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What are gold bonds?
About 40% of all bonds in this catalog are
'gold' bonds. That percentage has risen over the years
as more information is gathered. Gold
bonds promised repayment in gold coin as opposed to
silver coin or ordinary paper money. Why the difference?
Promotion?
At the heart of matters, the concept of promising repayment
in gold probably had more to do with promoting sales than
anything else.
When borrowing money, companies were effectively promising
two things: that they would repay investors’ money and
that they would pay interest for that privilege.
Knowledgeable investors, however, were also concerned with
inflation.
They did not want to loan money to risky railroad companies,
often for several decades, only to be repaid in money that
would lose value over the years.
Companies realized they could borrow money more easily
if they decreased inflationary worries. One way to
do that to guarantee to repay loans in gold. In the
financial theory of the time, gold was an effective
hedge against inflation.
Appearance of the first gold bonds
Only a few companies sold gold bonds before the end of the
Civil War in 1865. (See Timeline.)
The Civil War taught many things, among them, the effect of
inflation and deflation on the value of a dollar. Then came
a serious recession in 1872 that seriously crippled rail development.
To entice investment during threatening times, companies
promised more and more repayments in gold coin. Based on surviving
populations, only 6% of railroad bonds during the 1860s were
denominated in gold. In contrast, at least 21% of bonds issued
during the 1870s were gold bonds.
From that time forward, gold bonds became more and more fashionable.
During the 1880s, gold bonds probably constituted about 44%
of all the railroad bonds sold. (This assumes that the bonds
that survive are somewhat representative of the total population
that existed at the time.)
From then until the U.S. dollar was taken off the gold standard,
gold bonds seem to have accounted for almost three-quarters
of all railroad bonds!
But what about the risk?
Promising to repay loans in gold was an effective, but very
risky, sales ploy.
Once they started selling gold bonds, railroad companies
were betting that inflation would remain under control and
never threaten the stable price of gold. Unfortunately, they
never figured on the October, 1929 stock market crash.
The accepted rules of financial stability changed as the
global economy deteriorated into the Great Depression of the
1930s. (see Timeline.)
By 1933, a complicated series of global circumstances forced
the U.S. government to raise its fixed price of gold from
$20.67 per ounce to $35. Even though the jump to $35 could
have been higher, it still represented a 69% increase
in the official price of gold.
Can you imagine the effect on railroad companies that had
promised to repay bonds in gold?
Before the price jump, a company could repay a $1000 bond
with $1000 in gold. Afterwards, the same bond would have cost
the companies $1,693!
The U.S. government stepped in to prevent a collapse
To prevent wholesale collapse of American business, the government
stepped in. On June 5, 1933, Congress passed a joint resolution,
that in one fell swoop, nullified every
gold clause in every U.S. contract. It said that all payments
would henceforth be made in legal currency, NOT gold! Thus
ended the period of high-flying gold bonds.
Companies, however, did not immediately reprint and re-issue
their entire supply of bond certificates. You will discover
companies issued some 'gold' bonds well into the 1940s, with
a few issued even into the 1950s.
Are any bonds still redeemable in gold?
Absolutely not!
U.S. law is very clear on this subject. That, however, does
not prevent people from believing there is an easy way to
make a buck by cashing them in for gold. This has given rise
to several criminal scams.
Do not fall for them.
Identifying gold bonds
Most of the time, the word GOLD is prominently displayed
near the name of the railroad. Sometimes, especially with
earlier bonds, the words in gold coin appears in the
text, right after the denomination. Oftentimes, bonds are
worded like:
...will payer to the bearer $1000 in gold
coin on the first of January...
Some companies, however, recognized the risk of denomination
in gold, and purposely worded their bonds like:
...will pay to the bearer $1000 in lawful
money on the first of January...
When denominated in gold, most bonds also stipulate the time
of the gold standard, in a phrase within in the text worded
like:
...having a standard weight and fineness
existing on Jan. 1, 1893...
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