Thanks to a ruling of the U.S. Supreme Court, the government of Argentina is facing a major debt crisis.
Like many other governments around the world, including the governments of Greece and the United States, Argentina’s government went on big spending and borrowing sprees. Ultimately, the amount of the debt became so large — some $95 billion — that Argentina defaulted on its debt. Argentina offered the bondholders a settlement entailing payment of about 33 cents on the dollar.
The vast majority of the bondholders took the deal. But one American hedge fund took another route as a speculative venture. It scooped up a mountain of worthless Argentine debt and then sued in U.S. federal courts for the face amount of the bonds, which now total some $2.5 billion in principal and interest.
The U.S. courts have held Argentina to the terms of its debt contracts. When the Argentine government borrowed the money, the courts say, it made a promise to repay the amount borrowed plus interest. It should pay what it agreed to pay, the U.S. courts say.
Unfortunately, however, the U.S. Supreme Court didn’t take the same position when it came to the U.S. monetary system. It upheld President Franklin Roosevelt’s decree during the 1930s that nullified gold clauses in privately issued bonds. The Court held that contractual provisions in privately held contracts were subordinate to the federal government’s power to run the monetary system.
Keep in mind that for the first 125 years of American history, gold coins and silver coins were the official money of the United States. That was because that was the monetary system established by the Framers in the Constitution. The Constitution delegated the power to coin money to the federal government and did not authorize the federal government to employ paper money or fiat money. The Constitution also prohibited the states from making anything but gold coins and silver coins legal tender.
Why did our American ancestors choose a gold coin-silver coin monetary standard rather than a paper money standard?
Because they knew that with a paper money standard, U.S. officials would end up doing precisely what the Argentine government has done and, for that matter, the Greek government — go on massive spending and borrowing sprees and then using the printing press to print the paper money to pay off its ever-increasing debt.
In fact, they had just recently suffered the Greek-Argentine type of monetary experience during the Revolutionary War, when the rebels had printed up ever-increasing quantities of paper money called Continentals. They ended up inflating the money supply to such a large extent that the phrase “Not Worth a Continental” became a popular saying.
The Framers knew that governments throughout history have used inflation to plunder and loot people. So, they figured that by making gold coins and silver coins, not paper money or fiat money, the official money of the American people, they would be placing a serious constraint on the ability of federal officials to spend, borrow, and inflate.
When U.S. private companies went into the capital markets to borrow money, everyone understood that they were borrowing gold coins and obligating themselves to repay in gold coins. In fact, the bonds themselves expressly specified that the creditors were required to repay the debtors in gold coin of the same value as when the gold coins were borrowed. That protected the debtors from any future debasement in the amount of gold in any particular gold coin. It also protected them in the unlikely event the United States were ever to abandon the gold-coin standard and adopt a paper-money standard.
Upon becoming president, Roosevelt revolutionized America’s economic and monetary system, without even the semblance of a constitutional amendment. Among the most revolutionary changes was the abandonment of the gold-coin standard in favor of a fiat money standard — that is, one in which the paper money is used in the form of bills and notes that promise to pay nothing.
Part of that abandonment involved Roosevelt’s nationalization of gold belonging to the American people. Anyone caught possessing gold coins, which, again, had been the official money of our American ancestors under the Constitution, would now be guilty of a felony and prosecuted viciously by U.S. Attorneys.
How did U.S. officials compensate gold owners for the gold coins they seized from them? With irredeemable paper money, which U.S. officials promptly proceeded to devalue in relationship to gold.
What about the gold clauses in those privately issued bonds? When the Gold Clauses Cases came before the U.S. Supreme Court, unfortunately the Court didn’t take the same position that the federal courts have taken in the Argentina debt case. No highfalutin verbiage on the importance of governments’ honoring their contractual obligations. Instead, the Court held that contractual obligations had to take a back seat to the president’s authority to run the nation’s economy and monetary system.
Thus, when U.S. officials get tempted to look down their noses at how Argentina is addressing its monetary woes, they shouldn’t forget that they themselves are part of a governmental regime that did the same thing and worse. They are part of a regime that not only abandoned the monetary system established by the Framers under the Constitution but also did so without even the semblance of a constitutional amendment. A regime that stole people’s gold coins, offering debased fiat money in return. And a regime that voided contractual obligations in privately contracts.
As Justice McReynolds put it in the dissenting opinion in the Gold Clause Cases:
This is Nero at his worst. The Constitution is gone…. Loss of reputation for honorable dealing will bring us unending humiliation; the impending legal and moral chaos is appalling.
How right he was.