What Is a Liberty Bond?

What Is a Liberty Bond?

Let me explain what a Liberty Bond is directly to you: it's a debt obligation issued by the U.S. Department of the Treasury in partnership with the Federal Reserve. You might also hear it called a Liberty Loan, and it served as a war bond issued in four installments during 1917-1918 to fund the U.S. role in World War I and support the Allied efforts in Europe.

Interestingly, the U.S. government brought back Liberty Bonds after the September 11, 2001 terrorist attacks to help finance the rebuilding of Ground Zero and other damaged areas in New York.

Key Takeaways

Here's what you need to know at a glance: Liberty Bonds were federal debt instruments that financed America's World War I participation. They drew on patriotic feelings and gave many everyday Americans their initial taste of investing. Then, in 2002, New York City and State issued them jointly with U.S. government help to revitalize lower Manhattan after 9/11.

Understanding Liberty Bonds

You should understand that Liberty Bonds started with the Liberty Bond Act, later known as the First Liberty Bond Act, followed by three more acts for additional issues and a fifth postwar round. Through this, Americans essentially lent money to the government for military costs, getting it back with interest after years.

This was part of the Liberty Loan program, a collaboration between the Treasury and the newly formed Federal Reserve from 1914. The government pitched these as a patriotic duty to support the nation and its troops. But the first issue in April 1917 didn't sell well, embarrassing the Treasury, so they ramped up with posters, billboards, celebrity endorsements, and more for the second round later that year.

One key point: the final fifth release in April 1919 was called Victory Bonds to mark the war's end.

Liberty Bonds as Investments

As an investment, the first Liberty Bonds offered 3.5% interest, below typical savings accounts then, with rates climbing to 4.25% in later issues. The real draw was patriotism, not profit. Still, they introduced investing to ordinary folks, previously the domain of the rich or Wall Street pros.

Treasury Secretary William Gibbs McAdoo saw the program as both a patriotism booster and financial educator. They raised $17 billion overall. Bonds started at $50 denominations, or you could buy them via 25-cent War Thrift Stamps or $5 War Savings Certificates that converted to bonds. McAdoo kept rates low to avoid speculators and the wealthy dominating.

A big perk: interest was tax-exempt except for estate or inheritance taxes. With 25-30 year terms, many were redeemed early or converted to higher-rate bonds after 10-15 years, making original certificates rare and collectible today.

Liberty Bonds in the 21st Century

Fast forward to the early 2000s, and Liberty Bonds returned, but differently—not as federal Treasuries, but New York municipal bonds. Issued jointly by the New York City Housing Development Corporation and the New York State Housing Finance Agency from 2002-2006, with $1.2 billion from the feds, these private activity bonds aimed to rebuild the Liberty Zone in Lower Manhattan hit by the 9/11 attacks.

Unlike the originals, these targeted real estate developers and corporations to fund residential and commercial buildings, not war. The $8 billion issue was triple-tax-exempt, but critics said it favored big corporations and funded projects far from Ground Zero. Regardless, it kickstarted a building boom, making downtown Manhattan more vibrant and populated than before.