War Bonds
Bonds as an incentive to saving
That said, for a measly 1% of GDP, other methods are probably preferable. This brings us to the Treasury’s view of government deficits. During WWII, the Treasury helped administer the sale of special Savings Bonds, which we’d commonly call war bonds, in numerous drives and publicity campaigns. We’ve already noted above that the Treasury didn’t view the “finding the money” aspect of its job as particularly difficult. What then was the point of war bond drives, which occupied the energies of armies of officials and volunteers at a time when these were particularly scarce?
The answer to this question turns the conventional view of government borrowing on its head. As one Treasury official put it – amusingly, in an internally circulated review of Keynes’s How to Pay for the War – “A wartime borrowing program… should aim at stimulating people to save money which they would otherwise have spent for goods and services and to invest this money in government securities.” Furthermore, this passage continues, the second goal is quite optional: “It should be emphasized that it is the stimulation of savings and not the procurement of the investment of these savings in government securities which is essential. If the money is saved, it is only a matter of the niceties of finance that it should be invested directly in government securities by the saver.”
What does this mean? Government spending was placing financial wealth into private hands: when the government buys resources, it pays using money, which adds to the incomes and portfolios of somebody in the private sector. If private actors were to spend this wealth at a moment when goods were particularly scarce and supply chains stretched to the limit, this would likely drive up prices, exacerbating inflation. The Treasury understood this well.
To the extent that total borrowing exceeds the aggregate amount of savings consciously and intentionally undertaken, we are placing liquid assets in the hands of persons who may use them to put added pressure on price ceilings.
In other words, citizens were earning substantially more income on account of government war spending, and the Treasury’s main goal on this front was to coax them to save that income instead of spending it. Exactly the form of these savings, i.e. household portfolio allocation, didn’t really matter – the critical factor was abstaining from consumption spending. Or, as I like to say, we can give as much money as we want to people who aren’t going to spend it. This was why the government didn’t singularly demand that citizens purchase war bonds, but also implored saving in a variety of other forms, including cash, savings bank accounts, or even insurance.