United States Savings Bonds were first offered in March, 1935, and later were designed as an investment for excess savings during World War II. They are not really bonds, in a technical sense, since they are not a lien upon the properties of the government; more properly they should be classed as debentures, since their security depends entirely upon the credit and stability of the government of the United States.
Savings bonds such as these offer the investor certain very valuable features. Their safety is unquestioned; they are registered, with the result that if they are lost, stolen, or even destroyed the owner suffers no loss; they are bought without any fees or commissions; there is no problem of marketing or pricing, since bonds may be redeemed for cash at any time according to a given schedule of redemption values; interest accrues with the progress of time, so that the bonds become increasingly more valuable at the end of each half-year period, which is the equivalent of compound interest. Perhaps their main shortcoming is the fact that they are not designed to benefit the short-term saver, since they must be held for a considerable period of time in order to obtain the maximum return.
The short-term saver or investor, who may need a sum of money within a relatively short period of time, had better make use of some other medium of saving; but for those who are willing to be patient, the bonds offer a combination of unquestioned high security coupled with a good rate of return for this class of investment. The interest is exempt from all state and local forms of taxation, although it is taxable as ordinary income by the federal government.
Perhaps the strongest criticism of U. S. Savings Bonds has been directed against them because of the impact of inflation. If bonds were bought during the war years (the 40s) and cashed in at maturity during the postwar years (the 50s), the buyer was penalized for saving, because the dollars he actually received would buy considerably less in goods and services.
The answer to this criticism is that inflation affects all forms of investment that are repaid in a fixed number of dollars—the proceeds of life insurance, savings accounts, corporate bonds, etc. Perhaps the only investments that are constantly revalued from day to day are real estate, commodities (grain, vegetable oils, coffee, tea, etc.), and common stocks. Since these suffer serious valuation losses at times, it may be prudent to hold at least some investments in those forms which are payable in a fixed number of dollars.
Besides, who has the necessary knowledge to be sure that all his investments in commodities, stocks, and real estate such will be preserved without loss? The stock market is often considered a strong hedge against inflation, but it is not a one-way street; it can decline as well as rise. Can the losses that are incidental to a sudden drop be absorbed? For the average investor the answer is usually in the negative.
The savvy investor will therefore diversify his portfolio with a number of different investments -- in stocks, bonds, annuities and mutual funds -- so that if and when the stock market declines rapidly, he doesn't find himself in despair and out of capital.