UK Suddenly Plans to Issue War Bonds, What Are They?

The United Kingdom is considering issuing war bonds to finance an increase in the country’s defence spending. This discourse has revived an old story that became a bitter lesson for millions of investors. The debt instrument was previously used by the British government to raise funds during the First World War. At that time, war bonds were promoted as a safe investment instrument for the public. However, time proved otherwise. Government policy changes accompanied by inflationary pressures caused the investment value for millions of savers to shrink drastically, making it one of the most controversial episodes in the history of British war financing.

The discourse on issuing war bonds resurfaced after a proposal emerged for Prime Minister Andy Burnham to issue the instrument to fund an increase in the defence budget. Former Bank of England Chief Economist Andy Haldane is the central figure behind the idea. He believes this scheme has the potential to absorb a portion of the British public’s savings, which amount to around £2 trillion. According to him, providing tax incentives could be an effective way to attract public interest in buying war bonds.

War bonds are not new to Britain. In 1914, when the country was involved in the First World War against Germany and its allies, the government issued war loans with a 3.5% coupon and maturities between 1925 and 1928 to finance the war effort. However, the initial issuance failed to meet its target. From a target of £350 million, the government only managed to raise £91 million. The shortfall was later covered by the Bank of England, a fact that was only revealed to the public decades later. Two years on, the then Chancellor of the Exchequer, David Lloyd George, tried again to issue war bonds with a much more aggressive campaign. The government launched a marketing campaign with the slogan that investors bore no risk. This strategy successfully attracted around three million investors who invested up to £2.5 billion. However, the reality did not match the promises. In 1932, amidst the Great Depression, the British government reduced the interest burden by persuading investors to exchange their 5% bonds for perpetual bonds offering only a 3.5% coupon. Subsequently, inflation eroded the investment value for decades. When the government finally repaid the remaining debt in 2014, an initial investment of £100 made in 1917 was worth just over £2.

Despite being proposed again as a source of defence financing, some parties have reminded that war bonds are essentially government debt. Former Prime Minister Rishi Sunak assessed that the idea does not change the nature of the instrument, calling it unwise to test the market’s attitude towards lending more funds to the government. History shows that while war bonds can be an alternative source of state financing during a crisis, the instrument still holds risks for investors.