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The Gold Clause Cases

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The Supreme Court’s decision in the Legal Tender Cases in the late 1800s compelled the acceptance of otherwise worthless Treasury notes for all debts, removing from the individual’s rightful sphere of control a matter of serious financial import. The Gold Clause Cases, decided in 1935, continued to erode the liberal tradition of economic freedom, the further decline of which corresponds to the growth of government in all areas during the Franklin Roosevelt administration. It is no surprise that the passage of the Legal Tender Act and the Supreme Court’s subsequent decision in the Legal Tender Cases were among the principal catalysts of the widespread use of gold clauses. A gold clause is simply any provision whereby a party to an agreement stipulates payment in gold; such contractual terms were ubiquitous in the decades leading up to the Supreme Court’s decision in the Gold Clause Cases, central to the functioning of the financial sector and instruments such as bonds, which, of course, are just specific, specialized contracts. Businessmen and investors, prudently worried about the future value of the dollar, preferred bonds that included the additional protection afforded by gold clauses.

Still in its first few months, the Roosevelt administration sought to extricate the government and the financial system at large from the perceived constraints of the gold standard. In April 1933, the president signed an executive order that commanded all Americans, under penalty of steep fines or imprisonment, to turn their gold over to the government. In his signature “fireside chat” of May 7, he said of the gold seizures, “We have placed everyone on the same basis in order that the general good may be preserved.” The president then parroted the old delusions of mercantilism and bullionism, smugly declaring that he had “decided not to let any of the gold now in the country go out of it.” Specie monies have always been an important source of financial independence and security, a bulwark against the movements of the market and a value that exists outside of arbitrary government decrees. Indeed, for centuries the term “money” itself was virtually synonymous with gold and silver. The move to confiscate Americans’ gold was therefore revolutionary, a coup d’état that shifted economic power from the decentralized interactions of private citizens to the national government.

In his Economics and the Public Welfare, economist Benjamin M. Anderson decried Roosevelt’s “course in connection with the gold standard” as “an act of absolute bad faith,” a betrayal of, among other things, his campaign promises to adhere to sound-money policies and the gold standard. During the election of 1932, when Herbert Hoover had merely suggested the possibility that the United States would abandon a gold standard, candidate Roosevelt was apparently aghast, calling the suggestion “a libel on the credit of the United States.” Those words would echo ironically in Justice James Clark McReynolds’s Gold Clause Cases dissent. Underappreciated in its time and still largely neglected today, Anderson’s work is brimful with astute political and economic insights and vivid writing that speaks truth to power. Examining the role of the Federal Reserve System in the stock market crash and the subsequent Depression, Anderson issues a bold indictment: “they abandoned old standards and became daring innovators in the effort to play God.”

The apparent exigencies of the crisis thus created presented the Roosevelt administration with its own opportunity and license to “play God,” to peremptorily sweep aside long-lived precedent and constitutional limits. The legislature only too willingly acquiesced in the president’s power grab. Congress responded with a joint resolution that damned gold clauses as contrary to public policy and banned their future use, policies meant to stabilize the national economy during the “existing emergency” of the Great Depression. The practical upshot was the abrogation of millions of contracts, admittedly properly executed, at an untold cost to be borne by unwitting private parties who perfectly reasonably expected their terms to stand. This ex post facto invalidation of existing gold clauses represented, of course, a significant windfall to the parties, government and otherwise, who were no longer required to furnish gold. The Legal Tender Cases had altered existing contracts by obliging parties to accept the federal government’s paper notes in the place of the specie for which they had bargained; now, the Gold Clause Cases further subverted the freedom of contract in its definitive statement that no American could avail himself of the safeguard provided by a gold clause.

The Gold Clause Cases were a group of four lawsuits that oppugned the constitutionality of the new policies, argued all in the first days of the new year 1935, decided the following month, in February. Of the four, two (Norman v. Baltimore & Ohio Railroad Co. and United States v. Bankers Trust Co.) concerned bonds issued by private companies to private citizens; the other two (Perry v. United States and Nortz v. United States) implicated U.S. government bonds, the owners of which sued after the federal government refused to redeem the bonds “except by the payment of … legal tender currency.” The plaintiffs argued that the refusals, predicated on the above-mentioned congressional joint resolution, deprived them of a constitutionally protected property interest without due process of law — that the government had no power to alter or suspend the terms of their contracts. It is remarkable that, as economist Gregory B. Christainsen notes, none of the contracts at issue in the Gold Clause Cases actually “insisted on payment in gold.” Rather, they stipulated that the “creditor could collect what was due him either in dollars or in a specified quantity of gold” (see Richard H. Timberlake’s essay  “From Constitutional to Fiat Money: The U.S. Experience,” available online). Though seldom discussed today (even in the constitutional- law classroom, the cases are rarely taught), the Gold Clause Cases decision was controversial in its day, rightly regarded as a dangerous deviation from the existing constitutional order. So infuriated was Justice McReynolds, among the four dissenters, that he threw his papers to the floor and declared the opinion of the Court tantamount to the Constitution’s death. The actions of the government, he famously said, embodied “Nero in his worst form.”

