Non-Marketable Securities: What Made Savings Bonds UniqueThe United States has always issued debt, going as far back as the Revolutionary War. These bonds, however, were marketable. This means that those who originally loaned the money to the government in exchange for a bond that paid interest could later sell that bond to another investor without the government being involved in the transaction. If interest rates were higher, the investor would have to sell the bond at a discount to make up for the fact that it was earning less money than newly available bonds. (This is one of the basics of investing in bonds; when interest rates increase, bond values fall and visa versa.) The longer the bond maturity (that is, when the bond was due to be paid back in full and interest payments cease), the greater the bond's "duration". The greater the duration, the more violently the bond price responded to changes in interest rates.
For small investors, this was not an ideal situation. A farmer or a teacher would want a place to park their capital until they needed it to pay for education expenses, build a barn, or provide a gift for children upon marriage. Fluctuating bond prices presented a unique challenge. Certainly, the capitalist class could afford to take such risk, but those of ordinary means didn't like watching the value of their bonds change.
When Secretary Henry Morgenthau, Jr., developed the United States savings bond program, he wanted to each savings bond to be non-marketable. That meant that investors could not sell savings bonds to other investors. Instead, the savings bonds represented a contract between the original purchaser and the United States Government. This contract could not be transferred. In exchange, the savings bonds would never fluctuate in value. Investors would be able to cash in their savings bonds and receive their original invested principal, plus any interest owed. Combined with the promise that lost savings bonds could be reissued or replaced, the program became instantly popular.
"Baby Bonds" - The Nation's First Savings BondsThe United States issued its first savings bonds in four successive series - Series A savings bonds, Series B savings bonds, Series C savings bonds, and Series D savings bonds - all of which were created and sold from 1935 to 1941. These "baby bonds", as the first savings bonds were called, were sold to investors in denominations ranging from $25 to $1,000, for approximately 75% of face value with the full 100% of face value received upon maturity ten years later. This resulted in a 2.9% compound annual rate of return for owners of savings bonds. The bonds ceased earning interest income altogether in April 1951.
These Series A through D savings bonds were sold through post offices, not banks like modern day savings bonds, as well as direct mail marketing and some magazine advertisements. These first savings bonds were so successful that they raised $4 billion. Adjusted for inflation, this is more than $60 billion today. This proved once and for all that the idea of offering affordable, market protected savings bonds for small investors was a viable way to serve the public interest, while simultaneously funding the government.
The End of the Baby Bonds and the Rise of the Series E Savings BondsIn the midst of World War II, facing a huge rise in the national debt, the Treasury Department realized it needed to create a much larger financing mechanism and decided to the expand the scope of the savings bond program. The Series A through D savings bonds were brought to an end and the Series E savings bonds were introduced, with volunteers ranging from Hollywood stars, newspapers, bankers, community leaders, and other media working to actively encourage American citizens to invest in the savings bonds to help pay for the war. Executives from America's largest corporations worked hard to have employees enroll in the savings bonds payroll program, which would allow them to save a set percentage of their paycheck and have the money invested automatically in the new Series E savings bonds.
According to the US Treasury, the new Series E savings bonds were originally known as the "Defense Bond" in 1941, the "War Bond" from 1942 to 1945, and later, just a regular savings bond. Within a few years of its introduction, the new savings bonds became the most widely held and popular investment in the history of the world. Tens of millions of American households used their money to invest in the Series E savings bonds.
The first series E savings bonds were issued with 10 year maturities, but were later extended to 30 or 40 years depending upon the issue date. The last Series E bonds are scheduled to stop earning interest in 2010. In 1980, the Series E savings bonds were discontinued and replaced with the Series EE savings bonds, which are still issued today.