When America Actually Defaulted

In 1933, FDR and the Democrats took America off the gold standard, an episode that has much to teach as we hurtle toward the date when the government runs out of money.

Via Wikimedia Commons
FDR at Quebec in 1943. Via Wikimedia Commons

The default panic being sowed by the Democratic press over the debt ceiling is a moment to reflect on America’s actual default. It occurred when FDR and his party took us off the gold standard that was enacted in 1900. That default, which devalued the dollar in terms of gold and barred Americans from owning the specie, occurred in 1933. The episode has much to teach as we hurtle toward the date when the federales run out of money.

Mark that the Times called the default a matter of “the honor of the United States.” The Democrats’ scheme meant “repudiating the solemn obligation” America undertook to redeem its currency in full. Instead FDR cut the dollar’s gold value and ended the pledge to repay bonds in gold. The result, the Times said, was to “humiliate all Americans” who thought the government would never “violate its plighted word to its own citizens.”

The 1933 default has been overlooked in debt debates, like in 2011 when an Obama White House official warned that failing to raise the borrowing limit would be “essentially defaulting on our obligations, which is totally unprecedented in American history.” Yet a Harvard economist, Kenneth Rogoff, noted that America can rank among “sovereign default virgins” only by “excluding events such as lowering the gold content of the currency in 1933.”

Before FDR, the dollar was fixed at a 20.67th of an ounce of gold. After taking America off the gold standard, FDR devalued the dollar to a 35th of an ounce of gold, a 59 percent reduction. FDR also broke the “gold clauses” in contracts and bonds that required repayment at the original gold value. If Moody’s calls today’s manufactured default crisis “cataclysmic,” what do they call it when bondholders lose more than half of their investment?

“A calculated breach of contract” is how London’s Financial Times described it in May 1933. “The word default has an ugly sound,” the FT wrote, “but it is used deliberately with respect to the action taken by the United States Government.” A New York Sun editorial lamented that “small investors” had bought World War I bonds “in the confident belief” that they “would be paid off in the same gold dollars they cost.”

The Sun’s editors observed that “the idea that the government would repudiate its debt was never entertained.” Yet the Supreme Court in 1935 let FDR’s default slide, awarding no damages to the holders of federal debt. “The Constitution is gone,” was how Justice James McReynolds summed up the decision. “The way back to the old gold standard is now closed,” is how the editors of the New York Herald-Tribune described the default.

The Trib decried “the financial trickery, the plain dishonesty,” of FDR “taking the country off gold and attempting to wipe out the pledge of the nation” to repay its debt in specie. FDR’s default, by shaking confidence in the long-term value of investments, helped to prolong the Depression. Recovery came with the restoration of a partial gold standard under Bretton Woods, and America’s vow to redeem dollars presented by foreign governments in gold.

That pledge was later broken when President Nixon closed the gold window, another default. So we’re left unmoved by the left’s newfound default alarmism such as the Times’ headline this morning: “Debt Default Would Cripple U.S. Economy.” Never mind that there’s no risk of a default on America’s debt obligations, unless the Biden administration refuses its duty to prioritize debt repayment over other federal expenditures. 

Yet Senator Warren is warning “how dangerous it would be to default on the national debt” and the Times threatens millions could be thrown out of work amid a “2008-style financial crisis.” This ignores the extent to which America has already defaulted on its obligations in respect of the dollar. In 1935 the Sun urged a “revolt” against “the violation of the government’s pledges.” Then as now, the need is for “a Congress which will stop it.”

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