War Bonds in the Second World War: A Model for Hurricane Recovery Bonds?
CRS Report for Congress
War Bonds in the Second World War:
A Model for Hurricane Recovery Bonds?
James M. Bickley
Specialist in Public Finance
Government and Finance Division
Summary
Severe damage and dislocations resulting from Hurricanes Katrina and Rita have
rekindled congressional interest in the concept of the sale of a Treasury security to
finance recovery and relief operations. The question has been raised whether or not the
issuance of war bonds during the Second World War serves as a good model for new
“hurricane recovery bonds.” Two bills have been introduced that would permit the
issuance of some form of hurricane relief bond: H.R. 3892 and H.R. 3935.
During the World War II, war bonds were sold to help finance the cost of national
defense. War bonds were simply a new name for already existing U.S. savings bonds.
War bonds were aggressively marketed through well organized campaigns, which
appealed to citizens’ sense of patriotism. Their primary purpose was to reduce
consumer spending in order to lessen inflationary pressures and black market activity.
Also, campaigns to sell war bonds were intended to raise morale by creating a sense of
participation in the war effort. The sale of war bonds did reduce consumer spending.
Current economic and financial conditions differ from those of the early 1940s.
During the war, high inflation and over-employment prevailed. The federal government
imposed price and wage controls, production controls, rationing, controls on the level
of interest rates on Treasury securities, and regulations on installment loans. As
mentioned previously, war bonds were marketed primarily to reduce consumer spending.
Today, despite concern about the low personal savings rate, many federal officials are
more concerned about maintaining consumer spending. Furthermore, no savings bond
or any other Treasury security issue has ever had its funds earmarked for any specific
purpose; rather, all funds raised have been placed in the general fund.
In summary, the war bonds program in World War II is a problematic model for
hurricane relief bonds. This report will not be updated.
The severe damage and dislocations caused by Hurricanes Katrina and Rita have
resulted in renewed congressional interest in the concept of selling Treasury securities to
finance recovery and relief operations in the federally designated disaster areas of
Louisiana, Mississippi, Alabama, Texas, and Florida. During the first session of the 109th
Congressional Research Service ˜ The Library of Congress
Congress (as of October 17, 2006), two bills have been introduced which authorize the
issuance of bonds in response to Hurricanes Katrina and Rita.
H.R. 3892, Hurricane Katrina Bond Act of 2005, was introduced by Representative
Roger F. Wicker. This act:
Amends federal law governing the public debt to authorize the Secretary of the
Treasury to designate one or more series of bonds or certificates (or any portions
thereof) as “Hurricane Katrina Relief Bonds.”
Requires proceeds from such bonds and certificates to be used for expenditures
authorized for relief and reconstruction relating to the impact of Hurricane Katrina
along the Gulf Coast of the United States in 2005.
H.R. 3935, Hurricane Relief Bonds Act of 2005, was introduced by Representative
Harold Rogers. This act states:
The Secretary [of the Treasury] may designate one or more series of bonds or
certificates (or any portion thereof) issued under this section as ‘Hurricane Relief
Bonds’ in response to Hurricanes Katrina and Rita in 2005 and the subsequent
flooding and displacement of residents along the Gulf Coast of the United States.
In response to congressional attention, this report describes the use of war bonds
during the Second World War, examines their relevance as a model for new bonds for
Hurricane relief, and presents alternative policy options. This analysis concludes that war
bonds issued during the Second World War are a problematic model for hurricane
recovery bonds.
War Bonds in the Second World War
On March 1, 1935, the first savings bonds (Series A) were issued to provide a
savings instrument for small savers and to lower interest costs to the Treasury by1
expanding the potential market for Treasury securities. This bond was registered and
accrued interest at a fixed rate until redeemed. Series B, C, and D, which were similar to
Series A, were issued subsequently.
