06 January 2014

Reinhart and Rogoff: 1933 US gold reprice was a debt default

In this IMF Working Paper by Reinhart and Rogoff "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten" they state that

"... the United States had already defaulted on its sovereign debt in April 1933 to domestic and external creditors alike. The abrogation of the gold clause in conjunction with a subsequent 40 percent reduction in the gold content of the U.S. dollar (January 1934) also amounted to a debt haircut amounting to about 16 percent of GDP."

Nice to see mainstream economists calling a spade a spade and a handy link to use next time someone says the US never defaulted on its debt (links from goldbug sites don't count, we are all biased you know).

The rest of the paper is a depressing read, with Reinhart and Rogoff concluding that a "mix of austerity, forbearance and growth" will not get advanced economies out of their debt overhangs and that they will have to "resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression."

While this is all stuff gold followers are aware of, it is the continued appearance of this financial repression narrative and related bail in and other talk in mainstream circles that I think is more important. As it becomes accepted wisdom that this the path we are on, then we will see money move into gold. However, while the mainstream continue to believe that we don't have a big debt overhang and with a bit of taper here and there it will all end up peachy pie, we are going to see gold languish.

PS, if my mum saw the reports of Perth Mint sales up 41%, then no doubt you have as well. Just some caveats: the figures reported are just our minted coins and minted bar sales, and do not include volumes from our Depository business or cast bars (ie kilobars) sold into China etc. They thus represent less than 10% of the metal we refine and is more of an indicator of retail demand. Having said that, we are currently achieving solid premiums on kilobars ahead of the Chinese New Year.


  1. Hi Bron,
    first of all happy new year and keep on blogging :)

    "debt restructuring"
    that word is one of the most sick phrases used today, it simply means stealing.
    Just remember Bank of Cypruss, while regular people might think, that bankrupt businesses are taken out of the market like in the regular world, "debt restructuring" simply means regular people get screwed while e.g. BankOfCyruss is still in business and is allowed to continue running a deficit, as if nothing happend at all.
    In that context: Just imagine that the "overhang debt" is just simply "cypressed" away from the prudent savers, why need the "debt extinguisher" gold any more at all? Once its gone, no money left to buy gold, or what am I missing?
    Greets, AD

  2. So the US government stiffed its creditors in 1933? One of its biggest creditors was the Federal Reserve, thus the Fed was insolvent in 1933. The situation hasn't improved in 80 years, yet here we are in 2014 & Fed credit still competes with gold.

    I challenge anyone to rationalise that.

    Even Fekete makes mention of this in his latest defence of his theory of backwardation, but still doesn't explain why the $ "can still buy some gold". He can't, because it is impossible.