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?

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.

Only a few companies sold gold bonds before the end of the Civil War in 1865.  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!

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.  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!

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.

PBPK/CML