Before the Second World War started in Europe, the U.S. economy was still in the
Great Depression; hence, unemployment was high, unused productive capacity was
extensive, and wholesale and retail prices were declining. After war started in Europe
on September 1, 1939, the United States increased defense spending, which was financed
by new and higher taxes, cuts in nondefense spending, and an expansion in the national
debt. On March 11, 1941, Congress passed the “Lend — Lease Act,” which empowered
1 U.S. Dept. of the Treasury, Savings Bond Division, A History of the United States Savings Bond
Program (Washington: Sept. 1984), p. 5.
the President to provide defense material to foreign governments “whose defense the
President deems vital to the defense of the United States.”2
Despite higher taxes and cuts in nondefense spending, the large increase in defense
related spending plus the absorption of a significant proportion of the manpower pool by
the armed forces, began generating inflationary pressures as unemployment fell and
unused plant capacity diminished. The U.S. Government attempted to lessen inflationary
pressure by encouraging the general public to buy savings bonds, which were now called
“defense bonds.”3 On May 1, 1941, the Treasury issued a new savings bond (Series E).4
Because of the comparatively high rate offered on these securities, a limit of $5,000
(maturity value) was placed on the amount one person could acquire in any one calendar
year. 5
After the United States entered the war in December 1941, defense spending soared.
Savings bonds were renamed “war bonds.” During the Second World War, existing taxes
were raised, new taxes imposed, and price and wage controls implemented. In addition,
production controls were instituted and a rationing system established. The production
of many consumer products such as automobiles and refrigerators ended. Controls were
imposed on consumer credit and stock market credit.6
The Treasury and the Federal Reserve fixed interest rates on Treasury securities at
low levels to keep interest costs low. The Federal Reserve conducted an “easy” money
policy; hence, the banks had plenty of reserves. Although this policy kept interest costs
low, it contributed to inflationary pressures because the money supply expanded.
As war production expanded, inflationary pressures increased dramatically. Rising
employment and extensive overtime resulted in surging growth of wage incomes. Despite
higher taxes, workers had more disposable income. In order to assist in lessening
inflationary pressures and reducing black market activity, the War Savings Staff at the
Treasury managed a series of eight war loan drives. Employees were encouraged to
purchase war bonds through payroll deduction plans.
While the general population purchased war bonds, the U.S. government decided to
promote the purchase of Treasury market-risk securities (notes, bills, bonds, certificates,
and tax notes) to large individual and corporate investors.7 These market-risk securities
were simply regular Treasury marketable securities; that is, they were bought and sold on
financial markets. Victory Fund Committees consisting of bankers and members of the
2 Paul Studenski and Herman E. Krooss, Financial History of the United States (New York:
McGraw — Hill Book Company, Inc., 1963), p. 441.
3 U.S. Dept. of the Treasury, Savings Bond Division, p. 11.
4 For a description of E Bonds, see Questions and Answers about War Savings Bonds,
[ h t t p : / / www.ww2homef r ont .com/ t opi cs-bonds.ht ml ] .
5 U.S. Dept. of the Treasury, Savings Bond Division, p. 7.
6 Margaret G. Myers, A Financial History of the United States (New York: Columbia University
Press, 1970), pp. 333 — 359.
7 U.S. Treasury, Savings Bond Division, p. 15.
securities industry were established in each Federal Reserve district to assist the Treasury
in marketing both war bonds and market-risk securities, which were called “victory
loans.”8 Henry Morgenthau, Secretary of the Treasury, combined the War Savings Staff
managed by the Treasury and the Victory Fund Committees into a new organization called
the War Finance Division, which reported to the Treasury.9
From May 1, 1941 through December 1945, the War Finance Division and its
predecessors were responsible for the sale of nearly $186 billion worth of government
securities. Of this, more than $54 billion was in the form of War Savings bonds. E10
Bonds alone accounted for $33.7 billion.
According to most economic historians, the war loan drives were successful in
encouraging the average workers to purchase war bonds and those with greater financial
resources to purchase victory loans. These sales absorbed potential consumer spending
that would have exacerbated inflation and expanded black market activity. The purchase
of war bonds represented much new net savings because small savers had limited
alternative saving instruments.
The war loan drives had a strong patriotic appeal, involved 6 million volunteers, and
utilized extensive donated advertising. Each war loan drive
... was a unique fusion of nationalism and consumerism. Seeking to stir the
conscience of Americans, it invoked both their financial and moral stake in the war.
The sale of war bonds provided a way in which patriotic attitudes and the spirit of11
sacrifice could be expressed.
Neither war bonds nor victory loans were earmarked for defense spending. During
the Second World War, however, defense related spending reached over 90% of federal
outlays.
