Gold Clause Research Articles

The 2012 Greek Retrofit and Borrowing Costs in the European Periphery

This article examines the impact of Greece retroactively, via legislation, changing the terms in hundreds of billions of euros worth of Greek government bonds governed by domestic Greek law. As the abrogation of gold clauses in US government bonds by the US Congress in 1933 had been, the Greek action was decried as violative of the rule of law and sure to negatively impact the future ability of Euro area sovereigns to borrow. We test whether the Greek action had negative spillovers on European government debt markets. We find no evidence of increased borrowing for even the most peripheral European economies from the Greek action.

Gold Clauses in the Capital Markets of the Early Twentieth Century

Gold Clauses in the Capital Markets of the Early Twentieth Century

Change of monetary regime, contracts, and prices: Lessons from the great depression, 1932–1935

In this paper I analyze the process leading to the abandonment of the gold standard in the U.S. in 1933, and the devaluation of the dollar in 1934. I argue that most changes of monetary regime have an impact on contracts. In this specific case, contracts that were written in terms of gold, or “gold equivalent,” were rewritten in paper dollars. Congress did this on June 5, 1933, when it abrogated the “gold clause” retroactively. The Supreme Court validated the move in February 1935. The result was a very large transfer of wealth from creditors to debtors. I use daily data on commodity prices to investigate the extent to which these policies contributed to ending deflation. I find that commodity prices reacted strongly to the announcement of policy changes, and to legal procedures involving contracts. These results are consistent with the “change in regime” hypothesis of Sargent.

Leverage Risk and Investment: The Case of Gold Clauses in the 1930s

We study the impact of the 1933 abrogation of gold clauses on the slow recovery of corporate investment following the Great Depression. Legal challenges to the constitutionality of abrogating gold clauses exposed many firms to the possibility of a 69% increase in required payments to bondholders. We show that public firms with higher exposure to this risk reduced their investment in 1933 and 1934. For these firms, investment recovers quickly following the Supreme Court’s 1935 decision to uphold abrogating gold clauses. In the cross-section of firms, decreases in investment over 1933 and 1934 coincide with an increase in equity payouts. Our estimates imply that the risk of higher financial leverage accounts for about one-third of the decline in aggregate divestment by public firms over 1933 and 1934. This channel complements existing explanations of the slow recovery based on bank credit supply which public firms did not rely on.

Book Reviews

Christine Desan of Harvard Law School reviews “Constitutional Money: A Review of the Supreme Court's Monetary Decisions”, by Richard H. Timberlake. The Econlit abstract of this book begins: “Reviews ten U.S. Supreme Court cases and decisions that dealt with monetary laws and presents a summary history of monetary events and policies as they were affected by the Court's decisions. Discusses the current condition of monetary affairs in the United States; the emergence of money in civilized societies; the bimetallic monetary system and appearance of a national bank; McCulloch v. Maryland, 1819; Congress's power ““to coin money and regulate the value thereof …”; Craig v. Missouri, 1830; Briscoe v. The Bank of the Commonwealth of Kentucky, 1837; federal government issues of Treasury notes and greenbacks; the track of the legal tender bills through Congress; Bronson v. Rodes, 1868; Veazie Bank v. Fenno, 1869; Hepburn v. Griswold, 1870—the legal tender issue; Knox v. Lee and Parker v. Davis—reversal of Hepburn; monetary affairs in the United States, 1871–83; the third legal tender case—Juilliard v. Greenman, 1884; commentaries on the legal tender decisions—the issue of sovereignty; other commentaries on the legal tender cases; the (Gold) Currency Act of 1900 and monetary affairs in the United States before 1914; the Federal Reserve System, 1914–29; the Great Contraction, 1929–33; gold—where did it go, and why didn't the gold standard work?; the Gold Clause cases, 1934–35; gold and monetary affairs in the twentieth century; and a constitutional monetary system. Timberlake is Emeritus Professor of Economics at the University of Georgia and Adjunct Scholar at the Cato Institute.”

