May 1956
MAY 1, 1956 was the 15th anniversary
of the first sale of the Series E United
States savings bond. Since 1941 this bond
has been the heart of the United States savings bond program. It is currently owned
by more than 40 million individuals and
represents nearly one-seventh of the Federal debt.
Treasury sales of savings bonds did not
begin with the E series in 1941, nor have
they consisted only of E bonds since 1941.
From 1935 through April 1941 the Treasury sold approximately $4 billion savings
bonds, known successively as Series A
U.S. SAYINGS BONDS
through D issues; in 1941 Series F and G
savings bonds were offered as well as E's;
and in 1952, when the savings bond program was reorganized, Series J and K bonds
were substituted for the F's and G's and
a new H series was inaugurated.
From the beginning, in 1935, the underlying purpose of the savings bond program
has been to provide small savers with a safe,
liquid, and attractive investment, while at
the same time broadening the ownership of
the Federal debt. The intention has been to
encourage thrift as well as to interest citizens
in the fiscal affairs of their Government.
Beyond this broad continuing objective, savings bonds have been adapted to the temporary fiscal requirements of the Treasury.
From 1935 to 1941 the Treasury gained
useful experience in selling savings bonds
and small savers became familiar with this
type of investment. In most important respects the Series A-D issues of this period
were identical with the more familiar E's.
Like the E's, they were nonmarketable bonds
sold on a discount basis, yielding 2.9 per
cent if held 10 years to maturity, and redeemable on demand at a yield sacrifice
before maturity.
WARTIME EXPERIENCE
1940
1945
1950
1955
NOTE.—Treasury Department data for calendar years. Redemptions are at issue price. Special offerings of Series F and
G bonds explain the 1948 and 1950 sales increases shown in the
lower grid of the chart.
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Series E, F, and G savings bonds were introduced in 1941 as part of an expanded
program of defense financing, and later
they were adapted to the more pressing
needs of war finance. They attracted savings directly from the public, thereby reducing the need for Treasury borrowing from
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May 1956
441
UNITED STATES SAVINGS BONDS
banks, and they immobilized excess cash
balances which might otherwise have bid
up prices of scarce consumer items. In addition, the feature that permitted redemption
before maturity without capital loss appealed to investors who remembered the
decline of prices on marketable Government bonds after World War I.
Intensive utilization of the sales techniques developed from 1935 to 1941, introduction of the payroll savings plan, and
expansion of sales outlets all contributed
to an extraordinary increase in savings bond
sales after 1941. Other contributing factors
were appeals to patriotism, and the dearth
of consumer goods and private investments
as alternative uses for excess cash.
Sales of E bonds rose from approximately
$1 billion in 1941 to $12.4 billion in 1944.
While sales of F and G bonds expanded
more slowly, they also rose from $1.4 billion
to $3.7 billion. Savings bonds outstanding
rose from about $3 billion in 1940 to more
than $40 billion at the end of 1944, and
from 6 to approximately 18 per cent of the
Federal debt.
Before the war, A-D bonds were sold
to both individuals and institutions, but annual purchases per buyer were limited to
$10,000 (maturity value). The offering
of F and G bonds in 1941 was the first of
several changes in terms, each of which has
increased the annual availability of savings
bonds to larger investors. While only individuals could buy the new E bonds and
only in amounts up to $5,000 a year (maturity value), both individuals and institutions could purchase F and/or G bonds
in amounts up to $50,000 a year (cost
price). In 1942 this upper limit was raised
to $ 100,000. Yields at maturity (12 years)
on F and G bonds were 2.53 and 2.50 per
cent. The F series was a discount issue,
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like the E's, but the G series was an income
bond designed for coupon-conscious investors. Purchased at par, the G's paid interest
semiannually and were redeemable before
maturity at less than par.
EARLY POSTWAR EXPERIENCE
As the war drew to a close, the pace of E
bond redemptions accelerated. When it became apparent in 1946 that the postwar
problem was scarcity rather than unemployment of resources, the spending potential
inherent in the nearly $50 billion of redeemable savings bond debt was considered to
be an inflationary threat. The postwar
savings bond program was therefore focused
on maintaining the savings bond debt intact,
with sales efforts directed toward offsetting
redemptions.
In the early postwar years (1946-50)
total sales of savings bonds declined but
nevertheless exceeded redemptions.1 Behavior differed, however, for small and
large denomination bonds. For E bonds;
in denominations of $100 or less, redemptions exceeded sales. For larger denomination E bonds, the balance was reversed;
in the years 1947 through 1949, sales exceeded redemptions by more than $1.0 billion annually. Net sales of F and G bonds
also continued in the early postwar period,
totaling between $1.5 and $2.4 billion in
every year but one from 1946 through 1950.
KOREA AND AFTER
Beginning in 1951, the over-all balance in
the Treasury savings bond program shifted
from net sales to net redemptions. Net redemptions exceeded $1 billion in 1951,
reflecting a cut in sales to less than $4 billion, the smallest amount since 1941. After
1
Throughout this article redemptions are considered at issue price, excluding accrued discount.
