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WHAT IS ‘Liberty Bond’
Liberty Bonds were first issued by the U.S. government during World War I in spring 1917. They were initially introduced as a means of financing the war effort in Europe. Liberty Bonds were also sold after the terrorist attacks in the United States on September 11, 2001—this time, to finance the rebuilding of “Ground Zero” and other damaged areas.
BREAKING DOWN ‘Liberty Bond’
Liberty Bonds were created by an act of by Congress, known as the Liberty Bond Act. That initial legislation would later be called the First Liberty Bond Act, since there were subsequent Acts to authorize additional rounds of bonds. Liberty Bonds offered many Americans their first experience with individual investing.
With this program, Americans were essentially loaning the government money to help pay for the costs of wartime military operations. After a certain number of years, those who invested in these bonds would receive their money back, plus interest. These bonds were issued as part of what was known as the “Liberty Loan” program, a joint effort between the U.S. Treasury and the Federal Reserve System, which had been created in 1914.
These securities were promoted as a way for U.S. citizens to show their patriotic spirit and support the nation and its military. However, Liberty Bonds were only moderately successful when they were first issued in April 1917, which embarrassed the Treasury Department. To ensure the bonds were more successful the next time, the government organized a massive public awareness campaign using eye-catching posters, billboards, endorsements from movie stars and other promotional tactics for the second offering of Liberty Bonds in late 1917. During the fifth release of these bonds in April 1919, they became known as “Victory Bonds” to celebrate the end of the war.
Liberty Bonds as Investments
The first issue of Liberty Bonds offered an interest rate of 3.5 percent, which was lower than that available through a typical savings account at that time. Over the course of several subsequent releases, the interest rate gradually increased slightly. Still, the major appeal of these securities was patriotic support, not financial gain. One financial advantage of the early Liberty Bonds was that the interest on these bonds were exempt from taxes, except for estate or inheritance taxes. Most of the Liberty Bonds issued during the early rounds were cashed in or converted to bonds offering a higher interest rate. As a result, those bond certificates are rare and valued by collectors.