The Gold Clause: A Free-Market Gold Standard

President Franklin Roosevelt destroyed one of the most valuable uses of gold when he nationalized ownership of the metal in 1933: the gold clause. This value did not return when private ownership of gold was legalized once more in 1974, partly because its use is still discouraged by anti-usury laws.

The impact of its sudden absence was dramatized by a letter dated February 4, 1964, from the libertarian newspaper magnate R.C. Hoiles to Robert LeFevre. Hoiles explained that as a result of “the government abrogation of contract … I lost $240,000.” The contracts to which Hoiles referred were gold clause ones by which he sold two newspapers, with full payment due in 1935. The abrogation was House Joint Resolution 192 or the “Gold Clause Ban” of 1933, and the Gold Reserve Act of 1934, which annulled the clauses. (Adjusted for inflation, $240,000 in 1934 is equal to more than $4.5 million today.) Hoiles was a victim of Roosevelt’s war on private gold, which led to the erasure of an estimated 40 percent of public and private debt from 1933 to 1935 owing to the erasure of the gold clauses still in force. The debtors, especially government, benefited; creditors lost.

A gold clause is a provision that stipulates that a contractual obligation should be paid in a specific amount of gold or in its paper equivalent. The clauses were ubiquitous in America during the late nineteenth and early twentieth centuries. The 1934 essay “Some Aspects of the Nullification of Gold Clauses in Obligations,” published in the University of Chicago Law Review, stated, “It has been estimated that, of the $200,000,000,000 public and private debt, approximately one half contains a gold clause in one form or other.” They were a standard aspect of financial instruments such as bonds and mortgages because they provided protection against any future devaluation of the dollar. If the dollar was devalued vis-á-vis gold, then the dollar equivalent of the gold specified in the contract would simply increase by the amount of the devaluation.

Gold clauses sound antiquated to modern ears. Perhaps that is why the impact of Roosevelt’s debt default is not appreciated as a watershed moment in American economic history. But their annulment was pivotal. To impose a radical reorganization of America’s economic and political structure through the New Deal, he needed to control and manipulate the monetary system. Gold clauses blocked his path, and so he eliminated them. Especially now, with calls for debt forgiveness that range from student loans to global obligations, it is useful to review how the U.S. government handled a perceived debt crisis in its past.

The gold clause

The story begins with the election of Roosevelt, who was inaugurated on March 4, 1933, at the height of the Great Depression. He immediately took unprecedented control of the monetary system. In the early hours of March 6, after little more than a day in office, a national banking “holiday” was declared to stop bank runs and give Congress time to pass an Emergency Banking Act. The bill added a subsection to the Federal Reserve Act that allowed the Treasury secretary “to protect the currency system.” The secretary, “in his discretion,” could require “all individuals, partnerships, associations and corporations to pay and deliver to the Treasurer of the United States any or all gold coin, gold bullion, and gold certificates” they owned. In return, they would receive “an equivalent amount” of fiat currency.

Also in early March, Roosevelt’s famous “Hundred Days” began and lasted into June. Legislation and Executive Orders issued during this time changed the fundamental manner in which the U.S. economy and society functioned; it paved the way for a welfare state. But, again, gold was a barrier because it was a private currency and store of wealth. He needed to nationalize it.

On April 5, 1933, after one month as president, he issued Executive Order 6102 “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States.” With few exceptions, such as jewelry, people and businesses were required to surrender their gold holdings to the Federal Reserve Bank “on or before May 1, 1933” and receive the long-standing price of $20.67 per ounce in legal tender.

Generally speaking, people complied. Murray Rothbard explained, “One reason why it was so easy for the government to confiscate everyone’s gold in 1933 was that by that time, Establishment propaganda had worked to the extent that few people were actually using gold in their daily lives. Not using gold much, they didn’t think they missed it.”

Another reason was the reassuring tone assumed by Roosevelt. In his May 7 “fireside chat” — a distinctive feature of his presidency — he reached out to the common man by stating, “We have placed everyone on the same basis in order that the general good may be preserved.” The common man was not the one most affected by the confiscation of gold, however. Nevertheless, he assured the American people that the decision “not to let any of the gold now in the country go out of it” would strengthen the fiat currency with which most people conducted daily life. He pledged to debtors that his “administration has the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed.”

Gold clauses prevented Roosevelt from fulfilling his objective. If such contracts were widely used, then the “controlled” inflation would have a diminished impact because dollar payments would simply rise to reflect the dollar equivalent of the specified gold. The gold clause constituted a free-market version of a gold standard. (A free-market gold standard is based on the market price of gold, as opposed to redemption at a legally fixed price.)

It was not the first time in American history that the gold clause served that purpose. During the Civil War (1861–1865), the Bechtler gold coin, which was minted in North Carolina by Christopher Bechtler Sr., became the coin of choice because of its consistent purity. Even after new coins ceased to be issued, the old ones circulated widely in the South. In his book Lost and Buried Treasures of the Civil War, professional treasure-hunter W.C. Jameson said the coins were so popular that the monetary obligations of the Confederacy, such as purchasing contracts, were often specified as payable in Bechtler gold rather than Confederate currency or government-issued coins. Thus gold coins and clauses provided a free-market gold-standard defense against wartime inflation, albeit one that functioned in limited circumstances.