May 1956
442
FEDERAL RESERVE BULLETIN • MAY 1956
UNITED STATES SAVINGS BONDS
Amount
outstanding
End of
calendar year
Net sales or
redemptions (—)3
(In billions)
As a
percentage of
In
billions * total
Federal
All
series
A-E
and H
F, G, J
and K
1940..
1941..
1942..
1943..
1944..
$ 3.2
6.1
15.1
27.4
40.4
6.3
9.6
13.5
16.2
17.5
$ .9
2.9
8.8
12.2
12.7
$ .9
1.5
5.7
8.9
9.3
1.4
3.1
3.3
3.4
1945.
1946.
1947.
1948.
1949.
48.2
49.8
52.1
55.1
56.7
17.4
19.3
20.5
22.0
22.2
7.5
1.2
1.8
2.5
1.1
4.7
-1.2
1950.
1951.
1952.
1953.
1954.
1955.
58.0
57.6
57.9
57.7
57.7
57.9
22.8
22.4
21.8
21.1
20.9
20.8
-1.2
-.4
-.3
-.2
-.2
-.9
1956 (end of April).
57.7
21.2
-.5
'.2
.3
\l
1.0
1.4
2.7
2.4
1.9
2.2
1.5
-.3
-.3
-1.1
-1.1
-1.6
-1.0
1
2
3
Current redemption value; includes accrued interest.
Total direct and guaranteed interest-bearing debt.
Redemptions at issue price; details for series may not add to
total because of rounding.
1951, sales recovered and in 1954 and 1955
rose to the highest levels since 1948. Although gross redemptions reached historical
peaks in 1954 and 1955 and continued to
exceed sales, the margin of net redemptions
narrowed to negligible proportions.
The shift to net redemptions after 1950
was initially an outgrowth of the Korean
War. Price increases during late 1950 and
early 1951 led to anticipatory buying of
goods, which inhibited regular savings bond
sales and encouraged redemptions. After
the return to relative price stability in 1951,
market interest rates began to rise. By the
year-end yields on marketable Treasury
securities with maturities equivalent to those
of savings bonds had advanced above the
2.5 per cent rates obtainable from Series F
and G bonds, and interest returns on other
investments had also risen. During the year
sales of F and G bonds declined nearly 70
per cent from their 1950 level.
To adjust to current market conditions,
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in April 1952 the Treasury revised the
terms of its savings bond offerings. Purchase limits were raised from $10,000 to
$20,000 on E bonds and from $100,000
to $200,000 on new J and K bonds, which
were substituted for the F's and G's. The
yield at maturity on J's and K's was set at
2.76 per cent, and the yield on E's was
raised to 3 per cent. A new H bond was
inaugurated in denominations of $500 to
$10,000, and a $10,000 denomination E
bond was offered for the first time. The
new H series was an income bond like the
G's, but it resembled the E's in eligibility,
purchase limits, and yield.
Sales response to the 1952 revision of
terms was slow, partly because of further
interest rate advances in late 1952 and the
first half of 1953. Beginning with the full
year 1953, however, sales gained steadily.
In part this pickup reflected renewed promotion of savings bonds by the Treasury, the
growing popularity of the new H series, and
the decline of market interest rates from
mid-1953 to mid-1954. Sales of J and K
bonds were particularly responsive to the
1954 decline of interest rates, nearly tripling their 1953 level. By the end of 1955,
although rising market yields had again
erased the marginal advantage of fixed
yields on J's and K's, 1955 sales were double
the 1953 level.
Starting in May 1953 savings bond redemptions began to be dominated by the
large maturities of the F and G series initiated in 1941 as part of war financing.
Maturities of E bonds had first appeared in
1951, but had not caused any marked
change in the level of total redemptions because owners of maturing issues had generally elected to take advantage of the Treasury option to extend their holdings for a
second investment period. In 1952, fur-
May 1956
UNITED STATES SAVINGS BONDS
thermore, when other savings bond terms
were revised, the yield on extended E's had
been raised from 2.9 to 3.0 per cent. It was
decided, however, not to extend comparable
options to holders of F and G maturities,
and as a result redemptions of maturing F's
and G's from 1953 through 1955 more than
offset net sales of all other series.
Recently, market interest rates have advanced above the fixed yields on all savings
bonds, a situation that has existed only once
before, in late May and early June 1953.
Partly in consequence, in the first four
months of 1956 savings bond sales were
13 per cent below the same period in 1955,
with declines in H, J, and K issues.
At the end of December 1955 savings
bonds outstanding totaled $57.9 billion,
about 21 per cent of the Federal debt and
about 35 per cent of liquid assets as rep-
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443
resented by time deposits and savings and
loan shares, as well as savings bonds. Savings and loan shares totaled $32.3 billion
and time deposits $76.6 billion. About $7
billion or 12 per cent of the savings bond
debt reflected accrued discount, and $37.5
billion or approximately 65 per cent represented E bonds.
Taking the period as a whole, since the
program was first introduced the Treasury
has provided useful investment instruments
that have met the varying needs of millions
of small savers. As a result, savings bonds
are now widely held and in the aggregate
make up a substantial part of the Federal
debt. In recent years the outstanding total
of these special securities has been remarkably stable.