Jason Furman's Reviews > American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold

It is tempting to say that American Default is shockingly readable for a book written by an economist. But it is probably more fair to say that it is shockingly readable period. It is a history of the banking crisis around the onset of the Great Depression, the role that devaluing gold played in reversing deflation and reducing the value of debts, and the subsequent legal battle over the abrogation of “gold clauses” in those same debt contracts. It reads like a history but also has a substantial legal element while having insightful and always accurate economics woven throughout.

Sebastian Edwards is an excellent international macroeconomist who has spent most of his career writing about emerging markets, particularly economic disasters in Latin America. Which makes him well prepared to take on the United States’ emerging-market like crisis, the Great Depression.

The story starts with a cascading series of bank failures, the efforts of the outgoing Hoover to address them, and how Roosevelt and his incoming team reacted.

At the same time he traces the attitudes towards the gold standard and macroeconomic policy from a sleeper issue into Congress basically forcing the President’s hand to reinflate, which ultimately required revaluing gold at a higher value per dollar--a step that followed the UK. It is fascinating to read about how much Roosevelt was focused on and even targeting particular commodity prices and how quickly they all moved in proportion to the price of gold—just like the quantity theory of money would say. It is also fascinating to read about how the U.S. dollar behaved vis-a-vis the British pound (which was off the gold standard) and the French franc (which was still on it).

A big part of the economic boost caused by the devaluation was due to reducing the real value of debts, basically borrowers could repay them in cheaper money (or, equivalently, had to sell less cotton or whatever to get the dollars to pay them). But this was the rub: debt contracts had a “gold clause” that they were payable in dollars or gold, much for the same reason that emerging markets borrow in dollars—because it increases the certainty and security of lenders thus enabling borrowers to borrow for longer periods at lower interest rates.

The creditors sued and the case ended up in court litigating government bonds, private borrowing, and other aspects as well. Edwards tells an interesting legal drama of whether the Supreme Court would uphold the gold clause, which would have required debtors to repay about 67 percent more dollars—potentially causing an economic calamity. (In fact, an interesting part of the history is government officials debating whether or not to scare markets so they would go down while the Supreme Court was deliberating in an attempt to scare the Court into ruling against the gold clauses. Another interesting part, which I found personally resonant, was all the discussion of contingency planning for all of the possible outcomes of the case.)

Ultimately the Supreme Court ruled that the government had broken the law by retroactively breaking the gold clauses but that there were no damages because the inflation simply reversed the previous inflation so creditors ended up getting what they would have expected, in real terms, when they first made the loans.

Edwards is not completely convincing when he tries to defend the Roosevelt decision and court upholding it as a one-time necessity for the sake of the economy while simultaneously condemning Argentina for taking similar types of actions (in its case dollar clauses instead of gold clauses). There are more parallels than he admits. He is also not completely convincing in his attempt to make the case relevant to issues today. But ultimately this does not matter, what does is just how interesting this book is—and how much I learned about an aspect of going off the gold standard that I had never known about before.