Liberty Bond - Default of The Fourth Liberty Bond

Default of The Fourth Liberty Bond

The first three Liberty bonds, and the Victory Loan, were retired during the course of the 1920s, but the fourth Liberty Bond lasted into the 1930s leading to a technical default on the bond, the terms of which were for payment in gold. This default affected the large majority of Liberty bond debt because the terms of the bonds allowed holders of earlier bonds to trade them for the later bonds which had superior terms. For this reason most of the debt from the first, second, and third Liberty bonds had been rolled into the fourth issue. The fourth Liberty Bond had the following terms:

• Date of Bond: October 24, 1918
• Coupon Rate: 4.25%
• Callable Starting: October 15, 1933
• Maturity Date: October 15, 1938
• Amount Originally Tendered: $6 billion
• Amount Sold: $7 billion

The US Treasury called this bond on April 15, 1934, but refused to redeem the face value of the bond in gold as required by the terms of bond which read: "The principal and interest hereof are payable in United States gold coin of the present standard of value."

Since the US had devalued the dollar in the preceding year from $20.67 per troy ounce of gold (the 1918 standard of value) to $35 per troy ounce, the 21 million bond holders lost 139 million troy ounces of gold, or approximately 41% of the bond's principal. This was the equivalent of $2.866 billion (in 1918 dollars), or approximately $200 billion at the 2011 price of $1500 per troy ounce.

The legal basis for the refusal of the US Treasury to redeem in gold was House Joint Resolution 192, dated June 5, 1933. This resolution was later held to be unconstitutional and thrown out by the U.S. Supreme Court. Chief Justice Hughes writing for the majority elaborated the precedent that Congress may not legally nullify its own contracts:

We conclude that the Joint Resolution of June 5, 1933, insofar as it attempted to override the obligation created by the bond in suit, went beyond the congressional power. —Chief Justice Charles Evans Hughes, Perry v United States, 294 US 330 (1935), Page 294 U. S. 354

Due to the significant restrictions placed on gold trading by Roosevelt's reforms, the Court ruled that the bond-holders' loss was unquantifiable, and that to repay them in dollars according to the 1918 standard of value would be an "unjustified enrichment". The ruling therefore had little practical effect.