My Amazon Review of Sebastian Edwards' "American Default: The Untold Story of FDR, the Supreme Court and the Battle over Gold"

The Great Depression Showdown over Gold

As an economic history nerd I can only applaud the work of my UCLA colleague Sebastian Edwards in his vibrant telling the story of the long forgotten Supreme Court showdown over the United States’ abrogation of contracts written with the gold clause. Remembering the inflation of the Civil War greenback era, most creditors demanded gold clauses in debt contracts in which they would be repaid in in either gold or its paper money equivalent value.

This system worked fine until the onset of the Great Depression. It is here where Edwards begins his story as President Roosevelt adopts an inflationist policy by first abandoning the gold standard by requiring all citizens to turn in their physical gold at the then $20.67/ounce price. Then in June 1933 Congress adopts a joint resolution authorizing Roosevelt to increase the price of gold which he ultimately does to $35/ounce and the legislation abrogates the gold clause in all contracts. Indeed, most economists credit the early recovery from the depression directly to the monetary easing associated with Roosevelt’s gold policies.

If Congress hadn’t abrogated the gold clause all debts would have been written up to reflect the devaluation by 69%. Thus it would require a payment of approximately $1700 to repay a nominal debt of $1,000. Needless to say a host of bankruptcies would have ensued.

Of course several creditors sued and Edwards skillfully moves the action from Roosevelt and Congress to the Supreme Court. The Supreme Court ruled that it was in Congress’ power to alter private contracts, but it was not in its power to alter U.S. government debt. However, the court ruled that as of the date of the Joint Resolution gold was still trading at $20.67/ounce and Americans were not allowed to possess physical gold at that time. Hence there would be no damages. A brilliant 5-4 ruling by Chief Justice Hughes.

The reason why these cases have been forgotten is that if they went the other way all hell would have broken loose. Instead of rallying as the stock market did after the ruling, stocks likely would have crashed. It would have triggered a constitutional crisis with Court versus the other two branches of government. Indeed the lead up to the ruling was a precursor to the 1937 court fight that Roosevelt would have.

As an aside Edwards notes that the United States had a treaty with Panama concerning the lease payments for the Panama Canal. That treaty had a gold clause in it. After a long negotiation in 1939 the lease payment was increased retroactive to 1934 thereby reflecting the dollar devaluation. Thus, the U.S. made good on its international treaty obligations.

“American Default” is a worthy addition to the economics literature of the Great Depression. It should be read with the works of Friedman & Schwartz, Bernanke, Irwin, Eichengreen and Sumner. And because it is more a history book than an economics book the lay reader should find it very readable. Further given the rising debt/GDP ratio in the U.S. when coupled with even larger unfunded liabilities, the idea of a 21^st century American default is not totally improbable.

The full amazon URL appears at: https://www.amazon.com/review/R1JCSUKKX3TVDP/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv