Back in the dark days of World War I, when U.S. Liberty Bonds were launched, bankers joined hands with almost all other Americans in supporting this patriotic form of investment.

Advertising in those days stressed the idea that Liberty Bonds raised money, from ordinary citizens, that was essential to finance our military efforts.

Bankers of that era, of course, recognized how easily the government could have bypassed consumer investments by selling bonds directly to the Federal Reserve.

Keeping the Roof on Irflation

The big difference was that, by selling war bonds to the public at large, the Treasury Department was sopping up spending power.

Thus, the deficit was being financed with far less inflation than would have been the case if the Fed bought the bonds - and paid for them by cranking out new money on the printing press.

During World War II, newspaper advertisements claimed: "Your $37.50 bond will pay for a wheel on a truck." But whether or not that bond found a buyer, you can bet the truck would not have gone into battle with only three wheels.

More Peaceful Approach

Rather, the Fed would have paid for the missing wheel by creating new bank reserves. So selling Liberty Bonds lessened the adverse impact of paying for the war.

But once the war was over, Liberty Bonds (also known as war bonds) got the more peaceful name of U.S. Savings Bonds. And the banking industry is still under pressure to continue its strong promotion of these bonds.

There isn't nearly as much support from bankers these days, however. Savings Bonds just don't seem as meritorious anymore.

In the first place, the banks were being asked (for good, patriotic reasons) to promote a competitor for time and savings deposits.

Even more to the point, bankers recognized for many years that Savings Bonds were a poor investment: The rates offered by the Treasury did not compensate the saver for inflation over the years until the bond matured.

Consider someone like myself, who bought a bond of $750 face value in 1949. In those days, that amount would have paid for a new car.

Granted, Savings Bonds were fully tax exempt until cashed. But when my bond matured, years later, the federal taxes were collected all at once. And the remaining proceeds wouldn't even have paid for the power steering on a new car.

Still, bankers continued to push Savings Bonds to show that they were good citizens. Some bankers quietly told customers the truth about the issues, while many others just exhibited an unusual lack of enthusiasm.

Higher-Interest Alternatives

The thrifts enjoyed Regulation Q's interest rate ceiling, which kept a fairly low lid on rates they paid for savings deposits.

But the public reacted by turning to alternative investments that offered higher yields.

Since Treasury bills were among these alternatives, thrift lobbies forced the Treasury to make them less attractive by raising the minimum denomination to $10,000 from $1,000.

Today, for the first time in many years, Savings Bonds are again an extremely good deal for the public, compared with bank savings rates and yields on most other forms of fixed-income investments.

Patriotism in the Forefront

Along with attractive rates, Savings Bonds are exempt from state and local taxes if held at least six months. This is more and more appealing as these local entities raise their tax rates.

So bankers who are promoting Savings Bonds are really making a valuable suggestion to their customers - even though it means enticing money out of bank accounts.

Recently, we have seen a tremendous rise in Savings Bond sales. Much of this money must be coming from funds that formerly would have flowed into time and savings deposits at banks and thrifts.

A Lesson to the Treasury

At this moment it isn't a serious issue for bankers, for banks have few uses for funds. Many are trying to curb deposit growth and build profits by lowering the rate they pay on savings.

This strategy discourages the type of money that looks for yield - at a very high cost of funds.

But when banks promote Savings Bonds to the public, they should be giving a good lesson to the Treasury Department: In the minds of bankers, the nation's best interest has been placed first.

At some time in the future, it could happen again that U.S. Savings Bonds become less attractive to the general public than bank time and savings deposits.

If and when this happens, the Treasury should take pains to repay bankers for their enlightened patriotism.

Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.

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