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A liberty bond or liberty loan was a war bond that was sold in the United States to support the Allied cause in World War I. Subscribing to the bonds became a symbol of patriotic duty in the United States and introduced the idea of financial securities to many citizens for the first time.
Interest on up to $30,000 in the bonds was tax exempt only for the First Liberty Bond.
A common consensus was that more needed to be done to sell the bonds to small investors and the common man, rather than large concerns. The poor reception of the first issue resulted in a convertible re-issue five months later at the higher interest rate of 4% and with more favorable tax terms. When the new issue arrived it also sold below par, although the Times noted that "no Government bonds can sell at par except temporarily and by accident." New York Times, November 20, 1917. The subsequent 4.25% bond priced as low as 94 cents upon arrival. Investment Bankers Association of America Bulletin, Vol. VII, No. 2, October 1, 1918. p. 30.
Secretary of the Treasury William Gibbs McAdoo reacted to the sales problems by creating an aggressive campaign to popularize the bonds. The government used a division of the Committee on Public Information called the Four Minute Men to help sell Liberty Bonds and Thrift Stamps. Famous artists helped to make posters and movie and stage stars hosted bond rallies. Harry Lauder, Al Jolson, Elsie Janis, Mary Pickford, Theda Bara, Ethel Barrymore, Marie Dressler, Lillian Gish, Fatty Arbuckle, Mabel Normand, Douglas Fairbanks, and Charlie Chaplin were among the celebrities that made public appearances promoting the idea that purchasing a liberty bond was "the patriotic thing to do" during the era. Gale Encyclopedia of U.S. Economic History Chaplin also made a short film, The Bond, at his own expense for the drive.Chaplin, Charlie. My Autobiography (1964) The Boy Scouts and Girl Scouts sold the bonds, using the slogan "Every Scout to Save a Soldier".
Beyond these effective efforts, in 1917 the Aviation Section of the U.S. Army Signal Corps established an elite group of Army pilots assigned to the Liberty Bond campaign. The plan for selling bonds was for the pilots to crisscross the country in their Curtiss JN-4 "Jenny" training aircraft in flights of 3 to 5 aircraft. When they arrived over a town, they would perform aerobatic stunts, and put on mock dog fights for the populace.
After performing their air show, they would land on a road, a golf course, or a pasture nearby. By the time they shut down their engines, most of the townspeople, attracted by their performance, would have gathered. At that point, most people had never seen an airplane, nor ridden in one. Routinely each pilot stood in the rear cockpit of his craft and told the assemblage that every person who purchased a Liberty Bond would be taken for a ride in one of the airplanes. The program raised a substantial amount of money. The methodology developed and practiced by the Army was later followed by numerous entrepreneurial flyers known as Barnstorming, who purchased war surplus Jenny airplanes and flew across the country selling airplane rides.
Vast amounts of promotional materials were manufactured. For example, for the third Liberty Loan nine million posters, five million window stickers and 10 million buttons were produced and distributed. New York Times Magazine, Mar 10, 1918 The campaign spurred community efforts across the country and resulted in glowing, patriotically tinged reports on the "success" of the bonds. New York Times, March 27, 1918, page 4. For the fifth and final loan drive (the Victory Loan) in 1919 the Treasury Department produced steel medallions made from melted down German cannon that had been captured by American troops at Château-Thierry in NW France. The inch-and-a-quarter wide medallions suspended from a red, white, and blue ribbon were awarded by the Department to Victory Liberty Loan campaign volunteers in appreciation of their service in the drive.
Despite all these measures, recent researchKang Sung Won, Rockoff Hugh, (2006), "Capitalizing patriotism: the Liberty Loans of WW1", NBER Working Paper No. W11919, 55p. has shown that patriotic motives played only a minor role in investors' decisions to buy these bonds.
Through the selling of "Liberty bonds", the government raised around $17 billion for the war effort. Considering that there were approximately 100 million Americans at the time, each American, on average, raised $170 on Liberty bonds.
According to the Massachusetts Historical Society, "Because the first World War cost the federal government more than $30 billion (by way of comparison, total federal expenditures in 1913 were only $970 million), these programs became vital as a way to raise funds".Massachusetts Historical Society, "Focus on Women and War", June 2002.
Peak US indebtedness was in August 1919 at a value of $25,596,000,000 for Liberty Bonds, Victory Notes, War Savings Certificates, and other government securities. As early as 1922 the possibility that the war debt could not be paid in full within the expected schedule was raised, and that debt rescheduling may be needed. In 1921 the Treasury Department began issuing short term notes maturing in three to five years to repay the Victory Loan. Los Angeles Times, October 5, 1922, page IV9.
The fourth Liberty Bond had the following terms:Garbade, Kenneth D. "Why the U.S. Treasury Began Auctioning Treasury Bills in 1929." FRBNY Economic Policy Review, July 2008.
The terms of the bond included: "The principal and interest hereof are payable in United States gold coin of the present standard of value."Perry v United States, 294 US 330 (1935) This type of "gold clause" was common in both public and private contracts of the time, and was intended to guarantee that bond-holders would not be harmed by a devaluation of the currency.
However, when the US Treasury called the fourth bond on April 15, 1934, it defaulted on this term by refusing to redeem the bond in gold, and neither did it account for the devaluation of the dollar from $20.67 per troy ounce of gold (the 1918 standard of value) to $35 per ounce. The 21 millionSakolski, Aaron Morton. "Wall Street and the Security Markets". 1925 bond holders therefore lost 139 million troy ounces of gold, or approximately 41% of the bond's principal.
The legal basis for the refusal of the US Treasury to redeem in gold was the gold clause resolution (Pub. Res. 73–10), dated June 5, 1933.Records of the 73rd Congress of the United States, Session I, Chapters 46-48, pp. 112–3. The Supreme Court later held the gold clause resolution to be unconstitutional under section 4 of the Fourteenth Amendment:Perry v United States, 294 US 330 (1935), Page 294 U. S. 354
However, due to President Franklin D. Roosevelt's elimination of the open gold market with the signing of Executive Order 6102 on April 5, 1933, the Court ruled that the bond-holders' loss was unquantifiable, and that to repay them in dollars according to the 1918 standard of value would be an "unjustified enrichment". The ruling therefore had little practical effect.
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