Repudiation of Public Debt

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REPUDIATION OF PUBLIC DEBT. When an individual goes bankrupt, he or she might pay one cent on the dollar, but when a nation goes bankrupt, it inflates its currency and pays in a one-cent dollar. That is approximately what the United States and many states did in the 1780s. To guard against a repetition, the Constitution of the United States permits only Congress to coin money.

The Constitution says nothing, however, about issuing legal-tender treasury notes. This silence discouraged the United States from printing paper money until the exigencies of the Civil War produced the first U.S. notes. This currency, dubbed greenbacks, were legal tender for almost all payments but rapidly depreciated.

Thus, a series of challenges known as the Legal Tender Cases questioned the constitutionality of the Legal Tender Act. Nonetheless, the Supreme Court eventually upheld the right of Congress to make treasury notes legal tender. One important exception to the new general rule was that the Legal Tender Act did not apply if an explicit "gold clause" in a contract required a borrower to repay the debt in gold and silver coin, so many agreements included such a stipulation.

On 19 April 1933, the government abandonded the gold-coin standard. On 5 June President Franklin D. Roosevelt signed a joint resolution of Congress declaring all specific gold contracts inoperative. This was necessary if the United States was to devalue, and devaluation was an important instrument of the administration's price-raising policy. On 31 January 1934, the government ordained a new gold dollar worth 1.69 times less than the old.

Four Gold Clause Cases came before the Supreme Court questioning the constitutionality of the resolution of 5 June 1933, and claiming for the creditors, on the basis of the gold clause, $1.69 for each dollar owed. The decisions were of vital importance because they affected about $100 billion of debt bearing the gold clause. On 18 February 1935, the Supreme Court held the resolution of 5 June unconstitutional because, although Congress could initially negotiate specific terms for paying back debt, it could not change them later. On the other hand, the Supreme Court refused to award damages because the plaintiff had not lost any buying power.

The buying-power theory was precedent breaking. "Value" under the Constitution had previously meant weight of gold, not purchasing power. This decision opened the way for suits against the government as soon as anyone could demonstrate loss in purchasing power because of inflation. So, on 27 August 1935, the president signed a joint resolution of Congress closing the Court of Claims to such suits but granting bondholders the temporary privilege of receiving cash payment for the par value of the bonds plus accrued interest. This move eliminated the financial confusion that would have resulted from the success of such suits, but according to many critics, it compromised national honor.

To the extent that a nation allows its currency to depreciate in value and pays its borrowings in that currency, it is also repudiating part of its public debt, even if it is not doing so as openly as the United States did in 1933– 1934. Since March 1933 individuals have not had the right to demand gold coin for paper dollars, and on 15 August 1971, President Richard M. Nixon informed foreign central banks and treasuries that they had lost that right too. The American dollar has continued to depreciate over time.


Eichengreen, Barry J. Golden Fetters: The Gold Standard and the Great Depression, 1919–1939. New York: Oxford University Press, 1992.

Gallarotti, Giulio M. The Anatomy of an International Monetary Regime: The Classical Gold Standard, 1880–1914. New York: Oxford University Press, 1995.

Markham, Jerry W. A Financial History of the United States. Armonk, N.Y.: M. E. Sharpe, 2002.

Timberlake, Richard H. Monetary Policy in the United States: An Intellectual and Institutional History. Chicago: University of Chicago Press, 1993.

Wilson, Thomas Frederick. The Power "to Coin" Money: The Exercise of Monetary Powers by the Congress. Armonk, N.Y.: M. E. Sharp, 1992.

Donald L.Kemmerer/a. e.

See alsoConstitution of the United States ; Debt, Public ; Gold Standard .

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Repudiation of Public Debt

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