Economic and financial section > Report of the Committee for the Study of International Loan Contracts

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ANNEX I
RELATIVE ADVANTAGES OF CURRENCY OPTIONS
AND THE GOLD CLAUSE
1. On examining the principal cases in which gold clauses
have been adopted, it is found that most of the loans accom¬
panied by a gold clause have given rise to difficulties, whether
that clause applies to one currency alone or to several currencies.
On the other hand, the stipulations of loan contracts
carrying a currency option have in most cases been carried out
in full.
2. It is difficult to contend that this difference in treatment
has arisen entirely from difficulty in interpreting gold clauses.
As a matter of fact, the majority of gold clauses were drawn
up in the most explicit terms. But frequently, when a currency
has been devalued, States which issued a loan in the country
in question have been tempted to take the view that the na¬
tionals of that country could hardly insist on the application of
the gold clause, since, without so doing, they would receive in
the currency of their own country the same amount as before ;
and have ignored the fact that the conditions of the loan, and
particularly its actual issue price, were substantially determined
by the circumstance that the risk of subsequent devaluation
appeared to be eliminated.
In justification, borrower States put forward consideration
of public policy and refused to apply a stipulation which the
law of the country in whose territory it was to be carried out
had declared to be null and void, maintaining that the law to
be applied should be that of the place of execution and hence
of the country in which the devaluation had taken place.
If, however, the contract contains a currency option instead
of a gold .clause, the holders domiciled in a country whose cur¬
rency has been devalued will demand payment in the country
whose currency has not been devalued or has depreciated less
than their own. In such a case, they are treated on exactly
the same footing as the nationals of the country in question.
The borrower State can adduce no valid argument for paying
the latter less than the nominal amount expressed in their own
currency, and the other holders benefit by this state of affairs.
3. Moreover, it is probable, in the event of major fluctua¬
tions, that the alternative currencies included in the contract
will also depreciate, which will make it easier for the borrower