," Journal of Political Economy 51, no. 4 (1943), Accessed March 8, 2021, http://www.jstor.org/stable/1826805, 358. Bloch 44 loan drive, but not near the level of sales during the war. Between 1918 and 1919, redemptions as a percentage of sales were 0.8% and 18.2%, respectively.99 This showed that only a very few percentage of people cashed in their bonds, most likely for emergencies. This also occurred while the Treasury still promoted the purchase of Liberty Bonds, therefore potential investors would have been discouraged from turning in their bonds and be more inclined to continue purchasing securities. After 1920, the year after World War I ended, redemptions as a percentage of sales dramatically increased. From 1920 to 1923, redemptions peaked at 615.4% and troughed at 121.4%.100 Early redemptions can be viewed as a negative effect of patriotic appeals because once the main purpose for purchasing Liberty Bonds disappeared, redemptions increased. Some Americans believed that they loaned their money to the government to fight the war and now that the war ended, they were entitled to their money back. The problem with that philosophy, especially when engaging in long-term investments, was that investors were disappointed when their returns were far less than anticipated.
When Americans redeemed their bonds prior to maturity, they received only part of their investments back, with minimal interest. Not only did that damage the credibility of the
Treasury because investors believed that they were lied to, but it was also counterintuitive to the goal of limiting inflation. Investing in long term savings bonds, with maturities greater than ten years, allowed the post-war market to remain calm and steady without a sudden influx in disposable income. Because of bond redemptions, between 1918 and 1926, almost $1.295 billion was introduced to the money supply.101 With Americans refusing to hold onto their bonds, inflation inevitably rose with major increases in the money supply.
99 Spero, 358. 100 Spero, 358. 101 Spero, 358. Bloch 45
Americans redeeming their government bonds without purchasing new ones, along with the unprecedented government spending spelled disaster for controlling inflation. Government spending, as mentioned earlier, reached a peak of $2.087 billion in January 1919, or 32.43% of
GDP to meet war demands.102 This government money was spent on munitions, such as rifles, planes, tanks, and bullets, that directly entered the money supply. As a result of this massive influx in war time spending, as well as limited printing of money, World War I created a 48.6 percent increase in total money available during the war.103 Increasing the money supply by almost fifty percent within a four-year span drastically increased inflation rates to almost unsustainable levels. Bonds were able to absorb some of the damage from government spending, however it was not enough to curb inflation altogether; in order to compare the two, the $2.087 billion in government spending in January 1919 was less than half of the amount of bonds purchased in the Victory Loan Drive of April 1919, where $5.250 billion worth of bonds were purchased.104
One reason the Liberty Bond’s structure was a failure was due to the “gold clause.”
There was a provision in the Liberty Bonds that forced the United States government to pay for the present value of the bond in gold; “…Government bond for payment of principal and interest
‘in United States gold coin of the present standard of value’ must be fairly constructed; and its reasonable important as an assurance by the Government that the bondholder will not suffer loss through depreciation of the medium of payment.”105 Liberty Bonds had been backed by gold,
102 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 6. 103 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 29. 104 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 105 Charles Evans Hughes and Supreme Court of the United States, U.S. Reports: Perry v. United States, 294 U.S. 330, 1934, https://www.loc.gov/item/usrep294330/, 329. Bloch 46 and once the bond was redeemed, the bondholder was entitled to the value’s worth of gold. This was common for bonds at the time, as America was still on the gold standard.
There were no main issues regarding the “gold clause” until 1933, one year before the
Fourth Liberty Loans were callable. The Fourth Liberty Loan drive generated the greatest revenue out of any of the loan drives, with $6.989 billion worth of bonds purchased.106 This was the most successful of the loan drives, from both a revenue and subscriber perspective, with
22.778 million subscribers, more than four million more than Third Liberty Loan Drive.107
When it was time for the bonds to be redeemed, Americans, rightfully, believed that they would receive the full value of the bond in gold. However, in 1933, Congress suspended payments in gold to “assure uniform value to the coins and currencies of the United States.”108
This created a discrepancy between how the bonds would be redeemed and Americans would be compensated. Americans did not trust the recently created Federal Reserve notes and wanted their bonds redeemed in gold, which had intrinsic value. In 1934, when Americans were able to call their Fourth Liberty Bond, the Treasury defaulted on the payment of the bonds, which is the only federal bond in American history to default.109 This was later challenged in court, reaching the Supreme Court in Perry v. United States (1935). The Supreme Court ruled that Congress did violate their contract in regard to how the bonds would be paid, however, it would have been artificial enrichment if Perry, or any bondholder, received more than the bond was worth, due to the rising value of gold. The Supreme Court ruled that,
106 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 107 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” 36. 108 United States Congress, Joint Resolution To Assure Uniform Value to the Coins and Currencies of the United States, H.J. Resolution 192, 1933, https://www.loc.gov/law/help/statutes-at-large/73rd-congress/session- 1/c73s1ch48.pdf. 109 “The Liberty Loans,” The Joe I. Herbstman Memorial Collection of American Finance, Accessed March 8, 2021, https://www.theherbstmancollection.com/liberty-loans. Bloch 47
Because the government is not at liberty to alter or repudiate its obligations, it does not
follow that the claim advanced by the plaintiff should be sustained. The action is for
breach of contract. As a remedy for breach, plaintiff can recover no more than the loss he
has suffered and of which he may rightfully complain. He is not entitled to be enriched.
Plaintiff seeks judgment for $16,931.25, in present legal tender currency, on his bond for
$10,000.110
The default of the Fourth Liberty Loan angered many Americans who felt betrayed by their government, especially after The Great Depression. By 1934, gold prices declined around
40% due to Congressional legislation that prohibited the private ownership of most gold, as a way to stimulate the economy after the Great Depression.111 Bondholders received the current value of gold owed but through dollars instead of gold. Because gold became heavily devalued, the dollar-gold valuation created significant losses for bondholders, who wanted Fourth Liberty
Loan to be redeemed in a pre-1934 dollar-gold valuation.112 It was estimated that investors lost around $2.8 billion due to the value of gold declining.113
Uncontrollable Inflation
Historians debate why World War I inflation reached levels that the United States never experienced before or since. The money supply nearly doubled between 1914 and 1919, while the GNP only rose about 25%.114 A majority of historians believe that inflation was caused by a
110 United States Supreme Court, Perry v. United States, Legal Information Institute, Cornell Law School, 1935, Accessed March 8, 2021, https://www.law.cornell.edu/supremecourt/text/294/330. 111 Joshua Herbstman, “An Exception: A Brief History of the Default on the Fourth Liberty Loan,” Financial History, no. 114, (2015), Accessed March 8, 2021, https://archive.org/details/FH1142015Summer/mode/2up, 27. 112 Herbstman, 27. 113 Herbstman, 38. 114 Stephen Reed, “One Hundred Years of Price Change: the Consumer Price Index and the American Inflation Experience: Monthly Labor Review,” U.S. Bureau of Labor Statistics (U.S. Bureau of Labor Statistics, April 2014), https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the- american-inflation-experience.htm#_edn10. Bloch 48 combination of fiscal and monetary policy problems. Massive amounts of government spending and borrowing were not counterbalanced with strong monetary policy. The recently established
Federal Reserve was weak to combat the overgrowing money supply; using expansionary monetary policy only added to the inflationary disaster. Rockoff argues that, similar to the marketing of Liberty Bonds, the Federal Reserve gave Americans a false sense of security about the credibility and convenience of currency; Americans spent their money more recklessly as the
Federal Reserve served as an image of stability for the market.115
The Federal Reserve’s structure was weak and did not allow for a sizeable contraction of the money supply. Milton Friedman argued that the Federal Reserve had no power to offset any of the created funds in the money supply and the volume of gold, as America was still on the gold standard at the time. The Federal Reserve was able to create money through monetizing the debt and printing money but was limited in scope on how to limit the supply of money.
In order to do so, it would have had to impound and thereby keep out of bank reserves
and public circulation a sum of gold or other high-powered money equal in amount to the
gold inflow; or, alternatively to induce banks to lower the ratio of deposits to reserves by
enough to offset the effect of the inflow on the stock of money; or, finally, to induce the
public to lower the ratio of deposits to currency by enough to do so.116
The Federal Reserve could only persuade banks to keep their reserves high, but the demand for currency and consumer spending was too high for banks to increase their reserves.
Historians have no true answer to why there was such an increased demand for currency, as both
Rockoff and Friedman argue in their respective papers. All that was confirmed was that the money supply dramatically increased due to the Federal Reserve indirectly creating money
115 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 9. 116 Friedman, 212. Bloch 49 through the use of Federal Reserve notes; in which this fiat money accounted for 7% of the money supply before 1917 and 38% after World War I ended.117
This created a harmful environment between the American public and the Treasury because interest rates rose to meet inflation. Inflation rates during the war were unsustainable; between 1917 and 1920, the inflation rate peaked at 18% and troughed at 14.6%.118 This level of inflation struck fear into the American people because their investments may become worthless and generate a net loss, as seen in Perry v. United States. The rise in interest rates, along with a decrease in government spending, forced inflation rates to remain relatively stable during the post-war era. The Treasury was even able to combat inflation for two years, creating a negative inflation rate in 1920 and 1921. However, deflating the economy by 16.6% after inflation rates total 65.6% between 1917 and 1920 was by no means a success.119
The financial framework of the Liberty Bonds failed because it hurt both the Treasury and the American public. One of the main goals of offering government bonds was to control inflation and generate revenue. Liberty Bonds succeeded in generating revenue for the war, however, the everlasting effects of the Liberty Loan Drives damaged the country severely.
Inflation rates were unsustainable, reaching new heights never seen before or since. The
American public lost money on their Liberty Bonds due to rising inflation, interest rates, and a decline in the value of gold. Americans began to distrust the Treasury, not only because of massive inflation, but rising interest rates meant their bond’s value was declining. This created a terrible image for the Treasury, as Secretary Morgenthau later rebranded the Treasury and worked to calm the American fears of purchasing government bonds again.
117 Friedman, 217. 118 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet. 119 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021. Bloch 50
Rockoff argued that the success of Liberty Bonds was due to their financial incentives and not due to patriotism. Data showed that the return on Liberty Bonds was no different than municipal bonds. If patriotism was instrumental in the success of the bonds, then their yield should be higher than other bonds of the time. Rockoff’s data showed that the yields on the bonds were similar, both during and after the war. Between 1921 and 1925, the yield on municipal bonds and Fourth Drive Liberty Bonds remained around 4.2%.120 That would mean that Americans were purchasing the bonds as financial instruments and not due to patriotic means. If Americans purchased Liberty Bonds on account of the war, and not financial incentives, that would mean the yields would decrease once the war concluded; however, the yields follow the same trend that municipal bonds follow.121
Marketing the patriotic reason to buy bonds is more effective than advertising the financial benefits. The American people need a reason to buy bonds, other than serving as a financial instrument to save money. This was the main reason why the “Baby Bonds” of 1935-
1941 did not sell as well as Morgenthau hoped. Advertising and marketing were the key to offering bonds, and when a country offers them during wartime, Americans feel a sense of patriotic duty to support their country. When McAdoo issued Liberty Bonds, the bonds were
“over-subscribed,” which meant that there were more offers to buy bonds than bonds available; this proved that people supported the American war effort at great levels.
Liberty Bond sales after World War I prove that patriotism was the main reason why investors purchased the bonds. During the war, the Treasury advertised that purchasing bonds was the equivalent to fighting abroad. Once the armistice was signed, bond sales drastically declined. Between 1918 and 1919, over $1 billion worth of bonds were sold; only $169 million
120 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 27. 121 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 27. Bloch 51 were sold between 1920 and 1922.122 If Americans purchased Liberty Bonds as financial investments, sales would remain relatively constant once the war ended. The American soldier fighting abroad did his duty to win the war, and now returned home. The Liberty Bond purchaser did his duty to help his country win the war, and now they can stop purchasing bonds.
Bonds were marketed to help America win the war, and once the war was over, there was no longer a patriotic duty to purchase any more bonds. Purchasing bonds helped the American government finance their debts, however, no threat remained to encourage American participation.
McAdoo knew that the American people would be frustrated and upset financing an already unpopular war. In an attempt to calm the nerves and anger of Americans, McAdoo gave an address where he said, “We must be willing to give up something of personal convenience, something of personal comfort, something of our treasure – all, if necessary, and our lives in the bargain, to support our noble sons who go out to die for us."123 This quote forced citizens who were not enlisted to gain perspective about their unhappiness with their government. McAdoo’s quote also served as a great form of patriotic advertising because he guilts the American people into supporting the war financing because of “our noble sons who go out to die for us”. The
Treasury of the early 1940s used this effective form of advertising to sell Series E Bonds for
World War II.
Liberty Bond Legacy
The legacy of Liberty Bond’s should be considered both a failure and a success. Liberty
Bonds failed in two major ways: keeping inflation low and providing a solid financial framework
122 Spero, 358. 123 Richard Sutch, “Liberty Bonds,” https://www.federalreservehistory.org/essays/liberty-bonds. Bloch 52 to the American people. Historians debate why inflation rates were extraordinarily high during the time, even though Americans were purchasing billions of dollars’ worth of bonds. No matter what the case may be, the Liberty Bonds failed at keeping inflation rates low. As a result of this financial instability, interest rates rose which lowered the value of Liberty Bonds. In certain cases, $100 Liberty Bonds often sold for as little as $82 once World War I ended.124 The federal government even defaulted on the gold payments of the Fourth Liberty Loan. Americans who did their financial duty to their government lost money on their investments, which tarnished the reputation and credibility of the Treasury.
While the bonds failed from an inflationary and framework standpoint, the Treasury was able to fund over half of the entire war effort through the voluntary sale of bonds. The American people were committed to purchasing bonds to help their government and soldiers fighting abroad. The extensive marketing campaigns, working with different civic groups and communities, and emphasizing a patriotic duty convinced Americans to help their country fight at home. The Treasury learned how to successfully market bonds to the American public and encourage patriotic duty during times of war. Liberty Bonds, in all of their successes and failures, greatly influenced the Defense Bond campaigns of World War II because of the successful advertising and engagement with all members of society.
124 Morse, 22. Bloch 53
Chapter 2: Savings Bonds of 1935-1941
America underwent serious, unprecedented economic hardships between the sale of
Liberty Bonds in 1919 and Savings Bonds in 1935. The Great Depression, beginning in 1929, ravaged through American and global communities alike. Widespread poverty and starvation were rampant, especially in American cities. Unemployment reached new heights, with 24.9% of the labor force unemployed.125 As Americans lost their jobs and savings, public distrust began to build between the American people, the federal government, and the banking industry.
America, stuck in an economic standstill, required a cultural and economic change.
President Franklin Delano Roosevelt introduced a series of programs titled “The New
Deal” in 1933 to provide relief for Americans, recovery for the economy, and reform the market institutions after the Great Depression of 1929. The New Deal programs changed the relationship between civilians, businesses, and government, as the federal government created programs to employ American workers. The Tennessee Valley Authority, for example, was an electric-power business that introduced industry and electricity to the underdeveloped Upper
South region.126 The Social Security Act of 1935 established the Social Security program to give wealth stability and security to elderly Americans; a program with lasting economic consequences still witnessed today.127 Various regulatory and reform organizations, such as the
Securities and Exchange Commission and the Federal Deposit Insurance Corporation, aimed to stable economic conditions and make the economy less risky against the “hazards and
125 “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics, Accessed March 9, 2021, https://data.bls.gov/timeseries/LFU21000100&series_id=LFU22000100&from_year=1929&to_year=1939&periods _option=specific_periods&periods=Annual+Data. 126 David Kennedy, “What the New Deal Did,” Political Science Quarterly 124, no. 2 (2009), 266. 127 Kennedy, 253. Bloch 54 vicissitudes” of life, as President Roosevelt said.128 The New Deal tried to calm the fears of many Americans and put the American economy back on track, but it did not succeed in drastically cutting unemployment or recovering the economy.