On June 5, 1933, Roosevelt responded to the threat posed by this free-market gold standard. Congress passed Joint Resolution No. 10, which annulled gold clauses in past and in future contracts. Critics cried out that the resolution invited the debasement of contracts and the devaluation of currency. Advocates argued that the contracts were not being repudiated and, since private ownership of gold was already banned, Congress was merely clarifying the type of payment that was legal. The annulment occurred abruptly before contracts could be renegotiated or alternative arrangements made. That caused a huge and immediate transfer of wealth from creditors to debtors; the government was the largest debtor of all because of its bonds and other financial instruments on which it made payments.

On January 31, 1934, the end- game became clear. Roosevelt devalued the dollar by setting the price of gold at $35 an ounce, which was an increase of 69 percent over $20.67 an ounce. The currency was officially devalued. Not only did the government hold all legal gold; the currency with which it paid off debts was now debased. It was another huge transfer of wealth from creditors to the debtor government.

Those who held contracts or securities based on a gold clause moved to have Resolution No. 10 declared unconstitutional. Of the many lawsuits filed, four made it to the U.S. Supreme Court and were heard between January 8 and 10, 1935. Norman v. Baltimore & Ohio Railroad Co. and United States v. Bankers Trust Co. dealt with bonds that had been issued by private companies to private citizens. Perry v. United States and Nortz v. United States concerned U.S. government bonds that the government insisted on redeeming in legal-tender currency. The plaintiffs argued that the refusal to redeem in gold constituted a “taking” without due process of law. They also contested the power of government to alter the terms of a contract that had been legally entered into.

Arguably, Perry v. United States was the key case. Perry owned a $10,000 Liberty Bond that specified payment of principal and interest “in United States gold coin of the present standard of value.” At the time of the bond’s purchase, the standard gold dollar contained 25.8 grains of gold. At the time of redemption, the standard gold dollar was 15 5/21 grains. Perry argued that he was entitled to the weight in the original gold dollar at the time of purchase, or its legal tender equivalent. In essence, he demanded an additional $7,000 over the bond’s face amount. After all, the “takings clause” of the Fifth Amendment states, “[Nor] shall private property be taken for public use, without just compensation.” The question before the Court: Did the gold clause entitle Perry to legal tender in excess of the face amount of the bond?

On February 18, 1935, the Court ruled 5 to 4 in favor of Congress; Perry was entitled only to the bond’s face amount of legal tender, not the weight of the gold. The complicated and somewhat contradictory decision, written by Chief Justice Charles Evans Hughes, cited a broad congressional power to regulate the economy. The Court found that the government had a plenary power — an unlimited power — to regulate money. It denied the “taking” had damaged Perry, who would have been required to surrender any gold payment to the government at a fixed price, which was less than the market value.

The bitter dissenting opinion was signed by the “Four Horsemen” — the four conservative Supreme Court judges. Written by Justice James C. McReynolds, it accused the government of ignoring contractual obligations in order to enrich itself. McReynolds predicted that the ruling foreshadowed the confiscation of private property and financial chaos. Extemporaneously, he declared that “this is Nero at his worst,” and “shame and humiliation are upon us now.” He concluded that the Constitution “is gone.”

Certainly, the gold clause was gone for several decades.

The clause restored

In 1974, under President Gerald Ford, private gold ownership became legal once more. The situation regarding gold clauses was not so clear, however. On December 9, 1974, the Treasury Department issued a press release entitled “Statement on Gold Clause Resolution.” The Treasury saw nothing inconsistent with private ownership of gold and prohibiting gold clauses. But it concluded that “this area of the law is subject to varying legal interpretations and, as in other cases of statutory construction, the final arbiter must be the courts.”

In early 1977, the District Court for the Southern District of New York heard Feldman v. Great Northern Ry. Co. The question under consideration was whether “repealing the long-standing prohibition on private ownership of, and speculation in, gold, also repealed the … prohibited enforcement” of gold clauses. Just as the Treasury had thrown the question to the courts, the court now threw it to Congress. “It is Congress’ prerogative, not ours, to find and legislate that the public policy declaration of the Gold Clause Resolution [that annulled the gold clause] is no longer operative.” This effectively re-legalized the clause. Congress later reinstated its use in contracts issued after October 1977.

Why, then, did gold clauses not enjoy a vibrant revival? The Gold Clause: What It is and How to Use It Profitably, edited by Henry Mark Holzer, explained that long-term loan contracts through which a debtor may be required to pay back far more in gold-equivalent dollars than the face value of the contract itself may run afoul of state anti-usury laws. Although Holzer proposed a way of side-stepping the usury issue — namely, by requiring repayment in physical gold — the clause remains in a legal gray area.

That is a shame. The gold clause became a standard feature of business and credit contracts because it safeguarded private contracts against inflation by government or unforeseen forces. Roosevelt destroyed the gold clause for its virtues, not for its flaws. As long as the clause existed, the government could not effectively detach from the gold standard.

Instead of lobbying to return the dollar to a gold standard, however, free-market advocates should demand a free-market monetary system, one whereby the marketplace chooses the best money and people are free to use gold clauses — or clauses denominated in any other commodity — in their contracts.

This article was originally published in the December 2020 edition of Future of Freedom.

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