Since a recent blog touched on the gold standard (plus an amusing crack about it being dropped 75 years ago), I thought it would be interesting to look back at history and how the gold standard has evolved legally over the years and possible current effects. History has not only altered the gold standard itself but the gold clauses as well, the axing of which effectively gave the entire theory a big punch in the gut back in 1935.
The gold standard, a backing of currency with gold grams in an amount determined by the government, has its roots as far back as ancient Rome, but a bit closer to home, it had major beginnings in the U.S. in the 1900 Gold Standard Act, which set the value of gold per troy ounce. For the most part, the gold standard gave up the ghost during the inflationary years of the Great Depression, but what really hit home for many people was the repealment of the Gold Clauses. (Many governments still retain gold reserves however, to give added credibility to the value of currency.)
The gold clauses were contract clauses that basically allowed an obligee to collect his or her money in gold, rather than dollars, upon demand. In 1933, Congress nixed these clauses with a resolution making these types of clauses against public policy.
A series of U.S. Supreme Court cases, The Gold Clause Cases, addressed the constitutionality of this resolution in cases that addressed the clause in private railroad bonds, Liberty Gold Bonds, and U.S. Gold certificates. The court held the resolution repealing these clauses was within Congress’ power and effectively zapped the power of gold clauses across the country, disallowing obligees – including those of the government who owned U.S. bonds – from demanding payment in gold rather than dollars.
No controversial decision is without dissenters, and in the Gold Clause Cases, the four horsemen (Justices James McReynolds, Willis Van Devanter, George Sutherland, and Pierce Butler, who basically voted against anything FDR wanted) voted against the majority, saying, “This amounts to a declaration that the Government may give with one hand and take away with the other. …The impending legal and moral chaos is appalling.” Whether or not the impending doom predicted by the horsemen actually came to pass is perhaps debatable, but it was more likely not nearly as dire as they expected.
What’s interesting is how that plays out even today. While Roosevelt re-adopted the gold standard, which was again later dropped, the gold clauses were not reinstated until the 70’s, where it was authorized only for use in private contracts (this is in stark contrast to earlier contracts, which obligated the federal government to make payment in gold).
The interesting current twist is a case that is currently awaiting a decision in the 6th U.S. District Court. The case involves a lease between a landlord and a lessee who took over an existing lease. The original lease included the 70’s approved private contract gold clauses – the question is, did the new lessee take on that portion of the contract or was a new contract effectively made? The Northern District of Ohio said the gold clause was bunk, and there’s no obligation to pay up in gold rather than good old greenbacks (which would give the owners a potentially much higher payout in terms of real value, given the dollar’s slide). What will the 6th District say? My guess is likely the same as the lower court, but if not, it might be more fodder for the gold standard proponents. Whatever the decision, watching history repeat itself will remain entertaining, interesting, and relevant.
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