The Treasury’s offering of Savings Bonds was not as thoroughly researched as Liberty
Bonds or Defense Bonds. This thesis seeks to introduce new information about the sale of
Savings Bonds, including numerical data and marketing tactics. These bond drives were overlooked due to the short lifespan and not having a clearly defined purpose. Some historians, and even Morgenthau himself, believed that the Savings Bond program failed for many reasons, such as not successfully appealing to the average investor or generating massive sales. Savings
Bonds did not fund a major war, have an extensive marketing campaign, or curb excess inflation.
However, the introduction of these Savings Bonds was crucial to the success of the Series E
Defense Bonds for World War II due to their new financial framework.
The legacy of the Savings Bonds program serves as the antithesis of the Liberty Bonds.
The Savings Bonds controlled inflation far more successfully than Liberty Bonds, even though inflation was not a major issue for the time due to the recent depression and rising interest rates prior to the issue of bonds. Liberty Bond’s main failure was their weak financial structure.
Marketable bonds proved to be a disaster for Americans who redeemed their bonds early; defaulting on the Fourth Liberty Loan also caused economic losses. Designing bonds that depended on market forces and interest rates was not in the best interest of the American public, especially with a worldwide economic catastrophe soon after World War I ended. Morgenthau needed to change the structure of these savings bonds in order to encourage the average
American to trust the government. These savings bonds were nonmarketable, meaning the bonds
128 Kennedy, 254. Bloch 55 did not fluctuate in price and there was no secondary market. Each bond had their owner’s name on it and the government recorded who purchased the bond, for what amount, and promised to pay back the loan with interest.129 Creating a strong, stable financial framework assured the average American that their bond was credible and that they would receive a profit for their investment if they redeemed it any time after six months or until the bond matured.
Savings Bonds failed to reach the small saver and generate passionate support, unlike
Liberty Bonds. When bonds were issued during a war, it gave the citizens a common goal to rally behind. Liberty Bonds succeeded in creating a national advertising and marketing campaign that included all citizens, as well as engage with different civil groups. These new savings bonds failed from a marketing and engagement standpoint. There was no nationwide marketing campaign to the extent of Liberty Bonds. Americans had no emphatic support for the program because of two reasons: there was no emotional plea to encourage the purchase of bonds or they simply did not know the program existed. The failure of the Savings Bond
Program proves that in order for a bond drive to be successful, the government must do three things:
1. Interact with their citizens in places they trust, in order to gain credibility.
2. Make sure advertisements are seen wherever possible so citizens cannot avoid missing
the campaign.
3. Most importantly, give the people a genuine reason to purchase the bonds.
The reason why Liberty Bonds, and later the Defense Bonds, succeeded in generating revenue was due to the patriotic and emotional marketing of the bonds. If the American people have no
129 Laurence Olney, The War Bond Story (United States Treasury Savings Bond Division, 1971), 1. Bloch 56 care or knowledge of the program, nobody will buy them. The Savings Bond Program did not provide a compelling argument to the American people to have a stake in their government.
Historians debated what the main reason behind Morgenthau’s peacetime bond experiment. France and Britain had their own respective savings bond programs which may have influenced Morgenthau to attempt one in the United States. Morgenthau, a staunch New
Dealer, may have introduced the program to build greater public trust between Americans and the federal government. While the reasons behind the program remain unclear, Morgenthau publicly outlined the goals and objectives for his new Savings Bond Program. The three main goals were:
1. To instill into the minds of the American people the habit of thrift.
2. To educate the people with respect to government securities.
3. To bind the people closer to their government, not only in financial affairs, but for its
total well-being.130
Although not explicitly stated, Savings Bonds would also give the United States government additional revenue to fund the costly New Deal program. Thus, on March 1, 1935, the United
States Savings Bond was introduced.
Successful Framework
Following Secretary McAdoo’s philosophy, Morgenthau sought to encourage every
American to purchase bond, regardless of income. Savings Bonds denominations ranged between $25 and $1,000, with an interest rate of 2.9%, compounding semi-annually with a ten- year maturity.131 The smallest Liberty Bond denomination was $50, and Morgenthau lowered
130 Laurence Olney, The War Bond Story (United States Treasury Savings Bond Division, 1971), 1. 131 Linehan, 9. Bloch 57 the price of Savings Bonds further to allow even poorer American a chance to invest. The bonds were known colloquially as “Baby Bonds” due to their low starting price. Not only were the bonds not marketable, but they were also sold on a discount basis. Bonds sold at 75% of the face value, meaning that a $25 bond sold for $18.75. This allowed the small saver, or those will little incomes, to have the ability to purchase a bond, even if they could not afford the complete principal paid up front. The Treasury offered a new Savings Bond each year between 1935 and
1941, named Series A, B, C, and D; the Treasury anticipated to name each Saving Bond with a different letter each year, but it was later dropped.132 The maximum amount that one person could purchase within a single calendar year was $10,000, because the Savings Bond was designed for the small saver.133
The Treasury needed to provide a reasonable return in order to entice Americans to purchase Saving Bonds over other securities. Offering a higher interest rate than securities targeted for wealthy individuals, banks, and corporations made Savings Bonds more appealing.134 Although a 2.9% interest rate was attractive for the time, most Americans wanted a safe and secure place to store their money, after the Great Depression ruined the reputation and credibility of banks.135
Allowing every American a chance to invest not only helped the bond purchaser, but it also helped the federal government. After witnessing the failures leading up to the Great
Depression, Morgenthau believed that the United States would have been better off if the public debt was spread out. The Great Depression was caused by a heavy use of credit that was not paid back, leading to the failure of banks, and thus people’s savings. New Deal philosophy
132 Olney, 1. 133 Morse, 23. 134 Morse, 22. 135 Linehan, 9. Bloch 58 dictated that every American should be involved in their government and banks should be regulated. This was also crucial due to the large amount of government spending as a result of the New Deal; a $4.8 billion appropriation bill in 1935 required deficit financing that was not controlled by very few purchasers.136 Spreading out the public debt gave Americans a share in their government, as well as took the responsibility from banks and wealthy investors; this would create a more stable method of financing if everyone bared the responsibility.
Many Americans adored President Roosevelt after his New Deal legislation and programs in 1933. President Roosevelt was a major asset to Morgenthau and the Treasury in establishing credibility and promoting the new saving bonds. Roosevelt and Morgenthau worked closely together to make sure that every American had an opportunity to purchase the bonds and recognized the bond’s trustworthiness. In one of Morgenthau’s best marketing tactics, President
Roosevelt bought the very first Series A Bond from Postmaster General James Farley and
Morgenthau, himself, on March 4, 1935 in a televised newsreel to establish legitimacy for the
Savings Bond Program. “Mr. Postmaster general, I want to buy from you now, six of the twenty-five-dollar bonds. One for each of my five grandchildren and one for myself.”137
Roosevelt proceeded to do some arithmetic to calculate how much he owed Farley and then handed Farley one-hundred and fourteen dollars, asking for fifty cents back; this little comedic bit made Roosevelt, Farley, and Morgenthau come off as more personable and less demanding that people invest in the government.
When creating the Savings Bond Program, Morgenthau wanted Savings Bonds to be a voluntary way of including the average and poorer American into American financing. When
136 Olney, 1. 137 “President Buys First Baby Bond,” Universal Studios, 1935, https://archive.org/details/1935-03- 04_FDR_Buys_First_Baby_Bond. Bloch 59 the Savings Bonds were introduced on March 1, 1935, Morgenthau spoke to the New York
Times about the Treasury’s plan for the bonds. Morgenthau explained that,
These bonds are designed as a convenient and profitable investment for the savings of
individuals investors…As you know, since the World War the government has done its
financing by large bond issues which have been taken by banks and corporations. Now
the treasury has decided that every citizen should have a chance to buy sound government
securities and become a partner in his government.138
Morgenthau believed that it was mutually beneficial to the United States government and to the
American people if everyone purchased Savings Bonds, as it provided an economic safety net in case of market disasters, such as the Great Depression. Encouraging everyone to save would also appeal to the masses and generate widespread support, as seen through the marketing success of Liberty Bonds in World War I.
The Treasury had a tumultuous relationship with the American people due to the financial failure of Liberty Bonds, and now the added hardships of the Great Depression. Henry
Morgenthau sought to rebuild the relationship between the Treasury and the American people.
Thousands of Americans who sold their Liberty Bonds prior to maturity felt “swindled” by the
United States government because the market price for Liberty Bonds declined.139 The Treasury believed that they protected the small investor by offering Savings Bond and served as the
“trustee for the inexperienced investor who purchased Government bonds primarily to help his country in its time of stress and placed his faith in his Government that the securities were sound
138 "Roosevelt Starts Baby Bond Buying: Takes $113 From Pocket to Pay for Six, Farley Giving Him 50 Cents Change," New York Times (1923-Current File), Mar 02, 1935, https://login.proxy.lib.fsu.edu/login?url=https://www-proquest-com.proxy.lib.fsu.edu/historical- newspapers/roosevelt-starts-baby-bond-buying/docview/101499147/se-2?accountid=4840. 139 Morse, 22. Bloch 60 investments.”140 Issuing saving bonds allowed the American people to have a share in the success of their government, similar to how Liberty Bonds were marketed as a way to support their government. These bonds lacked the same intensity of a patriotic connection between bond purchases and supporting the government because American soldiers were not dying, and democracy was not on the verge of collapse.
Savings Bonds Marketing
The Treasury utilized many of the same marketing tactics in 1935 as it did in 1917, including posters and slogans. The Division of Savings Bonds was established in March 1936 to promote the sale of Savings Bonds.141 Led by Eugene W. Sloan, the Division of Savings Bonds was in charge of the Savings Bond’s marketing efforts and reaching the average American.
Sloan, an experienced banker and financial analyst, joined the Treasury in 1935 to obtain valuable experience, rather than a high paycheck.142 Sloan served as an Assistant to the Under
Secretary, where he was told to “do something about the Savings Bonds.”143 Under Sloan’s leadership, the Division of Savings Bonds employed multiple advertising agencies to create and spread Savings Bond posters and pamphlets.
Unlike Liberty Bonds, Savings Bonds could only be purchased through post offices.144
Congress supported the sale of Savings Bonds when they were first introduced in 1935, however, there was no organization or sales force. The Treasury purchased advertisements once a month, between 1936 and 1939, in major magazines, including National Geographic.145 Prior to the
140 Morse, 22. 141 Morse, 34. 142 Morse, 35. 143 Morse, 34. 144 Morse, 35. 145 Morse, 38. Bloch 61 creation of the Division of Savings Bonds in 1936, the Treasury relied on post office workers to promote Savings Bonds. This strategy did not encourage Americans to purchase bonds because post office workers were not trained salesmen and had competing priorities. Across America,
14,000 post offices offered Savings Bonds through a promotion centered around an “offered for sale” campaign.146 This meant that post offices merely displayed that Sales Bonds were available for purchase and did not encourage or entice potential buyers. Investors, especially small savers entering post offices, had no incentive to purchase Savings Bonds. Post office workers, as well as the Treasury’s marketing efforts in post offices, failed to attract many potential buyers.
Savings Bond advertisements were not as ubiquitous as Liberty Bonds advertisements.
Posters and reading materials were primarily displayed at post offices around the United States, with occasional advertisements in magazines.147 These promotional materials did not attract the same amount of support and engagement as Liberty Bonds did. Liberty Bond advertisements engaged with Americans almost everywhere, from banks, to schools, to churches. Engaging with all aspects of American communities allowed the Liberty Bond campaign to be as successful as it was because it established a credible ethos. Savings Bonds failed to engage with
American society to the same extent as Liberty Bonds. The Savings Bond campaign did not reach as many Americans because the advertisements were not constantly in citizen’s faces or integrated with American society.
The main difference between the marketing of Liberty Bonds and Savings Bonds was the message to the American people. Liberty Bonds served as a way for Americans on their home front to support America in World War I and help supply soldiers. When Secretary McAdoo
146 Morse, 34. 147 Morse, 34. Bloch 62 created a financial framework for Liberty Bonds in World War I, McAdoo made it competitive with municipal bonds at the time. While Liberty Bonds attracted experienced investors due to the tax benefits and coupon rates, Liberty Bonds were marketed as a patriotic duty and not an attractive, financial instrument. Savings Bonds did not have the same patriotic appeal that
Liberty Bonds. The Savings Bond campaign lacked an emotional argument to persuade the average American to purchase bonds. Marketing of Savings Bonds centered around personal investment for the future and creating a partnership with the United States government.148
Savings Bond posters utilized different forms of imagery compared to Liberty Bonds.
Liberty Bond posters showed American soldiers fighting while guarded by angelic figures.
These posters were designed to instill guilt and patriotic feelings into the average American.
Savings Bond posters showed American families or young Americans holding Savings Bonds, appearing innocent, hopeful, and happy.149 Magazine advertisements contained writing at the bottom that explained the Savings Bond campaign and how it would benefit the average
American. National Geographic advertisements contained a section at the bottom of each advertisement where the reader could fill out a Savings Bond order and mail it to the Treasury.150
In one such advertisement, an angelic woman stood in the center of the advertisement holding a scroll with a seal, with the American flag behind her. The advertisement contained information to purchase Savings Bonds with a caption stating, “A Gift that Increases in Value…a Gift for
148 John Morton Blum, From the Morgenthau Diaries: Years of Urgency 1938-1941 (Houghton Mifflin Company, 1965), https://hdl.handle.net/2027/inu.39000004762568, 301. 149 “National Geographic Magazine U.S. Savings Bonds Advertisements,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance, Accessed March 4, 2021, https://www.theherbstmancollection.com/newspapers--periodicals. 150 “National Geographic Magazine U.S. Savings Bonds Advertisements,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance. Bloch 63
Today and Tomorrow.”151 Advertisements, such as this one, aimed to persuade the average
American to purchase Savings Bonds as a present for anyone.
Unlike Liberty Bond posters, Savings Bond posters centered around how purchasing
Savings Bonds helped the purchaser, and not the government. Savings Bonds advertisements often displayed various aspects of an average American’s life, such as getting the mail, playing with a child, or going fishing.152 Advertisements contained captions or slogans relating to the image illustrated, such as “Plan for Sunny Days Through Systematic Savings,” beside a drawing of two men fishing off of a boat.153 The imagery typically used in the Savings Bonds advertisements could be viewed as patriotic, but not to the same degree as Liberty Bond advertisements. One Savings Bond advertisement from National Geographic displayed a father watching his son play with different letter blocks, with a caption saying, “Let’s build a firm foundation, Son.”154 The caption can be viewed as patriotic because the father was investing in an American future for his son, but the advertisement centers around how the Savings Bond can improve the life of the individual. This shift in advertising tactic was the complete opposite than the Liberty Bonds. Savings Bond advertisements centered around how subscribing to the
Savings Bond Program could benefit the individual investor, rather than how the investor could support the United States.
151 “December 1937 National Geographic Magazine United States Savings Bond Ad,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance, Accessed March 4, 2021, https://www.theherbstmancollection.com/newspapers--periodicals. 152 “December 1937 National Geographic Magazine United States Savings Bond Ad,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance. 153 “December 1937 National Geographic Magazine United States Savings Bond Ad,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance. 154 “December 1937 National Geographic Magazine United States Savings Bond Ad,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance. Bloch 64
Lack of Civic Engagement
One of the most successful ways the Treasury established a credible ethos with the
American public was through advertising in civic groups. The Savings Bond campaign of 1935-
1941 did not involve itself with American communities, primarily due to the lack of government funding. The Treasury’s only direct channel of communication was done through the direct-mail campaign. This was Morgenthau’s and Graves connection with the American people.
