Every gold bug worth his or her salt knows when the US defaulted, but many non-gold bugs are not aware of it. From Global Macro Monitor at macromon.wordpress.com:
One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. There’s just one problem: it’s not true, and while few people remember the “gold clause cases” of the 1930s, that episode holds valuable lessons for leaders today. – Sebastian Edwards, Project Syndicate, May 21, 2018
My friend, UCLA professor, Sebastian Edwards, is out with a must-read summer book, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold.
Sebastian has also published an excellent synopsis of the the book, Learning from America’s Forgotten Default, on the Project Syndicate (PS) website. It is an excellent introduction to the subject material but only scratches the surface and should not be a substitute or excuse for not purchasing the book.
Money quotes from the Project Syndicate piece:
- There was a time, decades ago, when the US behaved more like a “banana republic” than an advanced economy, restructuring debts unilaterally and retroactively
- In April 1933, in an effort to help the US escape the Great Depression, President Franklin Roosevelt announced plans to take the US off the gold standard and devalue the dollar.
- …this would not be as easy as FDR calculated. Most debt contracts at the time included a “gold clause,” which stated that the debtor must pay in “gold coin” or “gold equivalent.”
- These clauses were introduced during the Civil War as a way to protect investors against a possible inflationary surge.
- …the gold clause was an obstacle to devaluation. If the currency were devalued without addressing the contractual issue, the dollar value of debts would automatically increase to offset the weaker exchange rate, resulting in massive bankruptcies and huge increases in public debt.
- Congress passed a joint resolution on June 5, 1933, annulling all gold clauses in past and future contracts.
- Republicans were dismayed that the country’s reputation was being put at risk, while the Roosevelt administration argued that the resolution didn’t amount to “a repudiation of contracts.”
- On January 30, 1934, the dollar was officially devalued. The price of gold went from $20.67 an ounce – a price in effect since 1834 – to $35 an ounce.
To continue reading: When The U.S. Government Defaulted