Financial History Issue 114 (Summer 2015) | Page 29

Joe I. Herbstman Memorial Collection

$100 gold bond from the Fourth Liberty Loan.

On April 5, 1933, Executive Order 6102
was issued, requiring gold coin, gold bullion and gold certificates to be delivered
to the government. Some exceptions were
allowed, according to the Act; “Gold coin
and gold certificates in an amount not
exceeding in the aggregate $100 belonging
to any one person; and gold coins having
a recognized special value to collectors of
rare and unusual coins.”

Some eight months later, Congress
passed the Gold Reserve Act (January
30, 1934). This law prohibited the private
ownership of most gold. It also changed
the Treasury’s nominal valuation of gold
from $20.67 per ounce to $35 per ounce. It
is this provision that led to the only default
in the history of US Treasury debt.
Like many debentures of the 18th and
early 19th centuries, the Liberty Loans

were gold bonds, meaning they had a
provision whereby “principal and interest
hereof are payable in United States gold
coin of the present standard of value.”
Some $5.4 billion worth of Fourth Liberty
Loans were outstanding as of February
1, 1934. And gold had just been devalued
some 40%, angering many bondholders.
Enter the US Supreme Court.
In one of several legal challenges categorized as the Gold Clause Cases, the
Supreme Court would determine whether
or not holders of the Fourth Liberty Loan
would be entitled to a pre-1934 dollargold valuation of their bonds. In Perry v.
United States, the plaintiff argued that the
government had violated provisions of the
14th Amendment, which state that “The
validity of the public debt of the United
States, authorized by law…shall not be
questioned.” Perry argued that government, by refusing to honor the original
terms of the bond, went beyond its legal
and Constitutional authority.
The federal government countered that
the validity of the public debt was not
being undermined, since the debt was not,
in fact, being repudiated. Bondholders
would be receiving 100 cents to the dollar,
albeit in dollars devalued from an earlier
exchange rate. Furthermore, they countered, the 14th Amendment said nothing
about the medium of payment.
President Roosevelt was not prepared
for a ruling that would favor Perry. Privately, the White House was considering
various options should the Court rule
against the government. A whisper campaign of sorts began, attempting not only
to influence the Court, but public sentiment as well. Articles appeared in major
newspapers discussing the issue. The President even floated an idea to Treasury Secretary Henry Morgenthau Jr. to unsettle
the financial markets should Perry preside in the case. The Secretary adamantly
refused such a proposal, and eventually
the President settled on a plan to simply
ignore the opinion from high court should
it rule against the government. The White
House would invoke sovereign immunity
until a legislative answer from Congress
could remedy the Court’s decision.
In his opinion on behalf of the Court,
Chief Justice Charles Hughes seemed
persuaded by Perry, writing, “We conclude that the Joint Resolution of June 5,
1933, in so far as it attempted to over ɥ