When the US Government Defaulted on its Bonds
December 26, 2024 by Martin Armstrong
The first three Liberty bonds and the Victory Loan, sold to fund World War I, were indeed retired during the 1920s. However, because the terms of the bonds included a Ponzi Scheme that allowed the bondholder to swap them for the newer bonds, with superior terms, most of the debt from the first, second, and third Liberty bonds had been rolled over into this fourth issue. The terms of this 4th issue were as follows:
Date of Bond: October 24, 1918
Coupon Rate: 4.25%
Callable Starting: October 15, 1933
Maturity Date: October 15, 1938
Amount Originally Tendered: $6 billion
Amount Sold: $7 billion
The terms of this Fourth Liberty Bond specified: “The principal and interest hereof are payable in United States gold coin of the present standard of value.” This was the typical “gold clause” that was found in most sovereign bonds, both domestic and international. In addition, private contracts and bonds also included this gold clause before Roosevelt. Generally, it was intended to guarantee that bondholders would not suffer from a currency devaluation – not inflation since even a gold standard does not prevent inflation.
The US defaulted on these bonds thanks to Roosevelt. The US Treasury called in this Fourth Liberty Bond on April 15, 1934, for redemption. However, the US defaulted on this term by refusing to redeem the bond in gold. They also ignored the dollar devaluation imposed by Roosevelt, which changed the dollar’s gold value from $20.67 to $35. The entire purpose of the gold clauses prior to Roosevelt was to protect against a currency devaluation. The 21 million bondholders lost 139 million troy ounces of gold, which caused the loss in international value terms to be approximately 70% of the bond’s principal.
The legal basis for the refusal of the US Treasury to redeem in gold was the gold clause resolution was Roosevelt’s effort to seize gold, devalue the dollar, and attempt to ensure that all profits would accrue to the government (Pub. Res. 73–10), dated June 5, 1933. The Supreme Court was petitioned to decide this issue, and what we will see is that Roosevelt just ignored the Supreme Court once again, showing that the Constitution means nothing when it constructs the government from its goal.
Chief Justice Charles Evans Hughes wrote the decision in Perry v. United States, 294 U.S. 330, 354 (1935). He made it very clear that the Joint Resolution of June 5, 1933, nullified the gold clause obligations of the United States and that they would only honor dollar for dollar, which was unconstitutional id /349. Furthermore, the Court held that Congress cannot use its power to regulate the value of money to invalidate the Government’s obligations.
President Franklin D. Roosevelt’s closure of the open gold market and the removal of the domestic backing of the dollar with gold took place with the signing of Executive Order 6102 on April 5, 1933. The Supreme Court ruled that the bondholders’ loss was unquantifiable and, therefore, repaying them in dollars according to the 1918 standard of value would be an “unjustified enrichment.” FDR essentially defaulted on the US national debt, repaying it with depreciated dollars, reducing the debt by nearly 70%.
I've read a lot of Milton Friedman and Thomas Sowell, have two degrees in Economics, yet that's the best summary of that problem I've read in a long time. Moral of the story: Never trust the government-- especially democrats!
great article. looking at the photograph used in this article, I'm trying to see how Schiff actually made this 1918 address: is he using a microphone? where are the loudspeakers so the crowd can hear him? there seems to be a piano on the 'stage', to accompany... singing (the national anthem)? very confusing.