Morgenthau prided himself on encouraging everyone, regardless of income, to take stock in their government because, as he believed, “…the more people owning government securities, the greater would be the interest of Americans in the affairs of the government, in its strength and in its credit.”155
The success of the Savings Bond campaign completing the goal of democratizing finance and encouraging small savers to invest is debatable. Millions of Americans purchased Savings
Bonds to save for the future without worrying about another potential bank failure. Jim Bryan, one of the assistants in the Treasury Department, said during a Congressional hearing about the
1940 Treasury Appropriation Bill, “…the smaller income groups own the great majority of savings bonds…”156 By November 1938, more than 1.4 million Americans purchased over 7 million savings bonds, with a maturity value greater than $2 billion.157 While 1.4 million
Americans may appear as a large number, it was a significant decrease from the number of
Liberty Bond subscribers. The First Liberty Loan Drive in 1917 contained the fewest number of subscribers of all the Liberty Loan Drives, with 4 million subscribers.158 It took the Savings
Bond campaign three years to reach one quarter of the subscribers of the smallest Liberty Bond
155 Blum, 301. 156 Subcommittee on Treasury and Post Office Departments, 255. 157 Subcommittee on Treasury and Post Office Departments, 254. 158 Hilt, "Turning Citizens into Investors: Promoting Savings with Liberty Bonds During World War I," 91. Bloch 65 drive. In comparison to Liberty Bonds, the Savings Bonds did not generate nearly the same amount of support or widespread attention, which can be attributed to a lack of advertising.
Although the Savings Bond campaign did not have the same financial success of the
Liberty Bonds, it attracted small savers from various occupations. The majority of Savings Bond owners worked blue-collar jobs with small incomes. Out of a sample of 100,000 Savings
Bonds, the occupation of the bondholder ranked:
1. Skilled Worker
2. Clerk
3. Housewives and Domestics
4. Salesmen
5. Teachers
6. Professionals
7. Executives
8. Students
9. Farmers159
Of the top nine occupations, only professionals and executives were considered in the upper income bracket. Although the sample showed that the average American invested in Savings
Bonds, the sample was misleading as Savings Bond sales proved that many small savers did not purchase bonds. The Treasury introduced a $25 Savings Bond to attract the poorest of
Americans, but the sales of the smallest denominations were among the smallest. Only 5.2% of all Savings Bond sales between March 1, 1935 and June 30, 1940 accounted for the $25 and $50
Savings Bonds.160 Nearly 95% of the total amount invested in the Savings Bond Program was
159 Subcommittee on Treasury and Post Office Departments, 255. 160 Morse, 37. Bloch 66 done through the large denominations of Savings Bonds, such as the $100, $500, and $1000.161
While the Savings Bond Program intended to reach the small saver, it failed to accomplish this goal.
Advertising Campaign Results
In July 1936, Eugene W. Sloan organized a direct mail campaign in as a way to reach and connect the American people.162 The sales effort through post offices did not create a personable relationship with Americans, nor did it engage with community groups. In 1935, the Treasury only sold $204 million worth of bonds.163 This was a significant decrease from the which is a significant decrease from the $4.5 billion of Liberty Bonds sold during the Victory Loan Drive in
1919.164 Regardless of the reason, whether it was the little savings Americans possessed as a result of the Great Depression or distrust in the federal government, the Savings Bond campaign did not attract as many sales as Liberty Bonds. Creating a direct mail campaign allowed the
Treasury to establish a personable connection with the American people by talking to citizens directly. The Division of Savings Bonds complied mailing lists of actual and prospective bond purchasers and installed equipment with a capability of mailing 100,000 solicitation
“assemblies”.165 Each of these “assemblies” consisted of an order form and a return envelope, as well as literature, typically in the form of pamphlets, to inform the receiver about the benefits of
Savings Bonds. The direct-mail campaign grew into the largest mail order sales program in the
161 Morse, 37. 162 Morse, 35. 163 “Saving Bond Sales,” Research Center, Treasury Direct, Accessed March 4, 2021, Retrieved from https://www.treasurydirect.gov/indiv/research/history/history_sbsales.htm. 164 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 165 Morse, 35. Bloch 67 world; the number of active and prospective purchasers increased from 719,828 to about 7 million between 1936 and 1937.166
A direct, personable marketing campaign, in contrast to the lackluster, indirect post office campaign, led to an increase in the amount of bonds purchased. Once the direct mail campaign took effect in 1936, Saving Bond sales steadily increased. In 1935, the Treasury only sold $204 million, as post offices served as the only means of advertising.167 In 1935, the GDP was $74.2 billion, meaning Savings Bonds generated only 0.27% of GDP.168 Between 1936 and 1940, yearly sales increased from $370 million to $1.044 billion.169 When the American people learned about the Savings Bond campaign, the Treasury returned a greater the number of sales.
The number of Savings Bonds sold increased from 1,284,000 to 4,700,000 between 1936 and
1940, with more than 1.8 million subscribers.170 In total, the Savings Bond campaign generated
$3.949 billion, or 3.88% of 1940 GDP, according to the Treasury.171 Based on Bryan’s argument, if the Treasury received federal funding for an advertising campaign, similar to the Liberty
Bonds of World War I, the Savings Bond campaign would have received significantly more sales.
It can be argued that the Savings Bond campaign succeeded in sales based on the lack of marketing efforts. With only a direct mail campaign, Savings Bonds continued to have a steady, upward sales trend between 1935 and 1941. In a poll conducted in 1938, 16% of Americans would invest in Government Bonds if they had a large sum of cash; Government Bonds was the
166 Morse, 36. 167 “Saving Bond Sales,” Research Center, Treasury Direct. 168 “Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis, Revised February 2021, Accessed March 4, 2021, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey. 169 “Saving Bond Sales,” Research Center, Treasury Direct. 170 Morse, 37. 171 “Saving Bond Sales,” Research Center, Treasury Direct. Bloch 68 second most popular answer after 20% of Americans preferred investing in real estate.172 Sales between March 1935, when the Savings Bonds were introduced, and April 1941, when Series E
Defense Bonds were introduced, totaled around $4 billion, or 3.1% of 1941 GDP.173 Without a passionate sales force, the Treasury generated as much in bond sales as Victory Loan Drive, which was the second-most profitable Liberty Bond drive.174 The Savings Bond sales were not insignificant, considering $4 billion was generated without a serious marketing campaign.
Despite the increasing number of customers and sales, Congress cut the Treasury’s advertising funds in 1939.175 Many Republicans in Congress did not approve of the Treasury’s advertising efforts, as certain Republicans believed that the Treasury exploited poor Americans.
House Representative John Taber of New York led the Republican effort to cut Treasury advertising funds. Taber acknowledged some of the success of the Savings Bond campaign by saying, “Baby bonds are now held by more than a million families and tens of thousands of persons put their whole faith in them. Many people save through baby bonds who never saved before. It is claimed that these bonds have a great value in stimulating patriotism and good citizenship by making so many persons stockholders of the Government.”176 Taber, although supportive that Americans purchased bonds, did not support the advertising effort.
Representative Taber’s main grievance with the Treasury’s advertising campaign regarded
Treasury officials pressuring the small saver to purchase bonds that the individual could not
172 Fortune Magazine, “Roper Fortune # 2: General/Buying/Politics,” The Roper Organization, (Cornell University, Ithaca, NY: Roper Center for Public Opinion Research, 1938), Dataset, https://doi.roper.center/?doi=10.25940/ROPER-31097152. 173 Linehan, 10. 174 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 175 Linehan, 10. 176 Representative John Taber (NY), "Treasury-Post Office Appropriation Bill, 1940," Congressional Record 76-1 (February 24, 1939), Accessed March 10, 2021, https://congressional-proquest- com.proxy.lib.fsu.edu/congressional/docview/t19.d20.cr-1939-0224?accountid=4840, H1883. Bloch 69 afford. In a Congressional hearing on February 24, 1939, Representative Taber expressed the contempt that Republicans had with the Treasury’s advertising efforts, arguing,
We found that a very large number of people were buying these bonds under high-
pressure advertising and that sort of thing and the work of high-pressure salesmen. It is a
fine thing when our citizens will buy our bonds, but it is a very serious thing when we
crowd those bonds onto a lot of poor people who cannot afford to hold them and who
must give them up before they can get any interest. If they have a few dollars to stow
away like that, they might better put it in a savings bank where they might get a little
interest, rather than to have to redeem the bonds before they can hold them to an interest
period. Our committee put a stop to these big advertisements in the newspapers and
magazines and a lot of this extravagant expenditure that has been going on…Frankly I do
not believe that situation should be allowed to continue. I do not believe that in times of
peace, when we have funds available to buy our Government securities, that we can
afford to be crowding on to people who cannot afford to carry them, Government
obligations.177
The anti-New Deal efforts from Republicans to cut the Treasury’s advertisement funding succeeded in eliminating the previously limited Savings Bond advertising.178
Although the Treasury’s advertising funding was cut, members of the Treasury
Department tried to convince Congress to increase the Treasury’s budget in the 1940 Treasury
Appropriation bill. In 1939, Jim Bryan appeared before Congress to speak about the success of the Savings Bond campaign. Bryan argued that the Savings Bond campaign provided a safety net for over one million Americans, claiming the reasons why Americans purchased Savings
177 Representative John Taber (NY), "Treasury-Post Office Appropriation Bill, 1940." 178 Linehan, 10. Bloch 70 bonds was due to, “Safety of principal aid interest equivalent; a desire to own a Government bond; next, increasing value every year, making 33.33 percent gain on the investment in 10 years; next, no price fluctuation, because savings bonds are redeemable for fixed cash value.”179
Bryan also argued that the Savings Bond advertising campaign required funding because,
“Answers to questionnaires demonstrate that the great majority of owners would perhaps never have heard of savings bonds except for advertising and the distribution of descriptive literature.”180 The Treasury’s advertising efforts did not require a substantial amount of funds.
Bryan argued that the revenue from the Savings Bond campaign vastly outweighed the amount spent on advertisements. According to Bryan, “Promotions costs, including all salaries, equipment, and allocation of overhead, as well as the theoretical cost of postage had the official frank not been used, total less than one-fifth of 1 percent of the cash value of bonds sold.”181
Controlling Inflation
The Savings Bond Program primarily served to democratize finance and rebuild economic stability after the Great Depression. Government spending levels were especially high due to New Deal programs. In 1935, the federal government’s appropriation bill allocated $4.8 billion in government spending.182 The rate of government spending increased from 5.9 percent of 1929 real GDP in 1933 to nearly 11 percent by 1939.183 With such a high level of spending,
179 Subcommittee on Treasury and Post Office Departments, “Treasury Department Appropriation Bill for 1940,” Congressional Record 76-1 (January 17, 1939), Accessed March 10, 2021, https://congressional-proquest- com.proxy.lib.fsu.edu/congressional/docview/t29.d30.hrg-1939-hap-0001?accountid=4840, 254. 180 Subcommittee on Treasury and Post Office Departments, 256. 181 Subcommittee on Treasury and Post Office Departments, 257. 182 Olney, 1. 183 Price Fishback, “The Impact of New Deal Spending and Lending During the Great Depression,” The Reporter no. 3 (2014), National Bureau of Economic Research, https://www.nber.org/reporter/reporter/impact-new-deal- spending-and-lending-during-great-depression. Bloch 71 one would expect inflation levels would also increase dramatically. Fortunately, inflation rates remained relatively low and hovered around the annual targeted rate of 2%.
Unlike the other bond campaigns of the twentieth century, the Savings Bond campaign of
1935-1941 did not coincide with a war. Even though government spending dramatically increased, the Savings Bonds were not primarily designed to curb inflation. Especially after the
Great Depression in 1929, consumer spending decreased due to a lack of financial stability and credibility. The Federal Reserve increased interest rates, despite a contraction in economic activity. In 1931, the Federal Reserve doubled the short-term interest rate to 4% and increased the long-term interest rate one percentage point, to 5.32%.184 This was due to foreign crises, devaluation of the dollar, and bank failures.
The rate of inflation between 1929 and 1934 was significantly low as the Federal Reserve raised interest rates and consumer spending decreased. The United States experienced high levels of deflation, peaking in 1932 with an inflation rate of -9.9%.185 These high levels of deflation induced “debt deflation,” where default rates increase, investment decreases, and price levels decrease.186 According to economist Irving Fisher, debt deflation occurs, “as prices and nominal incomes begin falling at the onset of a slump, the real burden of (nominally contracted for) debt rises because borrowers are obligated to repay loans in money whose purchasing power is greater than it was at the time it was lent to them.”187 Deflation made it difficult for
Americans and banks to pay off debts, which led to high default risks and a decrease in
184 Federal Reserve Bank of St. Louis. "Interest Rates, 1914-1965," 5. 185 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet. 186 Shughart, 521. 187 Shughart, 521. Bloch 72 investments, as lenders feared their money would be lost. This vicious cycle created the terrible and sticky economic situation of the Great Depression.
Ben Bernanke, former Chairman of the Federal Reserve and scholar on the Great
Depression, argued that that the high default risk on bank loans caused lenders to shift toward more secure securities, such as Treasury securities.188 Savings Bonds, introduced six years after the Great Depression began, provided a stable investment for lenders and savers. Instituting a credible, non-marketable investment created an opportunity for the market to calm down, get guaranteed returns, and not lose money on a bank collapse.
The Federal Reserve’s contractionary actions, high unemployment, and decreases in consumer spending counteracted the high levels of government spending. The unemployment rate rose immensely between 1929 and 1939, reaching a peak in 1933 of 24.9%.189 With a high unemployment rate, Americans would have less consumer purchasing power due to a lack of income. Consumer spending negatively trended between 1929 and 1933, which was the height of the Great Depression. In 1929, consumer expenditures consisted of 74% of GDP or $77.4 billion, while in 1933, consumer expenditures were only $45.9 billion, or 80% of GDP.190 While consumer spending as a percent of GDP is greater in 1933, overall GDP decreased from $104.6 billion to $57.2, as private domestic investments severely decreased.191
The federal government spent less on the New Deal than on World War I, as a percentage of GDP. According to Rockoff, World War I totaled $32 billion at the time, or 46.6% of total
GDP between 1917 and 1920.192 Defense spending typically received the largest federal outlays,
188 Shughart, 521. 189 “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics. 190 “Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis. 191 Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis. 192 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I”, 36. Bloch 73 especially for discretionary spending. In total, the New Deal cost $41.7 billion at the time, or
5.1% of 1933 GDP.193 In 1935, when the Savings Bonds were introduced, federal spending consisted of 15% of GDP; while in 1941, when the Savings Bonds became Defense Bonds, federal spending consisted of 21.5% of GDP.194 Consumer spending began to increase in billions of dollars spent in 1934 and continued the upward trend as the Savings Bonds were introduced in 1935.
Despite the increase in consumer spending, inflation rates between 1935 and 1941 remained close to the targeted rate of 2%. The inflation rate peaked in 1941 at 5%, which can be attributed to World War II defense preparations.195 Government spending nearly doubled from
$15.6 billion to $27.8 billion, or 15.16 to 21.5% of GDP, between 1940 and 1941, as the United
States government began contracting private industries to produce war munitions.196 There was a period of deflation between 1938 and 1939, as a short recession occurred; inflation rates recorded -2.1% an -1.4%, respectively.197 The Treasury succeeded in keeping inflation rates low, but the impact of Savings Bonds on inflation rates is miniscule. By November 1938, more than 1.4 million Americans purchased over 7 million savings bonds, with a maturity value greater than $2 billion; that amount only attributes to 2.29% of American GDP in 1938.198
193 “Which Was Bigger: The 2009 Recovery Act or FDR's New Deal?” St. Louis Fed On the Economy Blog, Federal Reserve Bank of St. Louis, (2017), https://www.stlouisfed.org/on-the-economy/2017/may/which-bigger-2009- recovery-act-fdr-new-deal. 194 “Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis. 195 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet. 196 “Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis. 197 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet. 198 Subcommittee on Treasury and Post Office Departments, 254.
