- Date:
- Read time:
- 2 mins
- Author:
- Stefan Gerlach
Senior Economist
Lessons from 1933 and today’s “user fee” idea
A US default may seem unthinkable, but history says otherwise. In 1933, President Roosevelt voided gold clauses and devalued the dollar, cutting the value of repayments. Today, senior Trump adviser Stephen Miran has proposed a “user fee” on Treasury holders, an idea which would have a similar effect. In this Macro Flash Note, EFG Chief Economist Stefan Gerlach argues that investors must recognise that what has happened once can happen again.
The United States is running large budget deficits. In the spring, before the “Big Beautiful Bill” became law, the Congressional Budget Office projected that federal debt would rise from about 120 percent of GDP in 2025 to more than 150 percent by 2055. Forecasts are uncertain, but the debt is already very large, growing fast, and must at some point be brought under control. The question is how.
Most commentators regard a US default as so unlikely that it is barely discussed. There are no signs that investors fear the United States will struggle to meet its debt obligations. The Treasury market is deep and liquid, and the dollar remains the world’s reserve currency. Yet the United States has, in practice, defaulted before. Creditors were repaid on less favourable terms than agreed. The precedent of the 1933 abrogation of gold clauses is worth recalling.
Three points are useful to bear in mind. First, markets rarely anticipate defaults. They tend to happen, as Ernest Hemingway wrote of bankruptcy, “gradually and then suddenly”. For investors in US debt, it is prudent to think about what seems unthinkable, not because it is likely but because it is possible.
Second, if a US default were to occur, it would almost certainly be partial and presented under another name, perhaps as a fair adjustment or a necessary correction.1
Third, a precedent exists in trade policy. Tariffs have been justified as necessary for fairness.2 In 2023, Stephen Miran, now chairman of the Council of Economic Advisers and nominated by President Trump to serve as a Governor of the Federal Reserve, applied the same reasoning to debt markets. He suggested a “user fee” on foreign official holders of Treasury bonds to weaken the dollar and compensate the United States for the security it provides.3 If applied to existing bonds, it would reduce payments to creditors much like a partial default. His senior policy role shows that such ideas can no longer be dismissed as academic.
A precedent from the 1930s
In 1933 the United States was in the grip of the Great Depression. A central problem was the relentless fall in prices, which increased the real burden of debt and made it harder to service. Firms, banks, and households that had borrowed expecting prices and wages to keep rising instead saw them collapse. Debts grew heavier in real terms, forcing sharp cutbacks in spending, triggering defaults, and contributing to mass unemployment.
President Roosevelt saw that ending the downward spiral required higher prices, especially in agriculture. But with the United States on the gold standard since 1900, this meant devaluing the dollar, which in turn required breaking its link to gold.4
Public and private bonds generally contained a gold clause, guaranteeing repayment in gold or its equivalent. If the dollar were devalued while these clauses remained, the government and other borrowers would face a higher dollar cost of debt, undermining the purpose of devaluation. To avoid this, Roosevelt abolished the gold clauses and then devalued the dollar. Creditors lost the right to be repaid in gold, receiving instead dollars worth less in gold terms.
The gold policy unfolded in stages. In early 1933, gold was flowing out of the Federal Reserve as domestic holders preferred coins to deposits, and foreign investors feared devaluation. By March, the New York Fed could no longer convert currency into gold, and Roosevelt declared a national banking holiday. Congress gave him control over gold movements and empowered the Treasury to compel the surrender of gold coins and certificates.
Outflows continued, and in April the gold standard was suspended. Gold exports and domestic conversion were banned, halting the drain. In May, the Thomas Amendment to the Agricultural Adjustment Act authorised the president to reduce the gold content of the dollar by up to half and to back it with silver or a mix of metals.
In June, Congress voided gold clauses in all contracts, removing the legal guarantee of repayment in gold. The Supreme Court upheld the measure in 1935 in a series of close decisions.
In January 1934, the dollar was formally devalued. Gold was revalued at 35 dollars an ounce, up from 20.67, cutting the gold value of the dollar by 41 percent. Ownership of all monetary gold passed to the Treasury, and creditors were paid in depreciated dollars.
The effect of the abolition of gold clauses was the same as a partial default, though it was presented as a necessary step to revive the economy. By raising the price level, devaluation reduced real debt burdens, encouraged spending, and supported recovery. Roosevelt’s policies restored growth and improved the creditworthiness of many debtors, allowing some lenders to recover payments that might otherwise have been lost. In that sense, while creditors were not repaid in gold, the policy could be seen as serving their longer-term interests.
Parallels and lessons
A default today would likely follow a similar pattern, involving changes to repayment terms that reduce value for creditors. It would be justified as necessary for the broader good, would disproportionately affect foreign investors with limited political influence, and would be presented as a policy adjustment rather than a default.
The broader lesson is that defaults can and do happen in the United States, even if they are not called that. But the situation today would be very different from the 1930s. The Great Depression was an extraordinarily deep downturn with huge economic and social costs, often seen less as a policy failure than as an unavoidable calamity, an economic act of God. A partial default now would be viewed as bad faith and poor economic management, and markets would likely react far more negatively than they did ninety years ago. Investors should remember that what has happened once can happen again.
1 Of course, rating agencies may consider this a full default.
2 For instance, Reuters quotes President Trump as saying “I have decided for purposes of fairness, that I will charge a reciprocal tariff.” See: https://www.reuters.com/world/us/trump-says-reciprocal-tariffs-coming-thursday-2025-02-13/
3See https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf
4 See https://www.federalreservehistory.org/essays/roosevelts-gold-program
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