Positives and Negatives of War Bonds During World War 2 - Research Paper Example

?War bonds What are war bonds? War bonds are debt securities which are issued by a government during times of war mainly for the purpose of financingmilitary operations. There are several distinct advantages of war bonds poses but to gain a firm grasp to establish an understanding of these an analysis of what a war bond typically means has to be done. A war bond, simply put, is a special type of security. These are issued by an agency specifically for the purpose of capital generation. This makes the individuals that purchase such bonds lenders of money to the issuing agency. As a return for these loans, a certain amount of interest rate is fixed, although it is noticeable that the interest rate for these bonds is lower than of normal bonds. However as with regular bonds the purchaser always has the option of redeeming the bond for its face value at a later date. Typically war bonds tend to have a yield which is below market value and are usually sold in different denominations to suit different purchasing power of prospective buyers. All things considered these government issued bonds are considered as steady and reliable investments (Altius directory). War bonds were issued by many countries, including United States and Germany during World War I and II. The role of War Bonds During the Second World War, a number of companies encouraged citizens to buy war bonds. In addition to funding the government, war bonds also reduced the amount of currency on the open market, with the hope of keeping inflation rates down. Many Americans think of the Series E Bond when they hear the term “war bonds.” This bond was initially marketed as a “defense bond” in 1935, and with the outbreak of war, the Treasury switched to calling it a “war bond.” Series E Bonds were available from the Treasury until 1980. The funds from the sale of war bonds are used to finance the military. American Patriot Bonds may seem like war bonds, but the sale proceeds actually go into a general fund, rather than supporting the military specifically. For people who dislike the idea of supporting military action but want the safety and stability of government securities, other Treasury securities are available for sale, including treasury bills, notes, and general bonds. War bonds during World War 2 United States Initial offerings The last time it was seen that the United States issued war bonds was during the World War 2. This was in the event when full employment clashed with rationing, and the only way money could have been removed from circulation in order to reduce inflation was through the introduction of war bonds. These bonds were issued by the U.S Government, and they were initially called Defense Bonds. However post the attack on Pearl Harbor, on December 7, 1941; they were renamed to War Bonds. War bonds were primarily debt securities issued for the purpose of financing military operations in the war period, these bonds yielded a 2.9 percent return after a 10 year maturity. If you analyze the median income of a resident of the United States during the World War 2 phase, annual earnings equaled to a total of $2000. It was during this period that regardless of the hardships the American citizens were facing 134 million Americans were asked to purchase war bonds to aid in financing the war. Another option was to purchase stamps, costing 10 cents each, these could be saved towards the future acquisition of a bond. The first series labeled as the ‘E’ U.S. Savings bond was purchased by President Franklin. D. Roosevelt and it was sold to him by Henry Morgenthau, the Treasury Secretary. These bonds served as a loan to the government so that the war could be financed. The E Series bonds were sold at 75% of their face value in denominations of $ 25 up to $ 10,000, with some limitations. Promoting the War Bonds The voluntary promotion of the War Bonds was the key responsibly of the War Advertising Council whereas the sales were supervised by the War Finance Committee. Together the work of these two agencies resulted in the greatest volume of advertising in U.S. history. The appeal made to the public was centered on an appeal for the defense of American liberty and democracy. The advertising was based purely on an emotional appeal which highlighted the moral and financial stake in the war effort and it was the solid strength of this advertising which resulted in such a massive sale of bonds despite the fact that they were offered at a rate of return below the market value. The means of advertising was through radio, new papers and magazines that publicized the bonds to the masses. Due to the massive advertisement campaign word about war bonds spread quickly and polls indicated that 90% of respondents were aware of war bonds in just about a month, making them a home front for contribution to the national defense. Bond rallies were endorsed by famous celebrities, usually Hollywood film stars, artists such as Norman Rockwell who produced some of the most notable illustrations for war bonds and even singers such as Irving Berlin who wrote a song entitled ‘Any Bonds Today?’ to grab the public’s attention. One more notable successful single event was a 16 hour marathon radio broadcast done by CBS, during which about $40 million worth of bonds were sold. A baseball game was also held in New York City with the New York Yankees, the New York Giants and the Brooklyn Dodgers, it managed to raise $56,500,000 in war bond sales. At the end of World War II, January 3, 1946, the last proceeds from the Victory War Bond campaign were deposited into the U.S. Treasury. More than 85 million Americans — half the population — purchased bonds totaling $185.7 billion. Those incredible results, due to the mass selling efforts of helping to finance the war, have never since been matched. The Series E bond was withdrawn on June 30, 1980, when the Series EE bond replaced it, and the War Bond became history. This can be seen in the way taxes provided about $136.8 billion of the war's total cost of $304 billion, with the remaining $167.2 billion covered by War Bonds (Kennedy, 1999). Canada Canada also utilized War Savings Certificates and Victory Bonds to fund its expense of war. It sold its War Savings Certificated through banks, dealers and volunteers in 1940. The maturity period of these certificates was 7 years, and for every 4 dollars of investments a return of 5 dollars was received. However a limit of 600 dollars was imposed on each of these certificates. Victory bonds on the other hand had a maturity period of 6 to 14 years with a rate of interest ranging from 1.5% to 3%. A element of flexibility was also introduced to ease purchase of these bonds from a minimum of $50 to $ 100,000 being the highest. For Canada Victory Bonds were more successful than the War Savings Certificates in mobilizing people for buying the bonds. Germany During World War 1 Germany issued war bonds for financing its military operations however during World War 2 they borrowed money from financial institutions by giving short term war bonds. Also, German banks forced Czechoslovakia which was occupied by Germany to buy war bonds which were issued by Germany. Advantages of war bonds There are several distinct advantages that resulted by the mere issuance and the regulation of war bonds during the World War 2. War Bonds and Inflation Firstly war bonds primarily purpose was to serve as a means for financing the war. They are primarily used to pay for industrial materials which are needed for a war effort. However they result in a second unintended consequence. This can be seen in the way that the government can support the purchasing of war bonds as a means to remove excessive cash from the market. This they simply do as a means to control inflation because whenever there is too much cash in the market it results in inflation. So War bonds during periods of war serve as a means to aid in restricting inflation and keeping the prices fairly constant. In this effort war bonds incorporate a certain kind of a strategy. To aid in this process, the government usually appeals to the public by to aid in the sale of these bonds by utilizing propaganda to help the process along. An example, is that of the Us labeling war bonds as ‘Liberty bonds’, which aim to appeal t the patriotism of the masses claiming to require individual capital and assistance to sustain war effort; appeals such as these results in the sale of these bonds and a reduction in inflation in the marketplace hence resulting in a win-win situation. Furthermore by the use of War bonds a considerable amount of money is prevented from circulating in an over stimulated economy, and purchasing power of consumers, till the war is over; the benefit of this move is that after the war is concluded the funds can be liquidated and then serve as a stimulus to endorse consumer spending so steer the economy to transitioning to peacetime activity. Ease of purchase In World War, Americans could buy “Liberty Bonds,” while other nations issued an assortment of bonds and savings stamps to finance their war efforts. The language used in the promotion of war bonds is often quite florid, drawing the purchaser into the transaction with an appeal to his or her patriotism. War bonds are available in a wide range of denominations to make them affordable to all, ranging from small stamps which school children could purchase to bonds in very large denominations for wealthier individuals (Wisgeek). National Unity Other than its financial advantages war bonds also serve to bring out patriotic sentiments and eagerness of individuals, institutions and corporations to be a part of the war in some way hence making civilians feel involved in their national militaries. The purchase of war bonds is therefore for most of the part accompanied by sentiments of appeals of patriotism and conscience. This makes the public feel like they have a personal stake in the war and hence fulfills their need to be a part of something greater. The U.S.'s Position at the End of the War By the end of the war if you look at the U.S’s position from a macroeconomic perspective due to the healthy financing of the war not only by the end of it the Great Depression had ceased but also the conditions prevalent were for