Had the Supreme Court decided to hold the government’s actions unconstitutional, Roosevelt was prepared to disregard its opinion. He confided in Robert Jackson, then a Treasury Department lawyer and later to become a Supreme Court justice himself, that no option would be taken off the table — that, in Jackson’s words, even “[outright] defiance of the Court was possible.” Jackson was set to work exploring legal theories that the Roosevelt administration might use to ignore an adverse decision. It was during that period that Jackson, by his own admission, advised the president on the possibility of “enlarging the Court,” recalling Ulysses Grant’s addition of justices following the decision in Hepburn v. Griswold. As fate would have it, Jackson’s labors to discover (or concoct) a viable legal argument were not needed, the Court deciding the Gold Clause Cases in the government’s favor. Chief Justice Charles Evans Hughes cited the 1884 legal-tender case Juilliard v. Greenman for his proposition that the federal government enjoys a “broad and comprehensive national authority over the subjects of revenue, finance, and currency.” The connection between such vaguely defined yet far-reaching powers and the Constitution as written is tenuous at best. Hughes reasoned that this authority, though admittedly not an enumerated power, was a product of “the aggregate of the powers”that were explicitly granted by the Constitution. If the textual basis for such a theory was feeble, then that battle had been lost when Hepburn v. Griswold was overturned by the Legal Tender Cases.

The regulation of the monetary system (and the adoption of a “monetary policy”) is just a special case of economic planning, grounded on the same conceits and errors as all similar top-down designs. In the first concession that such a power is, in and of itself, entirely proper and appropriate, administrators are invested with an inherently dangerous discretion; the possibility — in fact, the strong likelihood — is created that these planners and administrators will annex still other powers considered necessary for the discharge of their duties. And since the monetary system is allowed to be properly the province of centralized government power, few arguments are available when, as in the Gold Clause Cases, government abuses its power. Today, there are precious few practical legal limits on the government’s ability to impose its malfeasance on the economic sphere. McReynolds’s warnings of “impending legal and moral chaos” have turned out to be prophetic. Today, we have an executive branch that is in no way bound by the rule of law, a Constitution that is more national symbol than functioning legal document. If the government has a free hand to confiscate one commodity — and to annul contracts whose terms implicate it — then there is no reason in principle that other commodities should be safe. Filled with indignation at the Court’s overreach, McReynolds observed as much in his dissent, noting that the decision threatened the destruction of “the very rights which they [the Framers] were endeavoring to protect.”

The tragedy is not so much that the government and the Court inflicted these disastrous policies on the American people, but that the seriously flawed political and economic theories upon which the policies stood continue to be dignified. There might have been some small solace in the knowledge that people had learned, had proceeded from such fallacies and left them in the past with Roosevelt and Hughes. That they didn’t learn, that they remain bound to economic superstitions that were exploded more than two centuries ago, attests to the need for continued education in the principles of liberty. Legal and political reforms that precede this education are a house built upon sand; the foundation lacking, everything else is doomed. The Gold Clause Cases represent the baleful idea, unfortunately triumphant today, that economic rights are lesser rights. But Chief Justice Hughes and his ilk were wrong. Individual liberty is an indivisible whole, the necessary precondition for a thriving society.

This article was originally published in the February 2017 edition of Future of Freedom.

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    David S. D'Amato is a policy advisor at the Future of Freedom Foundation, an attorney, and an adjunct law professor. He is also a regular contributor at the Cato Institute's Libertarianism.org and a policy advisor at the Heartland Institute. His writing has been featured at public policy organizations such as the Institute for Economic Affairs, the Centre for Policy Studies, and the Foundation for Economic Education, and in popular media such as Forbes, Investor's Business Daily, Newsweek, and RealClearPolicy.