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Thursday, May 04, 2023

Debt Validity vs. Devaluation

To build on my post from yesterday, why don't people think that the debt devaluation in the 1930s was a default? Here are a couple of possible answers that aren't necessarily based on a legal fiction or a lack of remedy:

  1. The Constitution is violated only when there is a total or a substantial default. A haircut for the bondholders does not count. This was part of what the United States argued in its brief in Perry.
  2. Paying people back at face value is not a default even if the real value of the dollar has declined. This makes sense in that you cannot say that any downward movement in the dollar over the term of the bond is a partial default. There has been inflation over the term of longer (and even shorter) bonds.
  3. Justice Stone's concurring opinion argued that Congress's power to regulate the currency would be unduly impaired if Section Four or the Constitution more generally was read to prohibit or restrict devaluations.


Posted by Gerard Magliocca on May 4, 2023 at 01:28 PM | Permalink


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