Bloch 74
Unlike the war time government bonds, controlling inflation was not a primary motive behind the Savings Bond Program.
Legacy of Savings Bonds
The Savings Bond Program began as a peacetime experiment which gradually turned into one of the most influential bond drives in American history. The Saving Bonds of 1935-1941 intended to calm the public fears of economic instability by providing a safe and secure means of saving for the future. Treasury Secretary Henry Morgenthau Jr. believed that Saving Bonds,
…could offer an opportunity to broaden the base of the public debt by attracting the
funds of small savers, thus lessening the governments dependence on large private
investors and the commercial banking system. It might also encourage citizens- as a by-
product of owning some share in their country- to become more interested in, and
concerned about, national policy.199
Savings Bonds had a different financial structure because the Liberty Bonds of World War I created losses for many Americans. Offering a non-marketable bond whose value did not depend on market forces created a stable security for millions of Americans to invest in. The
Treasury needed to rebuild trust with the American public after the failure of Liberty Bond’s secured returns, as well as create a stable resource for saving after the Great Depression.
Although there was no war effort to generate support for, the Treasury had to generate support for their own image. Savings Bonds succeeded in improving the image of the Treasury, as net saving of the United States began a positive trend in 1935 after years of negative savings rate.200
199 Linehan, 5. 200 “Table 5.1. Saving and Investment by Sector,” National Income and Product Accounts, Bureau of Economic Analysis, Revised February 2021, Accessed March 4, 2021, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey. Bloch 75
While the Savings Bonds were not created to finance a war, the Savings Bond Program of the
1930s established a functioning bond program that would later be rebranded for World War II.
The Savings Bond campaign failed to engage with civic groups and have a marketing campaign. Bond sales and revenue for the federal government were lackluster at the beginning of the campaign, as post office workers served as the main source of advertising.201 Once the direct mail campaign took effect in 1936, the number of customers dramatically increased and bond sales began to steadily increase, generating $4 billion, or 3.1% of 1941 GDP.202 In comparison, the Liberty Bonds Drives of World War I generated around $20 billion in total, in less than half of the years offered too.203 These were impressive sales numbers considering the lack of advertising funds available. After Congress eliminated the Treasury’s advertising budget in 1939, the Treasury could not engage with the American public and create an emotional connection with the American people. The failure of the Savings Bond campaign of 1935-1941 proved that a successful bond campaign must contain a marketing effort that engages will all members of society, in different mediums and institutions in order to increase sales and generate public support.
201 Olney, 2. 202 Linehan, 10. 203 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. Bloch 76
Chapter 3: World War II Defense Bonds
World War II (1939-1945) was the most expensive war in American history. Defense spending reached levels never seen before. Defense spending in World War I peaked at 14.1% of 1919 GDP, while World War II defense spending peaked at 37.5% of 1945 GDP.204 In order to finance this immense amount of spending, the Treasury, led by Henry Morgenthau Jr., issued bonds to the American public through seven War Loan Drives and one Victory Loan Drive.205
Each of these bond drives happened around five months apart, between November 1942 and
1945.206
The World War II Defense Bonds were the most successful government bonds offered during the twentieth century because they combined the successful aspects of prior bond campaigns. War bonds served as a way to keep inflation low by directing excess away from consumer spending, as well as finance the large sums of debt accumulated. War bonds were also crucial to keeping public opinion and morale positive during war, as it gave every citizen a share in the fight. In order to generate revenue for the government, an effective bond campaign contained extensive marketing efforts that kept the public involved, encouraged investing, and engaged with citizens within their communities. World War II Defense Bonds exhibited all of these characteristics to provide the federal government with a large amount of revenue, keep inflation low for a war time, and generate public support for the war effort.
Treasury Secretary Morgenthau saw the successes of Liberty Bonds during World War I and his own Savings Bond campaign of 1935 to 1941. World War I Liberty Bonds succeeded
204 Norwich University Online, “The Cost of U.S. Wars Then and Now,” Norwich University Online, (2020), https://online.norwich.edu/academic-programs/resources/cost-us-wars-then-and-now. 205 Norwich University Online, “The Cost of U.S. Wars Then and Now.” 206 Anna Jacobson Schwartz and Milton Friedman, “World War II Inflation, September 1939– August 1948,” In From New Deal Banking Reform to World War II Inflation, (Princeton University Press, 1980), 154. Bloch 77 through the extensive marketing campaign designed by Treasury Secretary McAdoo. The
Savings Bond campaign failed to generate sizeable amounts of revenue for the federal government to finance New Deal spending due to a lack of advertising funding that was later cut by Congress. The most important lesson that Morgenthau learned from both prior bond issues was that Defense Bonds needed an extensive, personable, and credible campaign to persuade the average American to invest in the success of the United States. Secretary Morgenthau saw
Liberty Bond’s failure to provide a stable financial instrument to the American public, who felt betrayed by their government once their bond depreciated after World War I ended. World War
II Defense Bonds utilized a similar structure to the Savings Bonds issued right before the United
States entered World War II. Combining the same marketing tactics as Liberty Bonds with a credible and stable financial structure created the most successful bond campaign of the twentieth century: World War II Defense Bonds.
Secretary Morgenthau shared the same philosophy about Defense Bonds as he did about the Savings Bond campaign: it should be democratic and appeal to everyone. In an address given on October 7, 1944, Morgenthau described the success of the Defense Bond campaign and his reasoning behind it, saying, “They [Defense Bonds] served not only as a vital factor in financing the rearmament of our fighting forces but, what seems to me even more important, they gave to the average citizen a sense of the war’s meaning and of the urgent nature of the national danger.”207 Secretary Morgenthau shared the same philosophy as Secretary McAdoo regarding bond participation, as they both encouraged every American, regardless of age or sex, to purchase or encourage others to buy bonds. Secretary McAdoo feared that compulsory financing though raising taxes would discourage Americans from supporting the war effort,
207 Morgenthau, 3. Bloch 78 which is why Liberty Bonds served as the primary form of financing World War I. Morgenthau did not approve of compulsory financing to fund the United States war effort, claiming, “I am against anything that is compulsory in this country, it is just exactly what we don’t want. We are selling this [Defense Bonds] in a democratic way to people who believe in this country and want to lend their money to the treasury to carry out this defense program.”208 Secretary Morgenthau prided himself on democratizing the Defense Bond campaign of World War II, saying,
There is one aspect of the War Bond program in which I take particular pride.
Throughout, it has been conducted on a genuinely voluntary, democratic basis….it was
determined that there should be no compulsion, no hysteria, no slacker lists, and no
invidious comparisons between those who bought bonds and those who did not. There
was to be room in this program for the individual which special burdens and
responsibilities who could contribute in very small amounts-even for the individual who
could not share at all.209
Successful Structure
World War II Defense Bonds began as a continuation of the Savings Bond campaign. On
May 1, 1941, the Series E Savings Bond was introduced as the next yearly installment of Savings
Bonds. Similar to the introduction of the Series A Savings Bonds, President Franklin D.
Roosevelt purchased the first Series E bond to give the bond credibility, publicity, and encourage
Americans around the country to purchase them. In his radio address, President Roosevelt invited every American to join him in “one great partnership” to finance the American defense effort.210
208 Blum, 304. 209 Morgenthau, 4. 210 Linehan, 12. Bloch 79
The United States embarked on massive amounts of defense production in 1940 to meet war munition demands from Britain as the “Battle of Britain” unfolded.211 Prior to the United
States’ entry into World War II, America already began producing war munitions for Great
Britain as a part of the Lend-Lease program, enacted on March 11, 1941, to provide aid to
England, who entered the war two years before the United States in 1939.212 According to economic historian Jarvis Means Morse,
We entered upon the defense program in 1940 with millions of unemployed workers and
an industrial plant not operating at full capacity. Instead of being worried about shortages
of manpower, industrial facilities or materials, we were at first bewildered by a surplus of
all three. So the defense program was in the beginning regarded not as a solemn necessity
that would require saving and sacrifice but as a welcome opportunity to put the economy
back to work again.213
It was Secretary Morgenthau’s plan to engage in an “all-out” defense program to not only supply our allies but reinvigorate the United States economy after the Great Depression and a recession in 1938.
After the attack on Pearl Harbor, the Series E Bonds were colloquially known by two names: War Bonds and Defense Bonds. This thesis will refer to the World War II bonds as
Defense Bonds. These bonds were strictly designed to democratize finance and fund the United
States defense effort. In an address in October 1944, Morgenthau explicitly stated,
The Series E War Bonds were conceived a decade ago as Baby Bonds with a very
definite purpose in view. That purpose was, in a phrase, to democratize public finance in
211 Morse, 12. 212 Morse, 5. 213 Morse, 11. Bloch 80
the United States…it was designed to protect the small investor against any possibility of
loss as a result of fluctuations in market value…in short, they are more likely to be
retained as investments.214
Financing a war by issuing bonds provided benefits, such as curbing inflation and generating public engagement, but that was not a priority to Morgenthau. Secretary Morgenthau was a staunch New Dealer who prioritized the need for complete public involvement. Historian John
Morton Blum interviewed Henry Morgenthau after his tenure as Treasury Secretary and believed that the Defense Bond program, “…had never been designed to raise all the revenues the government needed, or to roll back the forces of inflation. It contributed to those ends, as
Morgenthau hoped it would, but it was only one of the necessary instruments in financing national defense.”215 Morgenthau prioritized involving the general public over financing the war, which increased the Treasury’s interactions with American communities and increased
Defense Bond sales.
The Defense Bonds followed a similar structure to the Savings Bonds issued in 1935, as the Defense Bond was a continuation of the Savings Bond Program. The Savings Bond Program of 1935-1941 succeeded in increasing the savings rate and keeping early redemptions of Savings
Bonds low; net saving of the United States began a positive trend in 1935 after years of negative savings rate due to the Great Depression.216 Only $517 million of the $4 billion, or 12.9%, of
Savings Bonds were redeemed before 1941, when Defense Bonds replaced Savings Bonds.217
214 Morgenthau, 3. 215 Blum, 304. 216 “Table 5.1. Saving and Investment by Sector,” National Income and Product Accounts, Bureau of Economic Analysis. 217 “Saving Bond Redemptions,” Research Center, Treasury Direct, Accessed March 10, 2021, Retrieved from https://www.treasurydirect.gov/indiv/research/history/history_sbred.htm. Bloch 81
The non-marketable Savings Bonds proved to be more financially stable than Liberty Bonds, which influenced Morgenthau to keep the same structure.
Defense Bonds were purchased at 75% of face value and returned a 2.9% interest rate compounding semi-annually with a 10-year maturity. There were five denominations of Defense
Bonds to begin in 1941, including a $25, $50, $100, $500, and $1000 bond.218 Once the United
States entered the war, a $10 denomination was introduced for armed services members.219
Defense bonds could be redeemed any time after two months from the date of the issue at the full purchase price plus accumulated interest.220 Each Defense Bond contained the name of the individual, name of two people as co-owners, or the name of an individual payable upon death to a different individual to prevent the marketability of the Defense Bonds. Only $5,000 worth of
Defense Bonds could be purchased within one year due to the high interest rate of the secure
Defense Bonds.221 When designing the bonds, the Treasury had a sense of “favoritism” to the small investor due to the higher rate of interest than typically expected on government bonds, which is why the limit was set at $5,000; those with more money would have to invest their excess funds in other government or corporate securities with a lesser rate of interest. The
Treasury justified the favoritism on the grounds that the smaller investor sacrificed more to invest than the more affluent investor and were entitled to a larger return on their investment.222
In order to meet the demands of wealthy investors and businesses, the Treasury introduced Series F and G Bonds. These bonds could be purchased by individuals, corporations, institutions, and savings banks.223 The Series F and G Bonds carried a slightly lower rate of
218 Linehan, 12. 219 Linehan, 12. 220 Linehan, 12. 221 Linehan, 12. 222 Morse, 24. 223 Morse, 25. Bloch 82 interest compared to Series E/Defense Bonds at 2.53% and 2.50%, respectively. Series F and G
Bonds shared the same denominations as Series E/Defense Bonds with two additional ones including a $5,000 and $10,000 denomination.224 Series F Bonds could be redeemed any time after six months and were purchased at 74% of face value, similar to Series E. Unlike Series E or F, Series G Bonds were current-income securities that were purchased at face value but would pay interest every six months by Treasury check.225 Both Series F and G had a12 year maturity and generated billions of dollars for the Treasury.226 In this chapter, Defense Bonds will refer to all three different types of World War II Bonds: Series E, F and G.
Guaranteeing a return on the investment proved that the bond is successful, credible, and worth investing in. When Americans purchased bonds, it was successful from the government’s perspective as it generated revenue, but if the investors potentially lost money on their investment, then the bond cannot be considered an overall success. What made the Defense
Bonds and the Savings Bonds successful was that investors could not lose money on their investment based on market conditions, as non-marketable bonds did not fluctuate in value based on interest rates. If the bonds were redeemed prior to maturity, then investors would have been paid back the principal and any interest accumulated up until that point.
One of the main reasons why the Defense Bonds succeeded was due the Payroll Savings
Plan. Prior to the introduction of Defense Bonds, many businesses utilized a payroll deduction program in which employees could purchase company stock using withheld funds from their paycheck. Members of the Treasury persuaded Secretary Morgenthau to approve a payroll deduction plan that allowed working Americans to purchase Defense Bonds with withheld
224 Morse, 25. 225 Linehan, 14. 226 Linehan, 14. Bloch 83 income, as long as the program remained strictly voluntary.227 The Payroll Savings Plan served as the primary way for Americans to purchase Defense Bonds, as millions of Americans had never purchased a bond through any other medium or program.228 The Payroll Savings Plan also created good labor-management relations and streamlined the purchasing of Defense Bonds compared to World War I.229 Before Pearl Harbor, 700,000 Americans enrolled in the Payroll
Savings Plan; once the United States entered World War II, payroll savings enrollments increased dramatically to over 25 million Americans.230 It was considered patriotic if a company engaged in the Payroll Savings Plan because it allowed the company’s employees to easily invest in the United States’ defense effort. By the end of 1941, major firms such as Standard Oil,
United States Rubber, American Telephone and Telegraph, Riggs National Bank, Metropolitan
Life Insurance, Kraft Cheese, General Motors, Ford, and Chrysler engaged in the Payroll
Savings Program to allow employees to voluntarily make deductions from their wages to purchase Defense Bonds.231
Bond Marketing Success
The advertising structure of war bonds changed from a primarily grassroots campaign in
World War I to a top-down business approach in World War II. Both war advertising campaigns involved themselves with civic groups, but World War II Defense Bond advertising relied on the expertise of the advertising industry. The Treasury of World War I garnered the support of the
Boy Scouts and various women’s groups to sell bonds. In contrast, the Treasury of World War II sought the support of businesses to market and advertise the Defense Bond campaign. This
227 Linehan, 18. 228 “Individual - The Payroll Savings Plan,” Research Center (Treasury Direct). 229 Morse, 76. 230 Linehan, 19. 231 Blum, 302. Bloch 84 tactic established a credible and patriotic ethos for the Treasury and businesses alike, which in turn could stimulate business for both entities.
The Treasury encouraged businesses to advertise the Defense Bond campaign by allowing businesses to write off 80 percent of advertising costs if the advertisement “helped the war effort.”232 The Internal Revenue Service released a statement in 1942 that stated,
“…Advertisements featuring the sale of war bonds, conservation, nutrition or other government objectives and are clearly signed by their corporation...will be considered as institutional or goodwill advertising by the manufacturer and hence, deductible.”233 The tax-deduction created an incentive for businesses to advertise because it would display that the business is patriotic, which could potentially increase revenue of the business, while having few administrative costs.
