The U.S. Debt Restructuring of 1933: Consequences and Lessons
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.
Sebastian Edwards is with the UCLA Anderson School and the NBER. Francis A. Longstaff is with the UCLA Anderson School and the NBER. Alvaro Garcia Marin is with the Universidad de Chile. We are grateful for the capable research assistance of Colton Herbruck, Scott Longstaff, and Yuji Sakurai. All errors are our responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.