War bonds are used during wars to help finance the efforts of a country's fighting men and women. During wars, the economy becomes over-stimulated, which typically leads to inflation. This makes it difficult for countries to pay for their war efforts—or for domestic efforts taking place at the same time. War bonds are a way for countries to raise money and pay for their wars.

See Introduction to Savings Bonds for information from the Department of the Treasury on different types of bonds. The Treasury also runs an explanatory site aimed at kids: Treasury Direct KIDS.

In the United States, war bonds were first introduced during World War I. Known as Liberty Bonds, they were a way for the country to pay for its participation in this costly war. It has been estimated that the U.S. spent over $30 billion on that war, with much of the money raised by war bonds. Canada introduced its own war bonds during this time, known as Victory Bonds.

Visit U.S. War Bonds for information on the different war bonds used throughout history. For a basic guide to war bonds and how they work, see What Are War Bonds?

During World War II, the United States shifted to a bond called the Series E Savings Bond or Series E U.S. Savings Bond. The government first issued this bond in 1941 and continued the system until 1980, when it shifted to a different program.

War bonds sold from 1941 to 1965 accrued interest for 40 years. (The bonds issued after 1965 accrued interest for 20 years.) Americans who purchased these bonds did so at a 75 percent rate: for example, a $100 bond cost $75 to purchase. The interest rate on the bonds matured according to market trends and the current market rate. They were available in denominations of $25, $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. The bonds were nontransferable, meaning that only the purchaser could redeem the bonds in the future.

Pictures and images of the campaigns used by the government are shown at Ad*Access—War Bonds and at Pictures of World War II. Information on how women helped sell war bonds is discussed at Women and the Home Front, and Women and War lists more information on how women used war bonds.

Prior to 1941, the United States used U.S. Savings Bonds and United States Postal Service Bonds. Secretary of the Treasury Henry Morgenthau issued the first bonds, although at that time they were known as defense bonds. They didn't become known as war bonds until the U.S. officially entered World War II. The first purchaser was President Franklin D. Roosevelt, who bought a war bond on May 1, 1941. The E Series Bonds helped the U.S. pay for its war effort overseas in Europe. They were sold until 1980, when the country shifted to a different type of savings bond.

On the Homefront discusses the home front during World Wars I and II, including information on war bonds.

To sell the war bonds, the government turned to some popular artists such as Norman Rockwell. Posters showcasing the artists' work appeared across the country to promote war bonds. These posters showed Americans colorful pictures of what they were supporting, and encouraged individuals to get involved in the war effort. The posters showed that even those at home could still help with the war effort. Bond promoters also released music and songs about buying war bonds, and celebrities led rallies urging the people to buy bonds.

To date, the United States has contributed approximately $602 billion for the war efforts in Iraq and Afghanistan. The question is, where are the funds coming from and who is paying for them? War bonds are no longer sold as they were during World War I and World War II, so how does the United States government plan to pay for this huge, growing deficit? President Obama has declared the largest U.S. deficit since World War II, totaling an astonishing $1.75 trillion.

According to defense officials, the president will ask Congress for more than $200 billion to fund U.S. war efforts for the next several years. The main concern on the minds of most Americans is, What about my future and the future of my children? Do we have to bear the burden of these tremendous costs? Many financial experts expect that today’s voters, as well as their children and grandchildren, will be paying for this deficit for decades.

Families with an annual income of $208,850 or higher will be feeling a heavier tax burden. Under the current budget proposal, Obama will reduce the value of tax deductions such as charitable contributions and mortgage interest for households in the highest income tax brackets. Currently, the two highest brackets of 35 percent and 33 percent are set to increase to 39.6 percent and 36 percent, respectively. This is one example of the many federal tax increases that will be going to Congress for approval.

It is too soon to tell exactly what plans will be adopted to fund the rest of the war. With the budget deficit expected to balloon to $1.75 trillion this year, business owners as well as individual American taxpayers are cutting back on spending to save as much as possible.

About the Author

Written by Michael Marcin of Crest Capital. Michael oversees all operations and finance for this national equipment finance lender. He is an excellent technical writer on topics including equipment, vehicle, and software finance and associated tax implications.