After the United States entered World War II, the advertising industry quickly rallied behind the Defense Bond campaign. Many advertising industry leaders wanted to associate with the Treasury to get publicity and gain business from the American people. In 1942, leading representatives from advertising large corporate agencies and the media alike formed a private organization called the War Advertising Council.234 The War Advertising Council provided tax deductible advertising to the war effort by working with different government agencies.235 One of the main agencies the War Advertising Council collaborated with was the Office of War
Information to organize public information campaigns about World War II.236 The War
Advertising Council spent over one billion dollars coordinating an estimated 100 “public
232 Christopher Thomas and Ricard Jensen, “A Brief Overview of American Advertising and Posters during World War II,” Advertising & Society Review no. 10. (2009), https://www.researchgate.net/publication/322235034_A_Brief_Overview_of_American_Advertising_and_Posters_d uring_World_War_II. 233 Thomas and Jensen, “A Brief Overview of American Advertising and Posters during World War II.” 234 Robert Griffith, "The Selling of America: The Advertising Council and American Politics, 1942-1960," The Business History Review 57, no. 3 (1983), 390. 235 Griffith, 390. 236 Leff, 1310. Bloch 85 service” campaigns during World War II to inform and persuade the American public on
Defense Bonds and other campaigns, such as blood drives and Victory Gardens.237
The War Advertising Council provided the Treasury with expertise and capital that the leading advertising executives controlled. The War Advertising Council accomplished three major tasks when collaborating with the Treasury: it created a channel of communication in which information on the bond campaign could be reach influential advertising agencies, allowed an expert advisory board on the promotional plans developing in the Treasury, and created a wide variety of volume of bond advertising for Treasury use.238 Different advertising industry leaders focused on a different medium of advertising, from radio to magazine to newspaper. The extensive experience of the War Advertising Council proved to be effective on
Defense Bond marketing by creating massive amounts of effectively marketed publicity.
The effect of the War Advertising Council was illustrated through the number of advertisements during World War II. The number of Defense Bond advertisements increased during each War Loan Drive. Between the Second and Fourth Loan Drives, the number of
Defense Bond advertisements in daily newspapers more than doubled from 40,774 to 89,048.239
The Fifth War Loan Drive advertising totaled more than $24 million in radio, newspaper, and magazine advertisements; this amount grew to over $25 million for the Sixth War Loan Drive.240
The success of the War Loan advertisements can be witnessed through Defense Bond sales. The
Fifth and Sixth War Loan Drives occurred in 1944, with a combined advertising cost of around
$50 million.241 Defense Bond sales in 1944 reached a peak for the entirety of World War II, at
237 Griffith, 390. 238 Morse, 235. 239 Morse, 236. 240 Morse, 236. 241 Morse, 236. Bloch 86
$16 billion.242 As advertisement spending increased, the number of Defense Bonds followed.
After the Second War Loan Drive, where only $12 million was spent on advertising, only 62% of the adult population could recognize the name of the drive and only 20% of individuals who received income purchased bonds for the drive; to compare, the Seventh Loan Drive had over
$42 million in advertising costs, but 94% of the population could recognize the name of the drive and 40% of individuals with an income purchased bonds for the drive.243
Secretary Morgenthau adopted many of the same advertising ideas and techniques as
Secretary McAdoo applied in World War I. The Treasury used many different mediums to encourage Defense Bond purchases, including posters, paintings, celebrity involvement, and the newly introduced radio. Defense Bonds advertisements sought to entice to the average American to buy Defense Bonds by using different appeals. According to various social sciences writers, there were two different forms of appeals: sacred and profane. A sacred appeal encompassed the general idea of patriotism and American ideals, such as honor, sacrifice, and duty.244 A profane appeal involved private gain, such as economic benefits.245
During World War II Defense Bond advertising, the Treasury decreased the use of profane appeals, especially economic appeals, compared to World War I.246 In 1948, Gordon
Streib, a member of the Bureau of Applied Social Research of Columbia University, theorized that abundant public knowledge about the benefits of owning government bonds created the shift in economic appeals.247 Most of the American public was aware of the benefits of owning government bonds following World War I and the Savings Bond campaign. A Gallup poll in
242 “Saving Bond Sales,” Research Center, Treasury Direct. 243 Dorwin Cartwright, “Some Principles of Mass Persuasion: Selected Findings of Research on the Sale of United States War Bonds”, Human Relations 2, no. 3 (July 1949), 55. 244 Streib, 273. 245 Streib, 273. 246 Streib, 273. 247 Streib, 278. Bloch 87
1941 showed that 97 percent of Americans polled heard about Defense Bonds and stamps, proved that Americans did not need to be informed of the Defense Bond’s introduction and benefits.248 The Treasury no longer needed to inform the public about the financial advantages behind the Defense Bond campaign. Instead, advertising focused on patriotic and emotional appeals.
The different sacred appeals were broken down into further categories to analyze the specific approaches the Treasury and War Advertising Council took when creating advertisements. One of the most common sacred appeals used was patriotism, which can be divided into further sub-sets for examination, including “Direct Patriotism,” participation, sacrifice, and victory.249 “Direct Patriotism” involved references to “country,” “nation,” or
American symbols. An example of this was the Minute Man of Concord, which served as the symbol of the Defense Bond program because of the volunteer leadership of the Revolutionary
War.250 Using “Direct Patriotism” was very effective in invoking nostalgic emotions of
American greatness, such as the Revolutionary War.
Participation was another form of patriotic appeal that was commonly used to advertise
Defense Bonds. Almost 60% of Defense Bond advertisements used the participation approach.251
Streib described that participation appeals told the reader to “put his shoulder on the wheel” or
“do his part.”252 This advertising appeal encouraged and guilted Americans into purchasing
Defense Bonds. In certain cases, it would make Americans happy to purchase Defense Bonds because the bond campaign provided a job or duty for the individual. Some Americans felt
248 Linehan, 19. 249 Streib, 273. 250 Linehan, 16. 251 Streib, 275. 252 Streib, 273. Bloch 88 powerless if they did not directly provide for the war effort, such as a manufacturing job.
Purchasing Defense Bonds gave Americans without a job a new purpose or duty to help America win World War II. The Defense Bond campaign also made some Americans feel guilty if they failed to purchase bonds because the individual would essentially be failing his duty on the home front. In a poster for the Fifth War Loan, it states, “I DIED TODAY, WHAT DID YOU DO?
Back the Attack – BUY MORE THAN BEFORE.”253 The poster displays a soldier in the middle of a battlefield with a bullet hole in his helmet. The graphic imagery along with a plea for assistance invoked anger, guilt, encouragement, or pride in the reader to hopefully convince the individual to purchase Defense Bonds.
Familial images were also effective in portraying the importance of purchasing Defense
Bonds and the overall United States war effort. Many advertisements included phrases such as,
“BRING THE BOYS HOME QUICKER” or “PROTECT HIS OR HER FUTURE, BUY
BONDS!” to emphasize the influence Defense Bonds had only post-war home life.254 Artist
Norman Rockwell made a series of four paintings titled, “Four Freedoms,” in which Rockwell illustrated the four human freedoms that President Roosevelt envisioned a post-World War II world would be founded on: freedom of speech, freedom of worship, freedom from want, and freedom from fear.255 The United States Army commissioned Rockwell for one painting initially, but Rockwell wanted to do more for the war effort.256 Each of the paintings displayed the words “Buy War Bonds” beneath the photo and were inspired by Rockwell’s hometown experience, with each painting portraying a family or community working together.
253 Leff, 1308. 254 Streib, 273. 255 Norman Rockwell, “Freedom From Want,” Norman Rockwell’s Four Freedoms, Norman Rockwell Museum, Accessed March 4, 2021, https://www.nrm.org/2012/10/collections-four-freedoms. 256 Norman Rockwell, “Freedom From Want.” Bloch 89
One of the most famous of the paintings, “Freedom From Want,” displayed a family talking at a dinner table, about to have a Thanksgiving turkey dinner.257 A family having dinner was not as graphic or provocative as soldiers fighting or marching, but it connected to the average American. Fear and uncertainty were rampant on the home front during World War II and Americans wanted a return to normalcy. Seeing a normal, peaceful, and happy family calmed the American fears and encouraged Americans to purchase Defense Bonds because the painting connected the two tasks; if Americans wanted to share a delightful dinner with their families together again, Americans would have to purchase Defense Bonds. To prove the effectiveness of familial imagery, in the Seventh War Loan Drive, 16% of Americans purchased
Defense Bonds to “bring the boys back,” which was the second most popular answer.258
Other than posters and art, the Treasury worked with various government agencies and the War Advertising Council to create radio addresses and movies. Celebrities and government officials worked together to inform the public about the War Loan Drives and convince
Americans to purchase Defense Bonds. New technologies, such as the radio, gave the Treasury greater resources to advertise Defense Bonds. By 1940, over 50 million had radios, allowing the
Treasury to reach a massive audience with little input costs.259 Using celebrities gave the War
Loan Drives extra publicity and an added ethos. Celebrities went on various radio networks on
“Radio Bond Days,” to tell listeners about the Defense Bond program and urged Americans to pledge to purchase more Defense Bonds.260
257 Norman Rockwell, “Freedom From Want.” 258 Cartwright, “Some Principles of Mass Persuasion: Selected Findings of Research on the Sale of United States War Bonds”, 61. 259 Morse, 230. 260 Linehan, 21. Bloch 90
The Treasury quickly utilized the newly introduced radio as one of the main mediums to reach the general American audience. By September 1941, Time Magazine declared that
“Millions for Defense” became the United States’ most popular radio entertainment on
Thursdays and Fridays, as well as the best bond-selling days.261 “Millions for Defense” was organized by the Treasury Department, where celebrities such as Jack Benny, Fred Allen, Bob
Hope, and Bette Davis spoke to the nearly ten million listeners about the Defense Bond
Program.262 Radio reached much larger audiences than in-person shows or events. According to
“Millions for Defense” producer Charles Vanda, “In one evening, at no cost and without even having to dress or make up, the stars get a better audience than they could get in 10,000 personal appearances. One night of this program reaches more people than all the audiences Geraldine
Farrar sang to trying to sell bonds in the last war."263 The Treasury of World War II possessed far more effective resources for attracting the attention of the public than the Treasury of World
War I.
The American media and music industries played a major role in the Treasury’s advertising efforts. Various music artists, such as Irving Berlin, created theme songs for the
Defense Bond Program. “Any Bonds Today?” served as the theme songs Defense Bond
Program and rang across the nation.264 Singer Bing Crosby sang the theme to audiences to emphasize the sacrifice Americans needed to make, as well as the material benefit the military received from Defense Bonds. Lyrics included, “Buy buy buy buy a bond, and the bonds you buy will bring you victory…This is no time to say you’ve done enough this is the time to really
261 “Radio: Bond Show,” Time Magazine, September 1, 1941, http://content.time.com/time/subscriber/article/0,33009,850684,00.html. 262 “Radio: Bond Show,” Time Magazine. 263 “Radio: Bond Show,” Time Magazine. 264 “Radio: Bond Show,” Time Magazine. Bloch 91 do your stuff. Even if you can’t be a soldier in the ranks, you can be the guy who supplies the guns and planes and tanks.”265 Catchy lyrics replayed in the minds of Americans to remind them of the War Loan Drives wherever they went.
The Motion Picture Industry, through Twentieth Century Fox, produced All-Star Bond
Rally starring Bob Hope, Bing Crosby, Frank Sinatra, and Betty Grable.266 Attending movies was a common pastime for Americans which made it lucrative for the Treasury to produce films to reach large audiences. In All-Star Bond Rally, Bob Hope served as a master of ceremonies for an audience of moviegoers and informed the audience about the importance of Defense Bonds.
Hope begins All-Star Bond Rally saying, “This is Bob ‘Seventh War Loan’ Hope telling you to buy those bonds, get a load off your hips, and when the war is over, your pocketbook will be in the chips.”267 Various celebrities sang songs or danced to entertain and persuade the audience to buy Defense Bonds. Betty Grable, who was considered “the number-one pin-up girl of World
War II,” performed a dance act that featured many women saluting during the dance routine.268
In the middle of All-Star Bond Rally, Bob Hope talks directly to the audience, saying
We want you to buy extra War Bonds. That’s the deadly serious purpose behind all of
this fun. Most of the celebrities can tell stories about the horrors, the suffering, the
bombings. When you talk to the guys with the guns, you don’t mention War Bonds
because you don’t have to; they’re buying them too with all their monthly pay. We on
the home front are buying bonds but we have to buy more and more and more to make
victory complete.269
265 Don Quinn Fanchon, James Van Trees, et al, The All-Star Bond Rally, Edited by Rabjohn Staniting, Directed by Michael Audley, United States: Distributed by the War Activities Committee-Motion Picture Industry, 1945. Video. https://www.loc.gov/item/2018601425/. 266 Fanchon, The All-Star Bond Rally. 267 Fanchon, The All-Star Bond Rally. 268 Fanchon, The All-Star Bond Rally. 269 Fanchon, The All-Star Bond Rally. Bloch 92
A direct, emotional appeal from a celebrity carried much weight to it, compared to a poster or flyer.
Treasury Secretary Morgenthau worked along with major advertising professionals in the
War Advertising Council to generate public support for the War Loan Drives. Morgenthau followed many of the same ideas and principles as Secretary McAdoo established in World War
I, such as emphasizing the patriotic appeals. After the Savings Bond campaign only months earlier, the Treasury did not need to focus on educating the public about the financial benefit of
Defense Bonds; the Treasury instead prioritized sacred appeals, such as participation, to convince Americans to purchase Defense Bonds. Posters, newspaper, and magazine advertisements still comprised the bulk of the advertising efforts, but the Treasury of World War
II possessed far greater resources than in World War I as technology improved. By using celebrities, new mediums, and a greater connection with the advertising industry, the Defense
Bond Campaign of World War II was the most successful bond marketing campaign of the twentieth century.
Involvement with Civic Groups
In order to appeal and connect with the public, the Treasury had to engage with
Americans in different ways. The Payroll Deduction Program served as one of the main ways the Treasury and working class collaborated; the Treasury involved itself where Americans spent most of their time: working. But it was not the publicity alone that sold Defense Bonds, it was the combination of marketing tactics with the support of millions of Americans who volunteered to be Defense Bond salesmen in their respective communities. It was estimated that there were between five to six million volunteers across the United States, dedicated to helping the Treasury Bloch 93 sell Defense Bonds.270 These volunteers, both men and women, served as solicitors under the
Advertising Division of the Treasury, which worked closely with the War Advertising Council, to create an “atmosphere in which induced people to buy bonds when asked.”271
Purchasing Defense Bonds “where you work,” was the mantra of the Payroll Deduction
Program. It was effective because Americans no longer had to worry about saving money to purchase Defense Bonds, as the program withheld funds on the individual’s behalf automatically.
The Federal Reserve also joined the Treasury and businesses by advertising Defense Bonds to employees. Each different entity of the Federal Reserve tracked the total sales and publicized it as a way to encourage sales.272 The New York Fed, alone, purchased over $87,000 bonds in
April 1943.273 That was enough money to purchase a P-51 Mustang fighter plane, which was named the “N.Y Federalist” and engaged in battle in Germany and France.274 Displaying
Defense Bond sales and providing incentives, such as a personalized fighter plane, encouraged bond sales in American workplaces.
