by ERIC TOUSSAINT
During your education, did you learn that during the 1930s the government of the USA unceremoniously repudiated a central provision of debt contracts that represented phenomenal sums? Do any history books analyze that act? Historical narratives are fashioned by mainstream thought, whose aim is to induce the belief that governments like that of the USA respect the sacred character of contracts, in particular those involving debts and property. However that belief is far from reality. The repudiation of the gold clause in debt contracts in the name of public order, of the general interest and of necessity is an important episode in “contemporary” history. Yet it is an episode that has been kept quiet, including in the USA itself. The unilateral repudiation of debt contracts, in whole or in part, to which various governments have resorted over the past two centuries is currently a highly important topic, at a time when more and more countries are approaching a new major debt crisis.
On 19 April 1933, six weeks after the start of his term as president, the Democrat Franklin Roosevelt announced that the United States would no longer repay its debts in gold, but rather in paper money – in dollars in the form of banknotes.
This decision was of very great importance, since many loan contracts stipulated that creditors could require that debts be repaid either in gold or in dollars at the rate of 20 dollars for a troy ounce of gold.
Loan contracts containing the provision (a “gold clause”) represented a colossal sum for the time: USD 120 billion, including 20 billion in debts contracted by the public authorities and 100 billion in private-sector debt. That sum was greatly in excess of the market wealth produced in one year in the USA (according to Sebastian Edwards, debt contracts containing a gold clause represented 180% of the GDP of the United States at the time [1]).
The annulment of repayment in gold was accompanied by a measure by which the government prohibited ownership of gold in an amount exceeding USD 100 and required all companies and all persons residing in the USA to sell their gold to the Federal Reserve. The government exchanged the gold for banknotes.
This decision made by President Roosevelt was approved by the US Congress in June 1933, and the abandonment of the gold clause in debt securities became law. The minority of Congress members from his party and the Republican party who opposed the decision loudly protested that it amounted to nothing more or less than a repudiation of debts and contracts. Lewis Douglas, Director of the Budget and one of Roosevelt’s closest advisers and collaborators, had tried to oppose the decision and had declared at a crisis cabinet meeting called by Roosevelt that the decision meant nothing less than “the end of Western civilisation” (Edwards, p. 58). Sebastian Edwards, a neoliberal economist, whose book cited above and published in 2018 is entirely devoted to this decision by the Roosevelt administration, titles the book’s Chapter 6 “A Transfer of Wealth to the Debtor Class” – a title whose meaning is quite explicit (Edwards, p. 57).
After having annulled the gold clause that had been part of all debt contracts, the US President announced a 69% devaluation of the dollar against gold (an ounce of gold would now be worth USD 35, [2] whereas it had been worth USD 20.67 previously). This meant that the United States itself and private borrowers who had “issued” or signed acknowledgements of debt including the gold clause would now not repay their debts in gold, but rather in strongly devalued paper money.
In February 1935, the Supreme Court ruled on the constitutionality of the decision to cancel the gold clause made by Congress and the President.
A fundamental element of the government’s legal argument before the Supreme Court was that in 1933, Congress was faced with an urgent need for “immediate action” to end the Depression. The action in question, which included devaluation of the dollar against gold, could only be effective if the gold clause was eliminated from both past and future contracts. Had the clauses relating to gold been kept, according to the government, it would have meant insolvency at the national level. That is why Congress – still according to the government –, faced with a deep recession, banking collapse and monetary panic, adopted the Joint Resolution which annulled all gold clauses. According to the government, such action was necessary if the country was to be saved.
Jurists who opposed the cancellation of the gold clause maintained that it amounted to expropriation without compensation. (Edwards p. 152)
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