The response to the first Liberty Bond was unenthusiastic and although the $2 billion issue reportedly sold out, it probably had to be done below par because the notes traded consistently below par. Various explanations were offered for the weakness of the bonds ranging from German sabotage to the rich not buying the bonds because it would give an appearance of tax dodging (the bonds were exempt from some taxes). A common consensus was that more needed to be done to sell the bonds to small investors and the common man, rather than large concerns. The poor reception of the first issue resulted in a convertible re-issue five months later at the higher interest rate of 4% and with more favorable tax terms. When the new issue arrived it also sold below par, although the Times noted that "no Government bonds can sell at par except temporarily and by accident." The subsequent 4.25% bond priced as low as 94 cents upon arrival. Secretary of the Treasury
William Gibbs McAdoo reacted to the sales problems by creating an aggressive campaign to popularize the bonds. The campaign spurred community efforts across the country and resulted in glowing, patriotically tinged reports on the "success" of the bonds. For the fifth and final loan drive (the Victory Loan) in 1919 the Treasury Department produced steel medallions made from melted down German cannon that had been captured by American troops at
Château-Thierry in NW France. The inch-and-a-quarter wide medallions suspended from a red, white, and blue ribbon were awarded by the Department to Victory Liberty Loan campaign volunteers in appreciation of their service in the drive. Despite all these measures, recent research has shown that patriotic motives played only a minor role in investors' decisions to buy these bonds. Through the selling of "Liberty bonds", the government raised around $17 billion for the war effort. Considering that there were approximately 100 million Americans at the time, each American, on average, raised $170 on Liberty bonds. According to the
Massachusetts Historical Society, "Because the first World War cost the federal government more than $30 billion (by way of comparison, total federal expenditures in 1913 were only $970 million), these programs became vital as a way to raise funds". Peak US indebtedness was in August 1919 at a value of $25,596,000,000 for Liberty Bonds, Victory Notes, War Savings Certificates, and other government securities. As early as 1922 the possibility that the war debt could not be paid in full within the expected schedule was raised, and that debt rescheduling may be needed. In 1921 the Treasury Department began issuing short term notes maturing in three to five years to repay the Victory Loan.
Federal Reserve’s role The Federal Reserve also took an active role in promoting war bonds to commercial banks and the general public. The Federal Reserve provided loans at preferential rates for banks to purchase war bonds, which generated significant profits for member banks, led to a massive increase in the Fed’s balance sheet, and caused inflation rates ranging from 13 to 20%. ==Victory Liberty Loan==