War Bonds in the Second World War: A Model for Hurricane Recovery Bonds?

Publication Date: October 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Severe damage and dislocations resulting from Hurricanes Katrina and Rita have rekindled congressional interest in the concept of the sale of a Treasury security to finance recovery and relief operations. The question has been raised whether or not the issuance of war bonds during the Second World War serves as a good model for new "hurricane recovery bonds." Two bills have been introduced that would permit the issuance of some form of hurricane relief bond: H.R. 3892 and H.R. 3935.

During the World War II, 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 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 the low personal savings rate, many federal officials are more concerned about maintaining consumer spending. Furthermore, 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 war bonds program in World War II is a problematic model for hurricane relief bonds. This report will not be updated.