War Bonds in the Second World War: A Model for a New Iraq/Afghanistan War Bond?

The high costs of fighting the wars in Iraq and Afghanistan have rekindled congressional interest in the concept of the sale of a Treasury security to help finance these war costs. In the 111th Congress, three bills have been introduced that would permit the issuance of a war bond: S. 2846, H.R. 4315, and H.R. 4385. Although these bills are silent on any relationship between the proposed "war bonds" and World War II-era war bonds, the question has been raised whether or not the issuance of war bonds during the Second World War serves as a good model for a new "war bond." During the Second World War, 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 Second World 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 a personal savings rate below historical norms, most federal officials are more concerned about raising consumer spending, because of high unemployment and inadequate aggregate demand. To date, 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 prior war bonds program in the Second World War is a problematic model for Iraq/Afghanistan "war bonds."

Source: Congressional Research Service

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