The Treasury reorganized itself in order to appeal to different organizations and demographics. Harold Graves served as the Assistant to the Secretary of the Treasury and oversaw the entire Defense Bond operation through the War Finance Division.275 Graves previously served as the leader of the Defense Savings Staff in 1941, which coordinated the
Savings Bond advertisement campaigns.276 The Defense Savings Staff renamed itself into the
War Savings Staff once the United States entered World War II and constantly changed
270 Morse, 238. 271 Morse, 238. 272 Gary Richardson, “Federal Reserve's Role During WWII: 1941-1945,” Federal Reserve History, 2013, https://www.federalreservehistory.org/essays/feds-role-during-wwii. 273 Richardson, “Federal Reserve's Role During WWII: 1941-1945.” 274 Richardson, “Federal Reserve's Role During WWII: 1941-1945.” 275 Morse, 87. 276 Morse, 52. Bloch 94 administrators throughout World War II.277 Eugene Sloan, who led the Division of Savings
Bonds during the Savings Bond campaigns, served under Harold Graves to coordinate various sub-divisions of the Treasury to better engage with various public groups.278 Together, Sloan and Graves established four different divisions to approach the public about the Defense Bond
Campaign: 1. The Advertising and Publicity Division, which focused on press, radio and advertising. 2. The National Organizations Division, which concentrated efforts on labor unions, trade associations, and interracial groups. 3. The Field Division, which engaged with women, schools, agriculture, as well as organized speakers and special events across the United States. 4.
The Administrative Division, which worked with various government agencies and the other divisions to discuss personnel and budget management.279
The Field Division organization was crucial to the Defense Bond Campaign because it centered around engaging with specific civic groups to generate support. Although women were targeted as a group for the Treasury to market toward, there was less of a separation between men and women in marketing compared to World War I. In Gordon Streib’s research, the participation appeals to purchase Defense Bonds showed a shift in the status of women, who took over many jobs for men who fought abroad. Streib noted that, “In the first war [World War
I] women were approached as a separate group as opposed to men. Twenty-two of the earlier appeals specifically urged women to participate in the war effort by buying bonds. In the second sample this was found to be the case in only one instance.280 Although women had separate societal roles from men, World War II broke some societal barriers as women took on greater responsibilities on the home front.
277 Morse, 81. 278 Morse, 87. 279 Morse, 87. 280 Streib, 275. Bloch 95
The role of women on the Defense Bond Campaign cannot be understated. Women comprised around half of the six million volunteers who organized local campaigns across different states.281 Certain advertisements may not have directly appealed to women, but women had their own special promotions. The first exclusively women’s promotion, titled “Women At
War Week,” took place in the fall of 1942.282 Various War Loans had their own “Women’s
Section” dedicated to marketing to or organizing women. Many Defense Bond Campaigns centered around roles traditional occupied by women, such as fashion and motherly duties.
Women volunteers during the Second War Loan organized an “Outfit the Outfit” campaign, where different women’s committees and clubs formed rallies that illustrated the Defense Bond
Drives in terms of military outfits of soldiers, sailors, and marines.283 These committees photographed Defense Bond purchasers along with service members to show that the purchaser
“outfitted” the serviceman through the bond purchase.284 This rallying effort helped purchasers visualize what the money spent on Defense Bonds went and created a personal connection with the War Loans.
Women’s groups also coordinated Defense Bond Drives through hospitals. A 1943 advertising campaign, “Bonds for Babies,” had posters displayed around various nursery wards displaying the message: “For Baby’s Future, Buy War Bonds.”285 This is another example of the effective familial appeal, as it created an emotional plea for bond purchases by using an innocent baby; the baby’s future depended on the United States winning World War II and it was the individual’s duty to help fund the future of the baby and the nation. During the Fourth War
281 Morse, 185. 282 Morse, 183. 283 Morse, 183. 284 Morse, 183. 285 Morse, 183. Bloch 96
Loan, the “Women’s Section” created a Hospital Equipment Campaign, similar to the “Outfit the
Outfit” campaign.286 This campaign displayed the cost of various medical instruments to show what each denomination of Defense Bond funded. Women’s campaigns typically did not focus on warfare, such as tanks and guns, and focused on helping American soldiers with medical supplies and uniforms rather than destroying the enemies.
Different communities had different values, which is why the Field Division had a different State Committee for each state.287 The Treasury of World War II followed a similar model to the Treasury of World War I, where governors were asked to serve as honorary chairman and government officials served as state administrators for their respective Defense
Bond Drives.288 These officials recruited community leaders, such as businessmen or bankers, to become local chairmen and encourage Defense Bond purchases in their respective communities.
This was important for establishing an ethos for the Defense Bond Program because communities trusted and followed a leader from their own community who shared their constituent’s best interests.
Banks served as issuing agents for Defense Bonds after the Savings Bond campaign failed to generate widespread sales through post offices. Banks supported acting as marketing centers and issuing agents because it would generate support and businesses for themselves.
Even before the United States, on March 21, 1941, the New York Bankers Association reported that it “…stood ready to aid in marketing Defense Bonds.”289 The Treasury partnered with The
American Bankers Association to double the number of outlets for Defense Bond. Defense
286 Morse, 184. 287 Morse, 87. 288 Linehan, 17. 289 Blum, 301. Bloch 97
Bonds were also sold in movie theaters, as portrayed in All-Star Bond Rally.290 Creating an easy medium for Americans to purchase bonds, such as banks, movie theaters, and the Payroll
Deduction Program, increased sales because it removed any difficulty and confusion from the purchasing process.
The Field Division of the War Finance Division organized many local campaigns to generate community support. Similar to the promotion the Federal Reserve ran, the Treasury created a “Buy-a-Bomber” campaign. The “Buy-a-Bomber” campaigns rallied communities or groups together to purchase enough Defense Bonds to cover the cost of an aircraft.291 Once enough money was raided, the community, whether it was a state, county, town, school, business, or organization, named the plane that the community funded.292 At least 292 aircrafts were bought through the “Buy-A-Bomber” campaign.293 These planes would fly around the area and be displayed at local airfields for members to see. This provided a great incentive for average Americans to buy Defense Bonds because the public was able to see directly where the money was going. It also fostered patriotism as Americans felt pride knowing that their funds directly created an aircraft that they were able to witness.
In order to encourage patriotic values in the American youth, the Treasury sold Defense
Stamps, similar to when Secretary McAdoo’s Treasury sold War Saving Stamps in World War I.
Defense stamps could be purchased from post offices for 10, 25, 50 cents, $1, or $5.294 Post offices gave away blank albums of every stamp denomination for free; when the album was
290 Linehan, 22. 291 Jayson A. Altieri, "Government Girls: Crowd-Sourcing Aircraft in World War II," Air Power History 67, no. 1 (2020), 24. 292 Altieri, 24. 293 Altieri, 24. 294 Linehan, 15. Bloch 98 completely full of stamps, it could be redeemed for a Series E Defense Bond.295 Historian Jarvis
Means Morse outlined five benefits from the Treasury’s coordination with schools:
1. A majority of school administrators and teachers supported the merits of the
voluntary Defense Bond Campaign. 2. Teaching professionals were respected in their
communities, which meant communities were quick to follow their lead. 3. Children
told their parents about the Defense Bond message, which essentially created millions
of Treasury civilian advertisers. 4. Children and Boy Scout members helped distribute
Defense Bonds in their communities. 5. Coordinating with schools created a
microcosm of the Payroll Deduction Program, which set the groundwork habits for
future government savings.296
The primary purpose was to create a total-war effort that encouraged all members of society, including children and the poor, to take part in American success. Defense Stamps totaled
$1.652 billion or 0.72% of 1945 GDP from May 1941 through December 1945.297 It is impressive that of the $54.418 billion worth of Defense Bonds sold during World War II, 3% of
Defense Bonds came from redeemed Saving Stamps.298
The Treasury did not expect the Defense Stamps to be a major source of funding because of the cheap price, but despite the low cost, American children were able to fund various vehicles and munitions for the war effort. “Schools at War” was a program, sponsored by the Treasury and the Office of Education, that promoted stamp and bond purchases to children.299 Schools taught students about the importance of thrift and saving, especially during war time. American
295 Linehan, 15. 296 Morse, 176. 297 Olney, 106. 298 “Saving Bond Sales,” Research Center, Treasury Direct. 299 Linehan, 23. Bloch 99 children were encouraged to spend their allowances on Defense Stamps because it was a smart investment for their future and their country’s future. Through the “Schools at War” program, schools across the country purchased Defense Stamps to “buy a Jeep.”300 Considering how cheap Defense Stamps sold for, it was impressive that in 1943, alone, schools “purchased” more than 90,000 Jeeps.301
Results of the Sales Campaign
There were mixed reports on the total cost of World War II and the influence of the
Defense Bond Campaign. Different economists and organizations used their own unique methodology to determine the costs of the war, federal expenditures, and bond sales. Upon compiling and comparing research, the Defense Bonds of World War II provided a sizeable amount of revenue for the federal government relative to the Savings Bond campaign of 1935 to
1941.
The Defense Bond campaign started off slow in 1941. This is primarily due to the attack on Pearl Harbor occurring in December, which initiated the major increase in demand for
Defense Bonds. According to the Treasury, in 1941, the first year of sales, Defense Bonds generated $2.538 billion, or 1.96% of 1941 GDP.302 This was already more than the most profitable year of Saving Bonds, which generated $1.044 billion in 1940, or 1.01% of 1940
GDP.303 Defense Bonds sales increased every year between 1941 and 1944. One potential reason why Defense Bond sales decreased between 1944 and 1945 was the conclusion of World
War II in 1945, in both Europe and the Pacific. The peak of Defense Bond sales reached
300 Linehan, 23. 301 Linehan, 23. 302 “Saving Bond Sales,” Research Center, Treasury Direct. 303 “Saving Bond Sales,” Research Center, Treasury Direct. Bloch 100
$16.044 billion in 1944, or 7.15% of 1944 GDP.304 Around 450 million series E bonds were sold to over 85 million Americans on a voluntary basis.305 Comparing the Savings Bonds Drive to
World War II, the Defense Bonds were far more successful in generating revenue than Savings
Bonds. One potential reason for this peak in sales was the D-Day Invasion on June 6, 1944. The
United States’ annual GDP increased by $100 billion between 1941and 1944, which illustrated that as the American economy performed well and output increased, bond sales followed the same trend.306
The Congressional Research Service estimated that World War II military cost totaled
$296 billion, or 35.8% of GDP in 1945.307 Using the Treasury’s Defense Bond sales numbers, around $54.418 billion were sold between 1941 and 1945, or 23.8% of 1945 GDP.308 By using simple calculations with these two figures, Defense Bond sales made up 18.24% of the total
World War II cost, according to the Congressional Research Service. In contrast, economist
Hugh Rockoff estimated that total federal expenditures in 1939-1946 total $413.7 billion.309
Rockoff, however, did not only examine the defense expenditures, but the total federal expenditures including non-defense costs. Based on Rockoff’s estimate, the United States’ federal government borrowed $115.8 billion out of the $413.7 billion from the American public.310 By the end of World War II, borrowing money from the public financed 28% of federal government expenditures, by Rockoff’s estimates.311
304 “Saving Bond Sales,” Research Center, Treasury Direct. 305 Morse, 235. 306 “Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis. 307 Stephen Daggett, “Costs of Major U.S. Wars,” Congressional Research Service, 2010, 2. 308 “Saving Bond Sales,” Research Center, Treasury Direct. 309 Hugh Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, (Cambridge University Press, 2012), 171. 310 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 171. 311 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 171. Bloch 101
In either of the estimates, the financing of World War II through Defense Bonds was beneficial to funding the war effort. Defense Bond’s did not account for the same percentage of war financing as Liberty Bonds, but the percentage financed through Defense Bonds was still high, especially compared to Savings Bonds. Rockoff estimated that public borrowing in World
War I accounted for $24 billion, or 58 percent World War I expenditures.312 In comparison,
Rockoff estimated that public borrowing comprised 28% of World War II expenditures, meaning that public borrowing in World War II accounted for around half of what public borrowing did in
World War I.313 While that appeared as a significant decrease, World War II required significantly more funding than World War I. World War I required $33 billion in federal expenditures, or $37.62 billion in 1946 dollars.314 That is equivalent to only 9.09% of the $413.7 billion of the World War II federal expenditures between 1939 and 1946. According to the
Treasury, World War I’s total cost would only have financed four months of World War II.315
Although World War I public borrowing appeared more effective than in World War II as a percentage of the cost of the war, the Defense Bonds managed to fund over a quarter of the federal expenditures for World War II despite World War II requiring more than ten times the amount of funding than World War I.
The Defense Bonds generated significantly more revenue than the Savings Bond campaign. The Savings Bond campaign did not explicitly serve to finance any policy, as
Morgenthau created the program to democratize finance, but the federal government ran massive deficits as a result of New Deal Spending. Savings Bonds totaled around $4 billion, or 3.1% of
312 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 31. 313 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 171. 314 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 31. 315 Linehan, 23. Bloch 102
1941 GDP.316 That amount would only finance around 10% of New Deal’s cost of $41.7 billion, or 30.3% of 1931 GDP.317 While the New Deal program required significantly less funding than
World War II, World War II Defense Bonds were more effective in financing as a percentage of the program the bonds aimed to finance. It was even more impressive that the Defense Bonds were able to finance 28%, compared to 10%, of a program that required over ten times the amount of funding.
Controlling Inflation
The total war effort of the United States allowed the American economy to flourish after a decade of economic hardship. The Great Depression ruined the financial stability of countless
Americans and shattered the credibility of American financial institutions. World War II defense production created thousands of jobs and put Americans back to work. When World War II began in Europe in 1939, the unemployment rate in America was 17.2%, which is significantly larger than the target of 4%.318 By the fall of 1941, the United States had undeclared naval war with Germany and provided enormous amount of aid to the United Kingdom and the USSR.
Despite not entering World War II for two years after it began in Europe, the United States produced munitions for Great Britain and for the eventual entry into the fight. When the United
States entered World War II in 1941, unemployment dropped to 9.9%, a decrease of 58% from
316 Linehan, 10. 317 “Which Was Bigger: The 2009 Recovery Act or FDR's New Deal?” St. Louis Fed On the Economy Blog, Federal Reserve Bank of St. Louis. 318 “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics, Accessed March 9, 2021. Bloch 103
1939.319 Unemployment steadily dropped over the course of the war, hovering around 2% between 1943 and 1945.320
The United States’ GDP more than doubled over the course of World War II. In 1939, government spending contributed $15.2 billion to the total $93.4 billion of GDP.321 By 1945,
GDP grew to $228 billion, where government spending composed $96.4 billion.322 Government spending alone for 1945 was larger than the total GDP for 1939. Despite the large amount of government spending, inflation remained relatively low for a war period. Inflation reached the highest levels for World War II during the first three of American intervention due to the rapid mobilization efforts. Inflation levels for 1941-1943 averaged 7.3%, with a peak of 10.9% in
1942.323 Despite inflation levels averaging over 5% of the 2% target, inflation began to decrease and remain under control between 1944 and 1945, with inflation levels of 1.7% and 2.3%, respectively.324
Inflation was a major hazard that the Treasury and the federal government had to mitigate. American credit and savings were damaged severely as a result of the intense inflation of World War I. The disastrous past only twenty years early served as a warning for the
Treasury on how inflation must remain under control. Secretary Morgenthau did not design the
Defense Bond program to “roll back the forces of inflation,” but the inflationary market forces began to take hold by 1941.325 The public debt expanded rapidly, and inflation began to increase a result of Lend-Lease and overall American war production, in 1941. Issuing Defense bonds
319 “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics, Accessed March 9, 2021. 320 “Labor Force Statistics from the Current Population Survey,” Bureau of Labor Statistics, Accessed March 9, 2021. 321 “Table 1.1.5. Gross Domestic Product,” National Income and Product Accounts, Bureau of Economic Analysis. 322 “Table 1.1.5. Gross Domestic Product,” National Income and Product Accounts, Bureau of Economic Analysis. 323 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021. 324 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021. 325 Blum, 304. Bloch 104 took surplus funds out of consumer spending streams and stored the excess funds for future use.326 One of the main benefits of offering Defense Bonds, other than reducing inflationary pressures, was that incentives to work remained. If the Treasury taxed individuals in order to eliminate the same amount of purchasing power from the economy, Americans would have been disincentivized to work.327
World War II Defense Bonds managed to absorb a majority of consumer funds and finance a sizeable amount of the war effort. According to the Congressional Research Service,
World War II cost $296 billion, or 35.8% of GDP in 1945.328 Over the course of World War II, the Treasury sold over $185.7 billion, including Series E, F, and G Bonds.329 This would mean that Defense Bonds absorbed around 62% of the government expenditures throughout World
War II. This is impressive because government expenditures nearly tripled between 1941 and
1942 and rose another 50% from 1942 to 1943.330 The velocity of money, or how quickly money was being spent or transferred, was much lower in World War II than World War I;
Americans were much more eager to save in World War II than in World War I. This could have been due to rationing and the non-marketable structure of the Defense Bonds which created a desire to keep money in a stable and profitable security after the horrors of the Great Depression.
