War bonds are a method of financing war that reduces demand for goods and services by taking money out of circulation through investment in the bonds. This provides funds to underwrite the war. Modern warfare is an expensive business and must be financed carefully, else a government risks triggering inflation by increasing demand for goods. One method of avoiding this outcome is to raise taxes to finance the war, but such methods risk making a war unpopular. Through the more popular method of selling war bonds, citizens, in effect, invest in the war effort of their government just as they might invest in stocks. Selling war bonds lessens the need for tax increases.
During World War I, the U.S. government raised $5 billion through the sale of Liberty Bonds. Mass rallies to sell the bonds featured celebrities such as Douglas Fairbanks, Sr. Nonetheless, when most Americans talk about war bonds they are generally referring to the bonds sold during World War II. In part this is because the efforts of World War I involved a good deal of compulsion rather than persuasion. During that war school children were badgered, courts imposed illegal fines on those not owning bonds, and the houses of non-purchasers were painted yellow. But World War II bonds are probably better remembered simply because, by then, mass media had expanded considerably and the scale of the media campaign was greater.
War bonds were but one of the means at the government's disposal to regulate the wartime economy. During World War II, the cost of living in the United States increased by about thirty-three percent. Most of this increase occurred before 1943, when the government put strict price controls in place through the Office of Price Administration. The Revenue Act of 1942 established the modern American tax structure, which saw the tax base increase fourfold and introduced tax withholding. Through these measures, the government raised about fifty percent of its costs during the war. This was a considerable accomplishment compared to the thirty percent raised during World War I and twenty-three percent during the Civil War. During World War II, war bonds raised approximately $150 billion, or a quarter of the government's costs.
According to historian John Blum, the Secretary of the Treasury, Henry Morgenthau, said he wanted "to use bonds to sell the war, rather than vice versa." Morgenthau believed that there were quicker and easier ways for the government to raise money than through bond issues, but that it would increase people's stake in the war effort if they bought bonds. Many businesses promoted war bond purchases. Entertainment industry figures lent their celebrity to bond drives. Singer Kate Smith sold $40 million worth of bonds in a sixteen-hour radio session on September 21, 1943. Hollywood starlet Loretta Young sold bonds at a Kiwanis meeting and pin-up girl Betty Grable auctioned off her stockings. Comic book publishers DC and Marvel carried advertisements and columns urging their readers to tell their parents to buy bonds and to purchase 10-cent defense stamps themselves. Covers of Batman and Superman comics appealed to readers to buy war bonds to "Keep Those Bullets Flying" and "Slap a Jap."
War bonds were a relatively effective measure in reducing inflation and financing the war. Moreover they served as a means of popularizing the war by giving non-combatants a direct stake in its outcome. As sound fiscal policy, the measure of their worth can be judged by the inflationary pressures unleashed by President Lyndon Johnson's decision to finance the Vietnam War, which cost $150 billion, by printing more money rather than raising taxes or selling bonds.
Perrett, Geoffrey. Days of Sadness, Years of Triumph: The American People, 1939-1945. Baltimore, Penguin, 1973.