When Did Gold Clauses Die?

Abstract

Abstract: In the 19th century it was common to give international sovereign debt ‘gold clauses’ that promised investors repayment in a specified amount of gold. The real test for these clause came in the aftermath of WWI on the back of widespread currency depreciation, and international bond investors fought sovereign borrowers in international and domestic courts to recover payment in gold as opposed to depreciated national currency. In the modern economic literature the best known case is the US abrogation of gold clauses in the 1930s. But the issue acquired world signification in the late 1920s when the ICPJ in The Hague returned verdicts favorable to the clauses. We use international bond prices to revisit the literature on the gold clauses, expanding coverage globally to examine pricing around the important gold clause decisions at the Hague. We show that investors priced gold clauses as a legitimate institutional mechanism for constraining borrowers in the 1920s. By the time of the US Supreme Court decision in the 1930s there was no expectation that courts could constrain political decision-making. This episode traces the demise of international institutions in sovereign bond prices, and shows how a political commitment to the gold standard was replaced by market-pricing.