Uncle Sam's Investment Opportunity

Edition: November 2001 - Vol 9 Number 11
Article#: 1103
Author: Richard Yercheck

Resurgence of Patriotism

A tremendous wave of patriotism has swept through the United States in the weeks since the events of September 11. While sales of flags, ribbons, and patriotic pins at hometown merchants may be hitting record marks, both houses of Congress may soon approve the sale of a historic patriotic symbol —

''War Bonds.''

Senators Mitch McConnell and Conrad Burns recently introduced legislation to direct the Department of the Treasury to issue War Bonds for the first time since WWII. The proposed sale would help pay for the recovery and response efforts related to the events at the World Trade Center and the Pentagon. And while this legislation has not yet passed, the term ''War Bonds'' has raised many questions – what are they, how do they work, are they viable investments?

War Bonds: Fighting Financial Instruments

All Bonds are certificates of debt issued by a government, municipality, or corporation, guaranteeing payment of the original investment plus interest by a specified future date. The U.S. Treasury began issuing Savings Bonds in 1935, and, in 1941, issued the first Series E Savings Bonds, which became known as War Bonds.

War Bonds were issued to help fund war efforts. During World War II, they were heavily advertised and became at the time as much a part of culture as they were financial vehicles. With slogans like, ''Buy War Bonds for Victory,'' their sale inspired patriotism and offered all citizens a way to help the soldiers fighting overseas.

Technically, proceeds from the sale of War Bonds during WWII and other wars could have been used to fund any government expenditures – not just the war – but war efforts were the government's greatest expense at the time. On the heels of its successful advertising campaign, the government was able to raise more than $165 billion from the sale of War Bonds to more than 85 million Americans between 1941 to 1945. Of those sales, nearly $44 billion have yet to be cashed. Some Bonds were willingly destroyed at patriotic Bond-burning rallies during World War II; others have become collectibles and can be found at auctions and in antique stores. Though Series E Bonds were withdrawn from sale as of June 1980, the proceeds from their sales during WWII alone would equate to almost $1.4 trillion today.

Operational Investments

Offered in denominations from $10 to $10,000, Series E Savings Bonds were backed by the full faith and credit of the U.S. government. Like other types of Bonds, they were exempt from local and state income taxes, although investors paid federal income taxes on the income once the Bond was redeemed or repurchased by the issuer. The interest earned was paid at redemption as part of the redemption value.

While the interest earned on War Bonds was less than the potential return of other investments, the risk associated with Bonds was also considerably less; they were considered a good conservative investment vehicle. When purchased, Series E Bonds cost 75% of face value; for example, a $100 Bond would have cost $75 at the time of purchase. In addition, because Savings Bonds are registered with the U.S. Treasury's Bureau of the Public Debt, investors could get their Bonds replaced if they were lost, stolen, or destroyed.

The Return of War Bonds

While Congress is still debating the return of War Bonds, it is possible that Series E Bonds, in some form, could once again become a part of the conservative investment arena. Some investors may look at the proposed return as respite from the recent stock market volatility; others may dismiss the Bonds for their conservative returns. If War Bonds do return, however, they stand to receive much attention from the millions of Americans who would like to help out during this tragedy.

The above information was obtained from sources considered reliable. Its accuracy or completeness is not guaranteed, and the giving of this information is not deemed an offer or solicitation on our part with respect to the sale or purchase of securities.

Source: Department of the Treasury

ABOUT THE AUTHOR: Richard Yercheck is a Financial Consultant with IJL Wachovia in Charlotte, NC. He can be reached for comment at 800-929-0724 ext 9514. IJL Wachovia is one of the nation's largest full-service, regional, brokerage firms, offering a full range of investment services to investors.