The economics of war bonds

So I just finished a draft of my paper on the Treasury Department’s campaign to sell war bonds in the Second World War.  The subject interests me because to this day  the campaign is grossly misunderstood.  Most everyone, then and now, believes war bonds were how the government paid for the war.  This reflects the fact that most folk believe the government’s finances work like personal finances.  However when the Federal Reserve has monetary creation powers, the intuitive understanding of war finance breaks down.

From a macroeconomic standpoint, the war bond campaign was anti-inflationary policy.  With the government pumping billions of military expenditures into the pockets of consumers, the Treasury wanted to encourage folk to save this money, rather than spend it on scarce consumer goods.  Basically the Treasury was trying to increase the marginal propensity to save, by issuing savings bonds. Simple right?

Wrong.  The war bond campaign gets interesting on the micro scale.  First off, there is little evidence that consumers actually saved more because of the bond campaign.  The decision to spend or save is tied up in a myriad of of everyday decisions, and it is unlikely that an advertising campaign, however massive, would eliminate the demand to buy.  But the bond campaign plays a bigger role in another market: ie the market for efficacy.  To the vast majority of Americans on the home-front, the second world war was a war of imagination.  Millions of enthused Americans had only a tenuous connection to the war.  The war bond campaign allowed these citizens to feel like they were directly contributing to the war effort. In effect buying and selling war bonds fulifulled consumer demand for feeling useful.

This sounds trite, but considering the bond campaign became the largest selling campaign in history, a market for efficacy became a powerful cultural force.  Throughout the war the bond campaign mobilized 7 million volunteers, just shy of the 8.5 million men in the US army at the time.  The Treasury distributed $300 million ($3.5 billion in 2009 dollars)  in donated war bond ads.  Americans jumped onto the war bond band wagon because the idea of helping to pay for the war made a lot of sense to a consumerist America.  Indeed there truly are markets in everything.

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