Nice piece of economic history by Richard Sutch of Richmond Fed.
World War I began in Europe in 1914, the same year the Federal Reserve System was established. During the three years it took for the United States to enter the conflict, the Fed had completed its organization and was in a position to play a key role in the war effort. Wars are expensive and, like every governmental effort, they have to be financed through some combination of taxation, borrowing, and the expedience of printing money. For this war, the federal government relied on a mix of one-third new taxes and two-thirds borrowing from the general population. Very little new money was created. The borrowing effort was called the “Liberty Loan” and was made operational through the sale of Liberty Bonds. These securities were issued by the Treasury, but the Fed and its member banks conducted the bond sales.
Generally speaking, the secretary of the Treasury proposes a funding plan for war financing and works with Congress to enact the necessary legislation, while the Fed operates with considerable independence from both the executive and legislative branches of government. But World War I was different. The Treasury and the Fed, united under one leader, worked together in both the creation of the financial war plan and its execution.
This bit on denomination of bond is interesting. If price kept too high there would be few subscribers. If kept too low, the bonds would become currency and used for consumption:
The bonds were negotiable, with coupons cashable every six months. Although their term was 30 years, they were callable after 15. The lowest denomination available was $50. This, it seemed to some, would put them out of reach for the general public. The average compensation of a production worker in manufacturing was approximately 35 cents per hour at the time. Fifty dollars would require two weeks of wages. But there was an obstacle to issuing lower denominations: The government did not want to deal with the administrative cost of tracking ownership, so it designated Liberty Bonds as “bearer bonds.” These are securities that belong to whoever is holding them at the time rather than one registered owner. Had bearer bonds been issued in small denominations, they could be used like currency to purchase goods, thereby defeating McAdoo’s reason for refusing to print money. They would be money.
McAdoo found another way to make the bonds affordable. He introduced an installment plan. Even the poorest could purchase “War Thrift Stamps,” which cost only 25 cents. The Treasury Department called them “little baby bonds,” and like the Liberty Bonds, they earned interest. The stamps were pasted on a card until 16 had been collected, at which point they were exchanged for a $5 stamp called a “War Savings Stamp.” These were affixed to a “War Savings Certificate,” which also earned interest. When 10 $5 stamps were collected, the certificate could be exchanged for a $50 Liberty Bond. The key to this scheme was that the certificate was registered to its owner and could be cashed only by the person whose name was inscribed on the certificate. That made the certificate non-negotiable.
Good stuff. Plenty of lessons on monetary economics, design of bonds, marketing and so on..