Shortly after declaring war in 1917, the Wilson Administration was faced with the reality of having to pay for the massive military build-up required. Tax increases and monetary expansion were ruled out, leaving only borrowing as an option.
- On April 24th, 1917, the Emergency Loan Act authorized $5 billion. $1.9 billion in bonds were issued at 3.5%, 30 years maturity, callable at 15. Interest on up to $30,000 in bonds held was tax exempt.
- On October 1st, 1917 the Second Liberty Loan Act authorized up to $15 billion. $3.8 billion in bonds were issued at 4%, 25 years maturity, callable at 10.
- On April 5th, 1918 the Third Liberty Loan Act authorized $3 billion. $4.1 billion in bonds were issued at 4.15%, 10 year maturity. Limited to $45,000 per person.
- On September 28th, 1918 the Fourth Liberty Loan Act authorized $6 billion. $6.9 billion in bonds were issued at 4.25%, 20 year maturity, callable at 15. These were redeemable in gold.
- On April 21st, 1919 the Victory Loan Act authorized $4.5 billion at 4.75% four years maturity callable at three. These were redeemable in gold and tax-exempt.
All of the bonds were sold directly to the public by banks. In order to stimulate sales Bond Rallies were held, featuring parades, speeches and free performances by movie stars. The Four Minute Man campaign featured short speeches in public assemblies where prominent local persons urged the purchase of bonds. There was an installment purchase plan whereby persons could buy 25 cent War Savings Stamps and when 200 had been acquired the stamp books could be exchanged for a $50 bond.
New scholarship has established a link between Liberty Bond drive rallies and the spread of the Influenza. You can read about this here.
The Liberty Bonds were a milestone in American public finance; for the first time the common citizen was making long term investments. Altogether the bond issues raised about $17 billion from about 20 million investors. Investors were permitted to swap earlier issues for later ones to get more favorable terms. You can learn more about the Liberty Loans from this article by the Federal Reserve.
Most of the debt from the first three Liberty Bond issues was retired between 1921 and 1927. However, when the 4th Issue was called in 1934 the Treasury refused to pay off in gold, citing the following:
“ … every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payments in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby, is declared to be against public policy; and no such provision shall be contained in or made with respect to any obligation hereafter incurred. Every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any coin or currency which at time of payment is legal tender for public and private debts. Any such provision contained in any law authorizing obligations to be issued by or under authority of the United States, is hereby repealed, but the repeal of any such provision shall not invalidate any other provision or authority contained in such law”.HJR 192 of June 5th, 1933 PL 73-10:
This resulted in a speculative loss to the bondholders of nearly $2.9 billion since the price of gold had increased since 1918. This default was litigated all the way to the Supreme Court but no bond holder ever received any compensation for their loss.
The Liberty Loan Acts were never repealed and have been used to issue additional bonds through the years, most recently after 9/11 for the reconstruction and revitalization of affected parts of New York City.