Working Paper: NBER ID: w21694
Authors: Sebastian Edwards; Francis A. Longstaff; Alvaro Garcia Marin
Abstract: In 1933, the U.S. unilaterally restructured its debt by declaring that it would no longer honor the gold clause in Treasury securities. We study the effects of the abrogation of the gold clause on sovereign debt markets, the Treasury's ability to issue new debt, investors' willingness to hold Treasury bonds, and on the Treasury's borrowing costs. We find that the restructuring was followed by a flight to quality in the sovereign market. Despite this, there was little effect on the Treasury's ability to sell new debt or the willingness of investors to roll over restructured debt. The Treasury incurred a marginally higher cost of capital by issuing new bonds without the gold clause.
Keywords: US Debt Restructuring; Gold Clause; Sovereign Debt Markets
JEL Codes: E43; E44; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| abrogation of the gold clause (F33) | yields on dollar-denominated debt of high credit quality sovereigns (F34) |
| abrogation of the gold clause (F33) | Treasury's ability to issue new debt (H63) |
| abrogation of the gold clause (F33) | flight to quality in sovereign debt markets (F34) |
| abrogation of the gold clause (F33) | yields on high-quality sovereign bonds (E43) |
| abrogation of the gold clause (F33) | Treasury incurs a marginally higher cost of capital (G32) |
| yields on gold clause bonds trading at a premium (E43) | Treasury incurs a marginally higher cost of capital (G32) |