War Bonds

War bonds (also known as 'Liberty Bonds' during World War I in the U.S.) are a type of debt security issued by a government specifically to fund military operations and other expenditures during wartime. Think of them as a loan you, as a citizen, make to your country in its hour of need. The government sells these bonds to the public, promising to repay the full amount plus interest after a certain period. Historically, these bonds were heavily marketed not as a savvy financial move, but as an act of patriotism. Governments used powerful propaganda, enlisting famous actors and artists to create posters and host rallies, framing the purchase as every citizen's duty to support the troops on the front lines. While technically an investment, the interest rate offered was typically below the market rate. The real 'profit' for the buyer was the emotional satisfaction of contributing to the war effort. For the government, it was a crucial way to tap into a vast pool of domestic capital, reduce inflationary pressure by taking money out of circulation, and foster a sense of national unity and shared sacrifice.

The sale of war bonds is a masterclass in marketing and public persuasion. The primary selling point isn't the financial return; it’s the emotional and patriotic one. During major conflicts like World War II, the U.S. government's campaigns were inescapable. Posters with slogans like “Buy the Bonds that Back the Boys” were everywhere. Hollywood stars, from Charlie Chaplin to Bette Davis, held massive rallies to encourage citizens to open their wallets. The core message was simple: even if you couldn't carry a rifle, you could still fight the enemy by helping to fund the planes, ships, and supplies needed for victory. Buying a war bond was presented as a tangible contribution, a direct investment in the survival and success of the nation.

Behind all the patriotic fanfare, a war bond is a straightforward financial instrument. Here’s the breakdown:

• The Loan: You buy a bond for a certain price, for example, $18.75. This is your loan to the government.
• The Promise: The bond has a 'face value'—the amount the government promises to pay you back at a later date. In this example, the face value might be $25.
• The Wait: You hold onto the bond for a set number of years, known as its term to maturity. For the famous U.S. “Series E” bonds in WWII, this was typically 10 years.
• The Payday: Once the bond matures, you redeem it for its full face value, in this case, $25. The difference between your purchase price ($18.75) and the face value ($25) is your interest, or return on the investment.

The annual yield on these bonds was intentionally kept low, ensuring the government could borrow money cheaply.

For a value investor, any investment must be judged on its financial merits, not its emotional appeal. When viewed through this cold, hard lens, war bonds are almost always a poor choice.

The single greatest financial risk of holding war bonds is inflation. Wartime governments have to spend colossal amounts of money, which they often finance by printing more of it. This massive increase in the money supply typically leads to high inflation, meaning the prices of goods and services rise rapidly. A war bond pays a low, fixed rate of return that stands little chance of keeping up. Let's imagine you bought a $100 bond in 1942 that paid 2.9% interest annually. If wartime inflation was running at 8% per year, your investment was actually losing nearly 5% of its purchasing power every single year. By the time you cashed in your bond, the money you received would buy far less than the money you originally invested. You “supported the troops” but sacrificed your own financial well-being to do so.

From a value investing standpoint, war bonds fail two key tests:

• Return: The financial return is simply too low to be attractive.
• Opportunity Cost: The money locked up in a low-yielding war bond could have been invested elsewhere, for example, in the stocks of essential industrial companies that were booming due to war production. Such investments would have offered a much better chance of protecting and growing your capital against inflation.

While war bonds have virtually zero credit risk (a government is highly unlikely to default on its own citizens during a war it intends to win), the inflation and opportunity cost risks are so immense that they cannot be considered a 'value' investment. They are, in essence, a donation with a partial rebate.

The concept of war bonds is most famously associated with the United States during the two World Wars. The “Liberty Bond” drives of WWI and the “Victory Loan” campaigns for Series E bonds in WWII raised hundreds of billions of dollars and became iconic symbols of the American home front. Today, most governments finance their military operations differently. Instead of direct, patriotic appeals to the public, they issue standard treasury bonds that are sold on the open market to large institutional investors, pension funds, and even other countries. These bonds are priced competitively to attract capital, not to inspire patriotism. However, the classic war bond concept hasn't entirely vanished. Following the 2022 invasion, the Ukrainian government issued war bonds to its citizens and international supporters, blending a patriotic appeal with a relatively high interest rate to fund its defense. This shows that in times of existential crisis, the direct appeal for citizens to financially back their nation's survival remains a powerful tool.