The U.S. government first introduced war bonds (then known as defense bonds), which were branded as Liberty Bonds during World War I. The sale of Liberty Bonds generated $21.5 billion between 1917 and 1919 -- the equivalent of more than $5 trillion today.
During World War II, the federal government renamed defense bonds as war bonds after the Japanese attack on Pearl Harbor. More than 84 million Americans bought about $185 billion worth of war bonds (almost $1 of every $5 the U.S. borrowed to fight the war) during the Second World War. Throughout the conflict, war bonds were used not only to support military efforts but also to take money out of circulation and control inflation. These bonds were also known as Series E bonds.
How did war bonds work?
Whenever you buy bonds, you're essentially lending money to the issuing government or corporation. War bonds were no different. The people who purchased war bonds lent money to the American government.
War bonds were a type of savings bond known as zero-coupon bonds. Unlike most bonds, which offer periodic fixed interest payments (called coupons) until the bond matures, zero-coupon bonds are purchased at a discount and then redeemed for their full face value at maturity. For example, you could purchase an $18.75 war bond, then redeem it for $25 when it matured 10 years later.