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What is a 'Liberty Bond'

The U.S. government first issued liberty Bonds during World War I in spring 1917. Federal leaders initially introduced the bonds as a means of financing the war effort in Europe. The U.S. sold Liberty Bonds again after the terrorist attacks in the United States on September 11, 2001—this time, to finance the rebuilding of “Ground Zero” and other damaged areas.

BREAKING DOWN 'Liberty Bond'

Liberty Bonds launched by an act of by Congress, known as the Liberty Bond Act. Congress would later call that initial legislation 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 basically loaned 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. The government created these bonds as part of what was known as the “Liberty Loan” program, a joint effort between the U.S. Treasury and the Federal Reserve System, itself, created in 1914.

The federal government promoted these securities as a way for U.S. citizens to show their patriotic spirit and support the nation and its military. However, Liberty Bonds were only moderately successful when first issued in April 1917, which embarrassed the Treasury Department. The government, to ensure the bonds were more successful the next time, 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 primary appeal of these securities was as patriotic support, and not for financial gain. One economic advantage of the early Liberty Bonds was that the interest on these bonds was 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.

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