Current Savings Bonds
Currently, Series EE and Series I savings bonds are being issued. Series EE is the
dominant series, as measured by sales. Effective May 1, 2005, Series EE bonds issued
on or after May 1, 2005, earn a fixed rate of interest. Interest accrues monthly and
compounds semiannually and is payable at the time of redemption. The Treasury
guarantees that a bond’s value will double after 20 years. The bond owner has the option
of either deferring income taxes on interest earnings until the time of redemption, or
paying federal income taxes as interest accrues.
8 Ibid.
9 Ibid.
10 Ibid.
11 War Bonds (Loans), World War Two Advertising History, A project of the Digital Scriptorium:
Rare Book, Manuscript, and Special Collections Library, Duke University,
[http://scriptorium.lib.duke.edu/adaccess/.html ].
Series I bonds are securities that accrue earnings based on both a fixed rate of return
and a semiannual inflation rate. A single, annual rate, called the composite rate, reflects
the combined effects of the fixed rate and the semiannual inflation rate. The fixed rate
is selected by the Treasury and is in effect when a bond is issued, and applies until the
bond matures. The semiannual inflation rate reflects the percentage change in the
consumer price index for all urban consumers (CPI-U).
No savings bond issue or any other Treasury security issue has ever had its funds
earmarked for any specific purpose; rather, all funds raised have been placed in the
general fund.
Patriot Bonds
After the terrorist attacks of September 11, 2001, both houses of Congress
considered and passed differing measures authorizing the sale of so-called war bonds to
help give the public a greater sense of participation in the war effort and to provide
revenues that could be earmarked for disaster relief and anti-terrorist actions. On
December 11, 2001, the Department of the Treasury designated Series EE savings bonds12
as “Patriot Bonds,” whose purpose is “to fight the war on global terrorism.” The only
change, however, was to place a picture of a patriot on the front of a Series EE bond.13
This designation forestalled further congressional legislative action.
Summary
Sale of Hurricane Bonds
Congress could decide that a specific statutory endorsement of the decision to issue
“hurricane relief bonds” (or some other name) would add to these bonds’ attractiveness
as a savings alternative. Some funds used to purchase these hurricane relief war bonds
would likely represent the substitution of these bonds for some other form of savings. The
U.S. Treasury estimates that the U.S. saving bond program is cost effective; that is, the14
savings in interest costs exceed the extra administrative costs. These savings, however,
have an insignificant effect on the total budget.
The opportunity to buy “hurricane relief bonds” would give the public a direct sense
of participation in relief and recovery from the effects of hurricanes Katrina and Rita.
12 U.S. Department of the Treasury, “Treasury Department Unveils Patriot Bond on Anniversary
of September 11 Attacks,” Treasury News, Dec. 11, 2001, p. 1.
13 Detailed information about Patriot Bonds is available at
[http://www.publicdebt.treas.gov/sav/savpatriotbond.htm] .
14 The reliability of Treasury’s estimates are controversial. See U.S. Government Accountability
Office, Savings Bonds: Actions Needed to Increase the Reliability of Cost-effectiveness
Measures, GAO report GAO-03-513 (Washington: June 2003).
Spending for hurricane relief and recovery, however, is expected to be far higher than
funds raised from the issuance of “hurricane relief bonds.”15
War Bond Model
Economic and financial market conditions today differ so much from those of the
Second World War that the war bond model is problematic for a hurricane relief debt
issue.
The present economy is vastly different from that of the Second World War. War
bonds were then marketed to reduce consumer spending. The current economy, however,
has a low rate of inflation and low rate of unemployment. No controls exist on prices,
wages, production, interest rates on marketable Treasury securities, or installment loans.
No goods and services are rationed. Instead of attempting to reduce consumer spending,
many federal officials are concerned about maintaining consumer spending.
Moreover, the U.S. financial system is more complex, sophisticated, diverse, and
deregulated than in the World War II era. Small savers have an array of savings vehicles.
For example, they can invest in money market funds and certificates of deposit (CDs) of
financial institutions. Today savings bonds are almost always a substitute mechanism for
other forms of personal savings.
15 For an estimate these expenditures, see U.S. Congressional Budget Office, Macroeconomic and
Budgetary Effects of Hurricanes Katrina and Rita, Statement of CBO Director Douglas Holtz-
Eakin before the House Committee on the Budget, Oct. 6, 2005.