A ‘blank cheque'? Portuguese Second World War sterling balances, 1940–73

The British effort in the Second World War required massive external financing which depended on Lend‐Lease and the accumulation of sterling balances. Indebtedness in sterling balances corresponded to almost 38 per cent of this total at the end of the war. Portuguese sterling balances, although a small share of the total, were important because of pre‐emptive purchases, especially of wolfram, and because of the ‘gold clause’ which was to be applied to outstanding balances. Portugal's willingness to finance British purchases contrasts with the requirement of German payments in goods or cash for their purchases in Portugal. The settlement of Portuguese sterling balances in August 1945 was singular as it preceded the Anglo‐American settlement of December 1945 which had important consequences for sterling balance holders, as the US insisted that the US$3.75 billion loan should not be used to settle British war debts. Postwar settlement of British debt through a long‐term loan from Portugal to Britain contrasts with settlements that involved the sale of British assets. Salazar's concerns about the postwar international position of Portugal, the Portuguese Empire, and the survival of the Portuguese regime are relevant in explaining his pro‐British stance during and after the war.

The Gold Clause Cases and Constitutional Necessity

This Article presents a case study of how constitutional actors respond when the rule of law and necessity are sharply at odds and provides some background on Section Four of the Fourteenth Amendment. In 1935, the Supreme Court heard constitutional challenges to the abrogation of “gold clauses” in contracts and Treasury bonds. Gold clauses guaranteed that creditors would receive payment in gold dollars as valued at the time a contract was made. Due to the deflation that followed the Great Depression, this meant that debtors were being forced to pay back much more than they owed originally. To stop a looming wave of bankruptcies, Congress passed a Joint Resolution declaring all gold clauses null and void.Following oral argument, President Franklin D. Roosevelt was concerned that the Court would invalidate the Joint Resolution. He concluded that he could not accept this result, and thus drafted a Fireside Chat announcing that he would not comply with such a decision. This unprecedented statement, which invoked the New Testament and necessity as the grounds for rejecting the Court's decision, has never been closely analyzed until now.In the end, the Court did not hold that the gold clauses must be enforced. With respect to Treasury Bonds, however, a plurality of the Justices concluded that the Joint Resolution was unconstitutional but that the bondholders were not entitled to relief. This slippery reasoning (in Perry v. United States) harkened back to Chief Justice Marshall's approach in Marbury v. Madison – another case in which the Court was confronted with presidential defiance. By recounting how President Roosevelt and Chief Justice Hughes – the author of Perry – sought to defuse (or, in some cases, exacerbate) the gold crisis, the dark arts of constitutional are exposed.

On Graduation from Default, Inflation, and Banking Crises: Elusive or Illusion?

This paper uses a data set of over two hundred years of sovereign debt, banking and inflation crises to explore the question of how long it takes a country to "graduate" from the typical pattern of serial crisis that most emerging markets experience. We find that for default and inflation crises, twenty years is a significant market, but the distribution of recidivism has extremely fat tails. In the case of banking crises, it is unclear whether countries ever graduate. We also examine the more recent phenomenon of IMF programs, which sometimes result in "near misses" but sometimes end in default even after a program is instituted. The paper raises the important theoretical question of why countries experience serial default, and how they might graduate.

Conditional Strategic Retreat: The Court's Concession in the 1935 Gold Clause Cases

Though forgotten by history, the 1935 Gold Clause cases concerning abrogation of gold-indexed bonds were instantly dubbed historical landmarks. Perry v. U.S., the case addressing federal bond contracts, should be remembered as an important instance of strategic judicial retreat. Expecting that the wrong outcome would provoke an attack and harm its legitimacy, the Supreme Court granted the administration an important technical victory. This paper elucidates three conditions necessary for retreat: (1) very strong government outcome preferences, (2) signals of a direct attack, and (3) an environment which makes these threats credible. It compares the Gold Clause cases with a control case, U.S. v. Butler. It shows that the former strongly met the conditions while the latter, in which the Court made a sincere decision, did not. Finally, it refutes legal and attitudinal explanations and argues that the Perry opinion was written to grudgingly reach the strategically necessary result by granting a technical victory in the remedy.

Stabilize Home Mortgage Borrowers, and the Financial System Will Follow

To halt the Great Depression, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist Randall Kroszner, now a governor on the Federal Reserve Board, examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Investors and creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar. And the taxpayer did not pay a penny.This trick could only be performed once, now that gold clauses are out. So is there a way to eliminate today's mortgage debt overhang, staunch foreclosures, and restore liquidity and stability in our financial markets? Yes. We have not yet used our most potent weapon against the crisis: eminent domain.

Letter: Republican Opposition to Debt Reduction in Financial Crises--The Great Depression and Today

Luigi Zingales points out that an important policy in resolving the crisis of the 1930s was the cancellation of gold clauses in industrial bond contracts. Congressional Republicans, however, strongly opposed this policy, and interestingly, today Republicans are again the core opposition to government intervention in credit markets, according to Howard Rosenthal of NYU.

