Working Paper #2012-13 – The Original Operation Twist: The War Finance Corporation’s War Bond Purchases, 1918 - 1920

Department of Economics
University of Delaware
Working Paper #2012-13

The Original Operation Twist: The War Finance Corporation’s

War Bond Purchases, 1918-1920

James L. Butkiewicz and Mihaela Solcan

ABSTRACT

In 1918 the United States Treasury delegated to the War Finance Corporation, a newly-created off-budget federal agency, the task of buying Liberty and later victory bonds in an effort to stabilize prices. Bayesian vector autoregression analysis of the bond purchase indicate that the WFC purchase provided significant price support, and lowered bond yields while the program operated. Once WFC purchase ended, war bond yields increased substantially. However, since the war bond purchases were financed by the sale of short-term debt certificates, the bond purchases increased short rates while reducing long rates. The WFC’s bond purchases twisted the yield curve. 

JEL Codes: E43, N12, M22, N42, G12

Keywords: Liberty Bonds, Victory Bonds, War Finance Corporation, Bond Yields, Price Stabilization