productive postwar collaboration between the federal government, private enterprise and organized labor. These were the parties whose efforts and collaborations had helped achieve continued economic growth post the war. The U.S. had emerged not only physically unscathed, but economically strengthened by wartime due to essential financial funding and industrial expansion which had placed United States at advantages over its allies and enemies. By having and economy which was larger and richer than any other in the world, American leaders then lead a path towards contributing efforts to become the center of the postwar world economy Negative Implications Current War Bonds System Today war bonds are not specifically marked for a certain kind of given purchase. Instead, they add to a war fund, and can be spent when the need rises. What one needs to highlight here is that to all intents and purposes and despite the advantages war bonds pose they are for most of the part a debt incurred by the government, and hence increase a country’s national debt. This is a major criticism of war bonds. Furthermore the presence of a large number of substitutes further has lead to a downplay in the acquisition of War Bonds. The federal government offers different types of treasury bonds, some of these endorse environmental issues while others support the development of green energy; however ultimately they all fulfill the financial needs of the government so that they can take on projects without having to raise taxes. Presently they still serve to curb inflation, stimulate the economy, balance the needs of individuals over time as they experience financial emergencies or retire (Financial web). That being said, it is important to note here that the sale of bonds continued after World War II and into the twenty-first century. Following the terrorist attack on the World Trade Center towers in New York City on September 11, 2001, the Treasury Department announced that funds raised by the sale of Series EE U.S. Savings Bonds inscribed with the legend "Patriot Bonds" would contribute to the government's efforts to combat global terrorism (Wilson, War Bond Drives). However economists have said that it is a bad idea to issue thes bonds mainly because they encourage people to save. Also, Patriot Bonds don’t enable people to ‘contribute directly’ because the money from these bonds will simply flow into the general fund and not the specifically be set aside for counterterrorism (Lewis, 2001). War Bonds – a poor fit for current financial and economic conditions Today when the severe damage and dislocations that have resulted from disasters such as hurricanes Katrina and Rita there seems to have been a rekindled interest in the concept of the sale of a treasury security which will finance recovery and relief operations. The model that this notion is based on is that of the issuance of war bonds during the Second World War which was such a successful endeavor. During the World War 2, it was these war bonds that were sold to help finance the cost of national defense. War bonds, a simple substitute name for the already existing savings bonds of the U.S. through aggressive marketing and well organized campaigns worked due to the appeal to citizen’s sense of patriotism. Some points to consider here that made the War Bonds in the Second World War so popular were: the reduction in consumer spending, reduced inflation pressures, reduction in black market activities and increase in national morale. This is where a key criticism of the War Bonds comes in. The success of the War Bonds was not due to their successful formulation but merely because of the prevalent economic conditions in the 1940s. Conditions which today’s economy and finance differ greatly from. During the war, there was high inflation and over-employment hence the government imposed controls on price, wages, production and rationing and war bonds were introduced to reduce consumer spending. Today, however low personal savings rate prevails and officials are more concerned about maintaining consumer spending. Therefore to earmark funds for any kind of a treasury security issue is out of the question. Instead all the funds are placed in a general category to better cope with the current economic and financial crises the country faces (Library of Congress, 2005). References Altius directory. Retrieved from: http://www.altiusdirectory.com/Finance/war-bonds.php Fincancial web. The Role of War Bonds on Today's Bond System. Retrieved from: http://www.finweb.com/investing/the-role-of-war-bonds-on-todays-bond-system.html Library of Congress. (2005). War Bonds in the Second World War: A Model for Hurricane Recovery Bonds? Congressional Research. RS22305. Kennedy, David M. Freedom from Fear: The American People in Depression and War, 1929-1945. New York: Oxford University Press, 1999 Lewis.H. (2001). 'Patriot Bonds come marching in.’ Retrieved from: http://www.bankrate.com/brm/news/sav/20011121b.asp Wilson.K.L War Bond Drives. Retrieved from: http://digital.library.okstate.edu/encyclopedia/entries/w/wa020.html Wisgeek. Retrieved from: http://www.wisegeek.com/what-are-war-bonds.htm   Read More