When an individual purchased a Defense Bond, the deposit transferred to a war loan account at commercial banks, which was maintained by the Treasury; the government then transferred the deposit from the war loan account to Federal Reserve Banks.331 The government proceeded to spend this money, therefore releasing that money into the public, and eventually
326 Linehan, 11. 327 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 168. 328 Daggett, 2. 329 Morse, 238. 330 Schwartz, 140. 331 Schwartz, 154. Bloch 105 into private accounts of individuals through the form of income. These war loan accounts were exempt from reserve requirements, meaning that any transfer of funds to another account reduced the required reserves for the bank.332 According to economist Milton Friedman, the
Defense Bonds caused the money supply to act irregularly between 1943 and `1945, which coincided with the eight total War Loan Drives.333
Milton Friedman argued that the bond drives had no noticeable effects on currency by examining the deposits at Federal Reserve Member Banks of total deposits compared to deposits excluding the United States Defense Bonds. During each War Loan Drive, the total deposits increased as Americans were encouraged to purchase Defense Bonds. In comparison, total deposits excluding the Defense Bonds decreased during each War Loan.334 Due to the increase of deposits without a reserve requirement, one would expect that banks would lend out or transfer the excess money, which would greatly increase consumer spending and inflation.
However, the Federal Reserve System, “…offset some of the effect of the transfer of deposits by reducing its credit outstanding.”335 The Federal Reserve decreased the amount of lending to banks due to the decrease in the reserve requirement and the potential excess funds that would enter the United States economy.
Price controls and rationing contributed to keeping inflation levels lower than those during World War I. Price controls were previously used in other economic crises, such as
World War I, but not to the same extent as World War II. Congress granted The Office of Price
Administration (OPA), which oversaw price controls, extended powers in October 1942 with the
332 Schwartz, 156. 333 Schwartz, 155. 334 Schwartz, 154. 335 Schwartz, 156. Bloch 106 passage of the Emergency Stabilization Act.336 The Office of Price Administration sought to keep prices down as the incomes of Americans rose due to war production. A training manual from the Office of Price Administration explicitly stated the philosophy behind price controls, saying,
Business as usual is impossible under conditions of total war. People have more money,
but there is less for them to buy. As this greater amount of money bids for smaller
quantities of goods, prices rise. It is the duty, then, of the OPA to keep the cost of living
down so that everyone can have enough to eat, to wear, and a place to live—through
price control.337
With over 200 committees established to oversee prices in various industrial sectors, the Office of Price Administration estimated that the price controls reduced the price level by more than 30 percent below what it would have been without price controls instituted.338
Taxing and rationing also contributed to controlling inflation by limiting income and preventing many Americans from taking advantage of the low prices. Along with price ceilings,
Congress passed a broadly written price stabilization bill in 1942 that created an after-tax limit of
$25,000 on all salaries.339 President Roosevelt championed this legislation after originally proposing a 100 percent “super-tax” on excess incomes over $25,000, which was quickly dismissed by Congress.340 Rationing created an excess of demand for products, while supply declined. Price control from the Office of Price Administration kept prices low, especially for
336 Reed, “One Hundred Years of Price Change: the Consumer Price Index and the American Inflation Experience: Monthly Labor Review,” U.S. Bureau of Labor Statistics. 337 Reed, “One Hundred Years of Price Change: the Consumer Price Index and the American Inflation Experience: Monthly Labor Review,” U.S. Bureau of Labor Statistics. 338 Reed, “One Hundred Years of Price Change: the Consumer Price Index and the American Inflation Experience: Monthly Labor Review,” U.S. Bureau of Labor Statistics. 339 Leff, 1299. 340 Leff, 1299. Bloch 107 food. For example, egg prices in 1943 were less than half of the price in 1920.341 Consumers were not able to purchase large quantities of eggs because of rationing or scarcity of the product.
Certain goods or products, including cars and household appliances, became unavailable to purchase due to war production demands.342 Limiting the quantity that Americans were able to purchase, as well as keeping the price of goods low, considerably contributed to lowering inflation levels.
One of the main reasons why inflation remained under control was due to a stronger
Federal Reserve. One of the roles of the Federal Reserve was to engage in open-market- operations, or OMO. These open-market-operations allowed the Federal Reserve to buy or sell government securities in order to control the money supply. When the Federal Reserve bought securities, the money supply increased because the Federal Reserve injected additional funds into the money supply; when the Federal Reserve sold securities, the money supply shrunk because investors purchased securities, which the Federal Reserve held. In World War I, the Federal
Reserve System did not possess assets to sell to public to limit the money supply.343 Instead, the
Federal Reserve lent reserves to banks, which in turn made loans to private individuals, who purchased Liberty Bonds; this created an inflationary cycle that led to the high inflation of World
War I.344 By 1939, the Federal Reserve controlled over $2 billion worth of government securities to sell to the public, which created a much stronger and effective monetary position.345
341 Reed, “One Hundred Years of Price Change: the Consumer Price Index and the American Inflation Experience: Monthly Labor Review,” U.S. Bureau of Labor Statistics. 342 Reed, “One Hundred Years of Price Change: the Consumer Price Index and the American Inflation Experience: Monthly Labor Review,” U.S. Bureau of Labor Statistics. 343 Schwartz, 134. 344 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 169. 345 Schwartz, 134. Bloch 108
Public Opinion
Before the attack on Pearl Harbor, Americans were hesitant about joining World War II.
According to a Gallup poll, only 35% of Americans wanted to help England after France surrendered to Germany on June 22, 1940.346 The American public opinion on entering World
War II slowly changed as Pearl Harbor grew closer; 62% of Americans encouraged entering
World War II after Germany invaded the Soviet Union on June 22,1941.347 Once Pearl Harbor occurred, 91% of Americans wanted to declare war on Germany and Japan.348 One of the best measures of public opinion of World War II was the sale of Defense Bonds. If Americans did not approve of the war effort, one would expect Defense Bond sales to be significantly less than the amounts sold, as purchasing bonds is a voluntary act. By April 1943, 83% of 2,943
Americans surveyed had purchased defense bonds. Defense Bond sales increased yearly between 1941 and 1945, in every form of Defense Bond, including Series F and G.349
Many Americans supported the Defense Bond Drives in order to personally help the
United States win World War II. The Defense Bond Program, similar to the Liberty Bonds of
World War I, gave the average American a duty and role in the United States war effort. Out of
3112 Americans, 39% bought war bonds as a personal act to help win World War II. When asked if the individual received wages, salary, or other income put ten cents out of every dollar of their income in Defense Bonds and Stamps, 60% of Americans agreed.350 With over 85
346 “How did Public Opinion About Entering World War II Change Between 1939 and 1941?” United States Holocaust Memorial Museum, Accessed March 10, 2021, https://exhibitions.ushmm.org/americans-and-the- holocaust/us-public-opinion-world-war-II-1939-1941. 347 “How did Public Opinion About Entering World War II Change Between 1939 and 1941?” United States Holocaust Memorial Museum. 348 “How did Public Opinion About Entering World War II Change Between 1939 and 1941?” United States Holocaust Memorial Museum. 349 “Saving Bond Sales,” Research Center, Treasury Direct. 350 Gallup Organization, “Gallup Poll # 1942-0266: Working Overtime/Cost of War/Health, Gallup Organization,” (Cornell University, Ithaca, NY: Roper Center for Public Opinion Research, 1942), Dataset, https://doi.roper.center/?doi=10.25940/ROPER-31087249. Bloch 109 million Americans purchasing Series E Defense Bonds on a voluntary basis, a majority of
Americans supported the United States’ involvement in World War II.351
Defense Bond Legacy
The Defense Bond Campaign succeeded because of the millions of volunteers who organized events and drives in different communities across the nation. Women, children, waitresses, models, actors, singers, and clerks alike worked together to fund the American war effort.352 Due to the amount of public support and organizing, War Loan funding goals often surpassed the desired target at rates ranging from 120% to 192%.353 At the heart of the Defense
Bond Campaign was Secretary Morgenthau’s number one priority: democracy. The Treasury did not use compulsory lending, which could have been done out of fear that it would damage public opinion or because it went against New Deal philosophy. Secretary Morgenthau prided himself on the Defense Bond Program’s democratic nature twenty years after the program ended saying that, “…The Defense Bond Program had served in the absence of any federal propaganda agency as the ‘spearhead for getting people interested in the war.’”354
Organizing events that included everyone kept morale high on the home front. Every
American, regardless of gender or age, had a duty to help the United States win World War II.
Defense Bonds sold exceptionally well due to the effective marketing by the Treasury. Defense
Bonds funded 28% of World War II, the most expensive war in United States history.355 Schools and organizations promoted thrifting and saving through Defense Bonds. The savings rate
351 Morse, 235. 352 Morse, 185. 353 Morse, 185. 354 Blum, 304. 355 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 171. Bloch 110 increased yearly as World War II progressed.356 As a result, Defense Bonds absorbed many of the excess funds from war production and inflation rates remained under control, especially for war time. The non-marketable structure of Defense Bonds, influenced by the Savings Bonds issued months prior, proved to be far more successful than the marketable Liberty Bonds.
Americans did not lose money on the Defense Bonds, and if a bondholder redeemed the bond prior to maturity, the individual received the principal and any interest up to that point.
Defense Bond’s combined the successful marketing and civic engagement of Liberty
Bonds with the stable financial structure of Savings Bonds to create the most successful government bond issue of the twentieth century. This successful bond offering guaranteed a return on the individual’s investment and controlled inflation well for a war period. The Defense
Bond successes must be attributed to the experiences and lessons learned from the Liberty Bonds and Savings Bonds.
356 “Table 5.1. Saving and Investment by Sector,” National Income and Product Accounts, Bureau of Economic Analysis, Revised February 2021. Bloch 111
Epilogue: Savings Bonds After World War II
After World War II concluded in 1945, the Treasury and federal government continued offering Series E Defense Bonds, which returned to the old name of Savings Bonds (Series F and
G issues stopped in 1952).357 The teachings of thrift, financial literacy, and saving for the future from the Savings Bond campaign and Defense Bonds still resonated with Americans. The
Treasury hoped to continue the success of Defense Bonds after World War II, but the Savings
Bonds lacked a coordinated marketing effort. Savings Bonds constantly underwent structural change, such as increased interest rates and decreased maturity period; but without advertising,
Americans overlooked the once popular Savings Bonds. Some Americans continued to invest in
Savings Bonds, but as years passed and economic conditions changed, the Savings Bonds lost economic appeal and Americans switched to alternative forms of saving.
The main lesson the Treasury learned from the Liberty Bonds of World War I was that government savings bonds should be non-marketable to ensure a return on the investment an individual made. Because Liberty Bonds competed with other marketable investment opportunities, Secretary McAdoo altered the coupon rates and maturities of Liberty Bonds during each different Liberty Loan Drive in order to make it more attractive to investors.358
Secretary McAdoo even changed the tax structure of Liberty Bonds so the interest, up to
$30,000, avoided personal income tax.359 Once Secretary Morgenthau introduced the non- marketable Saving Bonds in 1935, the 2.9% interest rate was higher than typical government bonds as an incentive to purchase the secure Savings Bond over other investments, as well as reward the small saver for investing in the United States’ success.360 Making government bonds
357 “Saving Bond Sales,” Research Center, Treasury Direct. 358 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 359 Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” 34. 360 Morse, 24. Bloch 112 attractable created an added incentive to purchase them over other investments, such as municipal or corporate bonds.
As years passed and financial innovations established themselves in American work culture, such as the 401(K) and employee stock options, the Savings Bond lost a majority of the popularity it once had.361 The Treasury updated the coupon rate and maturity of Series E
Savings Bonds, as well as introduced a different Savings Bonds named Series H. The Series H
Savings Bond was introduced in 1952, seven years after World War II concluded to accompany the Series E. Series H Savings Bonds shared a similar structure to Series E Savings Bonds, as both bonds were only available to individuals and carried an interest rate close to 3%; Series E had an interest rate of 2.9% which was available in small denominations, while Series H carried a 3% interest rate and was available in larger denominations, such as a $5,000 and $10,000 denomination.362
As years passed after 1945, the sales of Series E Bonds diminished over time. Yearly
Series E sales struggled to break $4 billion in the 1950s.363 In an attempt to break the downward sales trend, in 1959 the Treasury increased the coupon rate and lowered the maturity on Series E and H Savings Bonds as a way to attract more sales. The interest rate on Series E and H rose to
3.75% and the maturity period decreased from ten years to seven years and nine months to make both Savings Bonds more appealing because other securities were becoming more attractive.364
Improving the structure of the Savings Bonds increased the sales of both Series E and H for a
361 Linehan, 50. 362 Linehan, 38. 363 “Saving Bond Sales,” Research Center, Treasury Direct. 364 Linehan, 38. Bloch 113 short period, as Series E broke over $4.5 billion sold in 1967 and Series H reached over $800 million in 1961.365
Although Savings Bond sales were on a positive trend, the yearly sales did not generate as much revenue as the Treasury hoped. The Treasury altered the structure of Series E Savings
Bonds four times between 1968 and 1973, ultimately raising the interest rate to 6% and lowering the maturity to five years.366 This change managed to increase sales to around World War II levels as Saving Bond Sales surpassed $5 billion in 1971.367 This sudden change in Saving Bond sales was short-lived, as rising inflation and economic crises halted the sudden rise in sales.
Inflation severely damaged the United States economy in the 1970s, reaching a peak of 11% in
1974.368 Energy prices rose due to energy shortages, such as the OPEC Oil Embargo.369
Purchasing a Savings Bond, which was not inflation linked, was counterintuitive for Americans to purchase; Savings Bonds allowed money to be stored for the future, but that money lost value as it was stored in Savings Bonds as United States prices rose. Many Americans redeemed their
Savings Bonds as economic uncertainty plagued American society. In 1980, more than $16 million worth of Savings Bonds were redeemed, which was more than double of the redemptions in 1978 and more than three times the amount of redemptions in 1971.370
Savings Bonds typically held around 20% of the privately held portion of the public debt, but after 1975 with rising inflation and other investment opportunities, it began to fall to below
20% and reached less than 10% after 1981.371 As a way to completely rebrand, the Treasury
365 “Saving Bond Sales,” Research Center, Treasury Direct. 366 Linehan, 48. 367 “Saving Bond Sales,” Research Center, Treasury Direct. 368 Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet. 369 Linehan, 49. 370 “Saving Bond Redemptions,” Research Center, Treasury Direct, Accessed March 10, 2021, Retrieved from https://www.treasurydirect.gov/indiv/research/history/history_sbred.htm. 371 Linehan, 64. Bloch 114 ceased issuing Series E and H Savings Bonds in 1980 and began issuing Series EE and HH
Bonds.372 Series EE Bonds continued the structure of Series E except Series EE sold at one-half of the face value of the bond, rather than three-fourths, as well as carried an interest rate of 7%, which was more than double the initial interest rate of 2.9% during World War II.373 Series HH
Bonds had an almost exact same structure to Series H, but an interest penalty was applied if the bond was redeemed prior to the maturity; this was done as a way to prevent Savings Bonds from being redeemed before maturity.374 Despite these beneficial changes, sales continued to decline and redemptions outweighed sales during most years after 1980.375
A profitable and desirable Savings Bond meant very little to Americans because the
Treasury failed to organize any significant Savings Bond campaign after World War II ended.
