Overview of Liberty Bonds

Liberty bonds are issued directly by the federal government in order to raise money. These types of bonds were originally issued back in the early 1900s to help fund World War I. Here are the basics of Liberty bonds and what they have provided to investors. 

Liberty Bonds

Liberty bonds were created by Secretary of the Treasury William Gibbs McAdoo. He came up with the idea to issue these bonds so that Americans could get involved in funding the war effort and earn fair returns on their investments. Americans could invest money into Liberty bonds and, after a certain amount of time, get their principal investments back with the interest that was earned. 

History

The first time that Liberty bonds were issued, they did not sell the entire batch that was available. Because of this, the United States Treasury was embarrassed. Due to the failure of the first issue, they went out of their way to market the second batch of Liberty bonds. The second time around, they utilized advertising and a campaign with popular movie stars of the day in order to get the word out about Liberty bonds. The second batch was a much bigger success for the Treasury Department. During this time, the bonds were readily available and promoted. You could even purchase a bond directly from Boy Scouts and Girl Scouts. 

Default

Even though the bonds were issued by the federal government, one issue of the bond did not turn out as investors had hoped. The fourth issue of Liberty bonds, which took place in 1918, was not paid as originally stated that it would be. According to the wording on the original bonds, they were to be repaid in United States gold coin in the present value. However, this never actually occurred. Because of the government's refusal to pay in gold, bond holders lost approximately 41 percent of the principal of the bond by the time the payments were made. 

Advantage

The big advantage of investing in Liberty bonds was that the interest that you earned would be tax-free. Although interest rates were not that high, you could make up for that by not having to pay any taxes. In addition to that, you would also be able to play a vital role in helping finance the war effort. 

Recent Use

While the initial use of these bonds occurred in the early 1900s, Liberty bonds were again issued after the September 11, 2001, terrorist attacks. The federal government decided to issue these bonds again in order to help with the costs of rebuilding "Ground Zero." These bonds were made available to investors as a way to help them earn tax-free income and to aid in the rebuilding effort. The cost of rebuilding the area was very substantial, and these bonds provided New York with a way to come up with some funding.

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