Financial Crises, 1880-1913: The Role of Foreign Currency Debt

What is the role of foreign currency debt in precipitating financial crises? In this paper we assemble data for nearly 30 countries between 1880 and 1913 and examine debt crises, currency crises, banking crises and twin crises. We pay special attention to the role of foreign currency and gold clause debt, currency mismatches and debt intolerance. We find fairly robust evidence that more foreign currency debt leads to a higher chance of having a debt crisis or a banking crisis. However, a key finding is that countries with noticeably different backgrounds, and strong institutions such as Australia, Canada, New Zealand, Norway, and the US deftly managed their exposure to hard currency debt, generally avoided having too many crises and never had severe financial meltdowns. Moreover, a strong reserve position matched up to hard currency liabilities seems to be correlated with a lower likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We also see that countries with previous default histories seem prone to debt crises even at seemingly low debt to revenue ratios. Finally we discuss the robustness of these results to local idiosyncrasies and the implications from this representative historical sample.

The Secret Lives of the Four Horsemen

Outlined against red velvet drapery on the first Monday of October, the Four Horsemen rode again. In dramatic lore they are known as Famine, Pestilence, Destruction, and Death. These are only aliases. Their real names are Van Devanter, McReynolds, Sutherland, and Butler. They formed the crest of the reactionary cyclone before which yet another progressive statute was swept over the precipice yesterday morning as a packed courtroom of spectators peered up at the bewildering panorama spread across the mahogany bench above. Or so Grantland Rice might have written, had he been a legal realist. For more than two generations scholars have seen the Four Horsemen as far right, reactionary, staunchly conservative apostles of laissez-faire and Social Darwinism. And not without good reason. One need only read opinions such as those in Adkins v. Children's Hospital and Morehead v. Tipaldo, Railroad Retirement Board v. Alton Railroad and Ribnik v. McBride, Hammer v. Dagenhart and Carter Coal, and the dissents in such cases as Nebbia, Blaisdell, the Gold Clause Cases, and the Wagner Act Cases to understand why. One can hardly avoid coming away from these and other decisions with the impression that these were men fanatically devoted to property rights and callously indifferent to the commonwealth.Here and there one finds shreds of biographical evidence suggesting that something like the milk of human kindness may have flowed in parsimonious quantities through veins. We discover that Sutherland's legislative career saw him support the eight-hour day, the Employers' Liability Act, the Pure Food and Drugs Act, the Hepburn Rate Bill, the Children's Bureau, the Seaman's Act of 1915, Postal Savings Banks, free coinage of silver, and the1896 presidential candidacy of the populist William Jennings Bryan. We even find Sutherland in the vanguard of the struggle for women's suffrage and a system of workmen's compensation for the employees of interstate carriers. We read of Butler's leadership in the fight for workmen's compensation in his home state of Minnesota; of his efforts on behalf of the federal government in prosecuting Swift, Armour and other large meatpackers for violations of the Sherman Antitrust Act; and of his success in saving the Canadian government huge sums of money in valuation proceedings against some of the western railroads. We are told of McReynolds' role as an avid trustbuster for Presidents Taft and Wilson, of his environmentalism, and of his generosity toward charitable causes. We learn of Van Devanter's reputed sensitivity to the plight of the Native American. But such paltry gestures of concern for the underdog have been far from sufficient to rebut Fred Rodell's charge that jurisprudence was driven by their basic and bone-deep Hamiltonian empathy with the well-to-do.When one dips a bit deeper into the U.S. Reports, however, one discovers some startling data. One finds the Four Horsemen actually supporting liberal case outcomes. At first one is inclined to dismiss these cases as mere aberrations, attributable perhaps to the dull Horsemen's inability to recognize when the liberals were pulling the wool over eyes. But the cases continue to mount until the sheer volume is so immense as to point irrefragably to only one conclusion: the Four Horsemen were themselves closet liberals. It appears that they struck a reactionary pose in celebrated cases in order to retain the good graces of the conservative sponsors to whom they owed positions and whose social amenities they continued to enjoy, while in legions of low-profile cases they quietly struck blows for own progressive agendas. In this way, it seems, the Horsemen could continue to enjoy access to the corridors of power and influence and the hospitality of the most fashionable Washington salons, while at the same time working surreptitiously to undermine the very causes that conservative patrons held most dear. Theirs, then, is not a simple story of handmaidens of the industrial and financial elite. It is instead a tale of luxury and deceit.