Each of the twentieth century bond issues, Liberty Bonds of World War I, Savings Bonds of
1935-1941, and Defense Bonds of World War II, confirm the argument that a proper bond campaign needs an extensive and community-oriented advertising campaign. None of the
Treasury’s structural improvements about Saving Bonds meant anything if the American public remained unaware about the change. Without patriotic advertising overwhelming almost every aspect of American culture, different investment opportunities presenting themselves, and rising interest rates, Saving Bonds lost most of their appeal.
One of the main differences between the Savings Bond campaign in the 1930s and the one post-World War II centered around knowledge of the Savings Bonds. When Secretary
Morgenthau introduced the Savings Bonds in 1935, few Americans knew about the bond’s existence. When Division of Savings Bonds Director Eugene Sloan spoke to Congress about the
372 Linehan, 49. 373 Linehan, 49. 374 Linehan, 49. 375 “Saving Bond Sales,” Research Center, Treasury Direct. Bloch 115 cut in the Treasury’s advertising funding in 1939, he mentioned that, “answers to questionnaires demonstrate that the great majority of owners would perhaps never have heard of savings bonds except for advertising and the distribution of descriptive literature.”376 In contrast to the Savings
Bonds of the 1930s, the American people knew about the Savings Bonds post-World War II because of the vast advertising campaign undertaken in World War II. Neither Savings Bond served to finance a war, which eliminated the Treasury’s hook to encourage bond purchases.
The post-World War II Saving Bonds followed a similar path as the Savings Bonds of
1935 to 1941. Both bond issues sought to spread the public debt and provide a medium for poorer Americans to save and invest money. The main flaw of both Savings Bond offerings was not the structure, but that the Treasury sponsored little to no advertising campaign. The Saving
Bonds of 1935 to 1941 proved that people need a reason to buy savings bonds and without a personal and direct effort from the Treasury, Americans would not invest the same amounts during peacetime compared to wartime. Savings Bonds were still attractable for a short while after World War II ended, but there were no full advertising campaigns. Small organizations and groups promoted thrifting and saving because of the uncertainty of the Cold War.377 Based on
Saving Bond sales data, Savings Bonds sold surprisingly well with most of the advertising funding cut. But if the Treasury committed to complete advertising campaign, similar to World
War I and World War II, one would expect the number of sales would have dramatically increased.
Once World War II ended, the Treasury still maintained some of the advertising resources used to advertise Defense Bonds. These resources included radio, local groups, and the War Advertising Council. All three of these mediums allowed the Treasury to engage with
376 Subcommittee on Treasury and Post Office Departments, 256. 377 Linehan, 33. Bloch 116 larger audiences than in World War I. The War Advertising Council turned into the Advertising
Council after World War II and continued to work with the Treasury, producing radio addresses and advertising connections.378 The Advertising Council organized advertising space and services estimated to be hundreds of millions of dollars.379 Despite all of the resources available, the Treasury cut most of the members of the Defense Savings Staff, later renamed the Division of Savings Bonds. Budget cuts, similar to the one in 1939, forced the Treasury to reduce costs, including staff and potential advertising campaigns. The staff of the Division of Savings Bonds was reduced to one-quarter of its size during World War II, with only 380 employees.380
Instead of having large scale marketing efforts that lasted months long, the Treasury capitalized on certain days or events to encourage Savings Bond purchases. These mini bond drives capitalized on American patriotism to remind Americans about the patriotic duty that was abundantly advertised years earlier. On days such as Independence Day and D-Day, Treasury
Secretary Fred Vinson, who succeeded Henry Morgenthau in July 1945, led a miniature bond drive through radio broadcasts discussing the importance of bond purchases and controlling inflation.381 Saving Bond advertisements used patriotism as a factor for bond purchasing, but primarily focused on the significance bond buying had on personal finance and economic gain.
Many of the advertisements used the profane appeals that Gordon Streib outlined because the advertisement focused on personal benefit, rather than patriotism or participation.382
Companies and local groups continued to promote the ideas behind the Savings Bonds, such as thrift, investing, and saving for the future. Celebrities and radio addresses continued to
378 Linehan, 30. 379 Tufano et al. “Reinventing Savings Bonds,” 13. 380 Linehan, 31. 381 Linehan, 32. 382 Streib, 273. Bloch 117 reach massive audiences and have considerable influence on Americans. Many organized events occurred in the 1950s and early 1960s as the Series E Savings Bond still remained in many
Americans’ mind. The Women’s National Advisory Committee for Savings Bonds ran a nationwide tour in 1952 promoting the sales of Savings Bonds starring celebrity Mary Pickford, known as “America’s Sweetheart.”383 Disney created a special bond presentation certificate for babies to encourage patriotic sentiment and investment in the United States, as well as provide positive publicity for Disney.384 In the late 1950s, the Greeting Card Association for the Savings
Bond Division, as Savings Bonds were considered gifts, especially for Christmas and graduations.385 Communities developed slogans and miniature bond drives promoting the
Payroll Deduction Program with slogans such as “Share in America” and “Take Stock in
America.”386
The Savings Bond Program depended on the volunteer and community effort more than any other advertising force. The Treasury failed to organize any significant campaign effort to the extent of World War I or World War II and Savings Bond sales declined as a result. Without the volunteers, local groups, and community focus, none of the bond programs of the twentieth would have had generated as much popularity and revenue. The volunteers created a personal and direct connection with Americans across the country to create a stronger appeal to purchase government bonds. The importance of engaging with civic groups can be seen through the failures of the 1930s Savings Bonds. The 1930s Savings Bonds did not have engagement with local groups or an energetic sales force, and instead relied on post office workers to spread the message of the Savings Bonds. A direct mail campaign quickly developed, and sales increased,
383 Linehan, 36. 384 Linehan, 37. 385 Linehan, 37. 386 Linehan, 37. Bloch 118 but the growth was slow, and it took the Savings Bond campaign three years to reach one quarter of the subscribers of the smallest Liberty Bond drive.387
Civic engagement served as the driving force behind the success of a government bond.
This is evident through the Treasury’s offering of Patriot Bonds after the September 11 terrorist attacks in 2001. Patriot Bonds followed the pattern of Liberty Bonds and Defense Bonds by having a name that sounded patriotic and powerful. Instead of creating a new government bond, the Treasury merely put the words “Patriot Bond” and a picture of Thomas Jefferson on the
Series EE Bond, that had been in circulation since 1980.388 The Treasury embarked on Patriot
Bond Program to “allow Americans to support the relief and recovery efforts at the World Trade
Center and the Pentagon and to help fund the war on terrorism.”389 Patriot Bonds aimed to capitalize on the sudden rise in patriotism and unity in Americans after the attacks but failed to gain any substantial attraction or success. Patriot Bond sales broke $1 billion shortly after the attacks, but quickly dropped by more than $400 million within the following months because the
Treasury provided no incentives, large-scale advertising campaign, or civic engagement to promote the Patriot Bonds.390 Without providing a reason to support the Patriot Bond program, nevertheless reminding the public the program existed, the Patriot Bond program failed to generate any substantial support. By 2003, the Treasury closed down all regional marketing offices for Savings Bonds and completely cut the marketing budget from $22.4 million to $0.391
The importance of a marketing effort through civic engagement cannot be understated.
387 Hilt, 91. 388 Hilt, 101. 389 Join Committee of Congress, “Commemorative Joint Meeting of the Congress of the United States In Remembrance of the Victims and Heroes of September 11, 2001,” House Concurrent Resolution 448 (September 6, 2002), https://www.govinfo.gov/content/pkg/CDOC-107hdoc285/html/CDOC-107hdoc285.htm. 390 Hilt, 101. 391 Tufano et al. “Reinventing Savings Bonds,” 1. Bloch 119
World War II Defense Bond advertisements utilized different mediums available, such as radio, movies, and celebrities and produced the greatest sales results. World War I Liberty
Bonds advertisements also engaged in similar mediums, such as using celebrities such as Charlie
Chaplin to organize crowds and encourage Liberty Bond purchasing.392 World War II Defense
Bond advertisements were more successful than Liberty Bond advertisements as a result of the technological advancements developed between World War I and World War II. Radio and movies allowed the Defense Bond campaign to connect with millions of audience members with less input costs. One radio address could reach millions of Americans across the nation, compared to a rally which only reached those who attended. Over 85 million Americans purchased Series E Defense Bonds on a voluntary basis.393 In comparison, only 64 million
Americans subscribed to Liberty Bonds during World War I.394 Both of these bond drives succeeded in engaging with the public and creating a message that the American public could rally behind.
Incentivizing the public was crucial to bond drives. Bond drives that encouraged patriotism through active participation, helping the home front, and donating to a cause greater than the individual yielded stronger results. World War I and World War II provided an emotional reason to encourage bond purchases. Secretary of the Treasury McAdoo said after the
Liberty Loan Drives that, "We [The Treasury] capitalized the profound impulse patriotism.”395
World War II Defense Bonds emphasized the patriotic duty of purchasing bonds, without having to educate the public about the financial importance of Defense Bonds because of the Savings
Bond Program months earlier. Without sacred appeals to patriotism, participation, family, and
392 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” 4. 393 Morse, 235. 394 Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” 36. 395 Streib, 275. Bloch 120 victory, bond drives in the twentieth century faced lackluster sales. Peacetime Savings Bonds did sell well, especially for a lack of advertisement funding, but compared to World War I and II, the bond sales did not compete.
Each of the various bond drives proved that war finance is a difficult and risky undertaking by a nation. This thesis judged the various bond drives based on their respective abilities to control inflation, partake in civic engagement, advertise across multiple mediums, and generate a sizeable amount of funds for the government. Each of the different bond drives of the twentieth century succeeded in at least one or more of these factors, but the World War II
Defense Bonds succeeded in each of the factors. Defense Bonds combined the marketing success of Liberty Bonds with a stable financial framework from the Savings Bonds of the 1930s to create the most successful bond drive of the twentieth century.
For a wartime bond, Defense Bonds controlled inflation significantly more compared to
Liberty Bonds. Public borrowing funded 28% of the entire cost World War II, which was the most expensive war in American history.396 The $54.418 billion of Defense Bonds sold would not have been possible without the total war approach of the United States and the voluntary engagement of organizations, advertisers, and civic groups.397 The Treasury successfully marketed Defense Bonds by creating movies, delivering radio addresses, commissioning artwork, and sponsoring various group events. Engaging with Americans across the nation through community groups established a credible ethos for the Defense Bonds and encouraged bond purchases.
396 Rockoff, America's Economic Way of War: War and the US Economy from the Spanish-American War to the Persian Gulf War, 171. 397 “Saving Bond Sales,” Research Center, Treasury Direct. Bloch 121
While war bonds served explicitly to finance a war, issuing bonds gave average individuals a role in the war effort. By giving everyone a duty, American morale remained positive and bond sales continued to increase. The twentieth century bond issues proved that a successful bond campaign emphasized an emotional reason to participate in the program; without a connection built between the Treasury and the American public, bond sales did not reach the levels of World War II. The twentieth century Saving Bond story demonstrated that even if a bond is financially beneficial, people needed incentives and guilt through patriotism was a powerful motivator.
Bloch 122
Appendix
Howard Chandler Christy, “Fight or Buy Bonds /Third Loan Liberty Loan,” National Museum of American History, Smithsonian Institution Accessed March 4, 2021, https://www.si.edu/object/fight-or-buy-bonds-third-loan-liberty-loan:nasm_A19990258000.
Bloch 123
John Joseph Pershing, National Portrait Gallery, Smithsonian Institution Accessed March 4, 2021, https://www.si.edu/object/john-joseph-pershing:npg_NPG.84.79.
Bloch 124
“December 1937 National Geographic Magazine United States Savings Bond Ad,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance, Accessed March 4, 2021, https://www.theherbstmancollection.com/newspapers--periodicals.
Bloch 125
“National Geographic Magazine U.S. Savings Bonds Advertisements,” Newspapers and Periodicals, The Joe I. Herbstman Memorial Collection of American Finance, Accessed March 4, 2021, https://www.theherbstmancollection.com/newspapers--periodicals.
Bloch 126
Mark H. Leff, "The Politics of Sacrifice on the American Home Front in World War II", The Journal of American History 77, no. 4 (1991), 1308. Accessed March 4, 2021. doi:10.2307/2078263.
Bloch 127
Norman Rockwell, “Freedom From Want,” Norman Rockwell’s Four Freedoms, Norman Rockwell Museum, Accessed March 4, 2021, https://www.nrm.org/2012/10/collections-four- freedoms.
Bloch 128
Table 1: Result of the Liberty Loan Campaigns
Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” National Bureau of Economic Research, Working Paper Series: 11919 (2006), http://www.nber.org/papers/w11919. Used with permission from Hugh Rockoff.
Bloch 129
Table 2: Denominations of Liberty Bonds Outstanding on June 30, 1920
Sung Won Kang and Hugh Rockoff, “Capitalizing Patriotism: The Liberty Loans of World War I,” National Bureau of Economic Research, Working Paper Series: 11919 (2006), http://www.nber.org/papers/w11919. Used with permission from Hugh Rockoff.
Bloch 130
Table 3: Financing World War I, March 1917 – May 1919
Hugh Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” National Bureau of Economic Research, Working Paper Series: 10580 (2004), http://www.nber.org/papers/w10580. Used with permission from Hugh Rockoff.
Table 4: Financing World War II, January 1939 – December 1946
Hugh Rockoff, America's Economic Way of War: War and the US Economy from the Spanish- American War to the Persian Gulf War, (Cambridge University Press, 2012), 171. Bloch 131
Table 5: The Liberty Loan Drives
Hugh Rockoff, “Until it's Over, Over There: The U.S. Economy in World War I,” National Bureau of Economic Research, Working Paper Series: 10580 (2004), http://www.nber.org/papers/w10580. Used with permission from Hugh Rockoff.
Bloch 132
Figure 1: Government Spending Compared to Total GDP (In Billions), 1929 - 1946
“Table 1.1.5. Gross Domestic Product”, National Income and Product Accounts, Bureau of Economic Analysis, Revised February 2021, Accessed March 4, 2021, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=sur vey.
Bloch 133
Figure 2: United States Inflation Rate Between 1914 and 1970
Bureau of Labor Statistics, CPI for All Urban Consumers, 1914-2021 [Time Series], 2021, Accessed March 4, 2021, Retrieved from https://data.bls.gov/pdq/SurveyOutputServlet.
Bloch 134
Figure 3: Different Savings Bond Sales Between 1935 and 1980 (in Millions)
“Saving Bond Sales,” Research Center, Treasury Direct, Accessed March 4, 2021, Retrieved from https://www.treasurydirect.gov/indiv/research/history/history_sbsales.htm.
Bloch 135
Figure 4: Net Saving of the United States between 1929 and 1955
“Table 5.1. Saving and Investment by Sector,” National Income and Product Accounts, Bureau of Economic Analysis, Revised February 2021, Accessed March 4, 2021, https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=sur vey.
Bloch 136
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