Living with an Archaic Treaty: Solving the Problem of the Warsaw Convention's Gold Clause

Article 22 of the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage By Air limits carriers' liability by reference to the franc Poincaré or gold franc, a standard that no longer exists. Until the Montreal Protocols come into force or a revised and consolidated Convention is created, the author proposes a method that relies on cooperation between the executive and the courts to keep Article 22 alive and useful.

The Debate on Profound Changes of Circumstances and Interpretation of the Gold Clauses in International Transport Treaties

The Debate on Profound Changes of Circumstances and Interpretation of the Gold Clauses in International Transport Treaties

From the Gold Clause Cases to the Gold Commission: A Half Century of American Monetary Law

Half century ago, Franklin Roosevelt, in one of his first official acts, took the United States off the gold standard. That was the most lasting effect of the March 1933 Bank Holiday and its accompanying proclamations and legislation.' This reversal of more than fifty years' resolute adherence to the gold standard was all the more remarkable because Roosevelt as candidate had excoriated Herbert Hoover's warning that the United States was close to going off gold as a libel on the credit of the United States. Roosevelt declared that no responsible government would have sold to the country securities payable in gold if it knew that the promise-yes, the covenant-embodied in these securities was as dubious as the President of the United States claims it was.2 In 1980 American voters, again dissatisfied with an economy that was reducing the standard of living of the American worker,3

Gold Value Clauses and Public Policy

Gold value clauses are rarely used in England. In the United States, before the Joint Resolution of both Houses of Congress of January 5, 1933, which abrogated gold clauses in the U.S. retrospectively and prospectively, declaring them to be against public policy, gold coin clauses were a common occurrence. In the past on the European continent much use has been made of gold value clauses.In England gold value clauses may assume greater importance in the future. Lately, the two-tier system of gold prices has been introduced, one between Central Banks and another at the free market price. In an individual gold value clause, the question of which price is recognized by the parties, who probably did not in fact foresee the possibility of the creation of a two-tier system, is one of construction. Even today, a party to a gold value clause which refers to the free market price may gain a profit, if there is an appreciation of the price of gold on the free market above the U.S. government minimum level of $35.00 per ounce.

In re Imperial Japanese Government 4 per cent. Loan of 1910 Issued in France—Methods of Resumption of Service.

State responsibility — For debts — Settlement by creditor with consent of creditor’s Government — Whether reference to gold-yen constitutes a gold clause — Relevance of judgments in Serbian Loans case — Effect of interruption of service of loan and of fall in value of currency of repayment — Effect of war on debts — Settlement of dispute by conciliator on practical and equitable basis.

The Norwegian Gold Clause Case

The Norwegian Supreme Court, sitting in banc (the Chief Justice, with fourteen Associate Justices)1 on May 2, 1962, rendered judgment in the so-called gold clause case.2 This was an appeal case arising out of an action brought against the Norwegian Government, and two Norwegian Government-sponsored banks, by an association of French investors, the Association des Porteurs Franqais de Valeurs Mobilieres. Members of this association are the holders of bonds, issued by the Norwegian Government in 1896, 1902, 1903, 1904, and 1905, by the Mortgage Bank of the Kingdom of Norway in 1900, 1902, 1905, 1907, and 1909, and by the Small Holding and Workers' Housing Bank3 in 1904. The bonds-made out to bearer-were payable in several currencies and contained, in one form or another, references to gold. The loans in respect of which the bonds were issued, had been floated through consortiums of banks. The majority of the participants in the consortiums were French and other foreign banks; some Norwegian banks, however, also took part. The bonds of the Government were payable in Norwegian crowns, French francs, and pounds sterling; those of the loan of 1903 in Reichsmark as well. The bonds and the coupons were expressed in Norwegian, French, and English. (The bonds of the loan of 1903, however, had a German text, instead of an English one.) Underneath the amount in crowns on top of the mantle (the frame surrounding the text on the face of the instruments) were added the words: d'Or in parenthesis. other places in the text were inserted, after the amounts in crowns, the words I Guld, En Monnaie d'Or, or In Gold; such

NOTES OF CASES Gold Clauses in Domestic Transactions

The Modern Law ReviewVolume 20, Issue 3 p. 266-291 Free Access NOTES OF CASES Gold Clauses in Domestic Transactions J. Unger, J. UngerSearch for more papers by this author J. Unger, J. UngerSearch for more papers by this author First published: May 1957 https://doi.org/10.1111/j.1468-2230.1957.tb00444.xCitations: 1AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume20, Issue3May 1957Pages 266-291 RelatedInformation