The Uncertain Future of Gold Clause Contracts


The legalization of gold ownership in America, after 40 years of prohibition, is an event of virtually no significance whatsoever. Such was the consensus that seemed to emerge, however reluctantly, from last December's conference on gold clauses at the University of Miami's Center for Studies in Law and Economics. The result was all the more surprising since friends of gold were quite amply represented among almost 60 distinguished participants. Ben Rogge and Israel Kirzner were there, as was Don Kemmerer of the Committee for Monetary Research and Education, and REASON's own Davis Keeler. Other familiar names included Armen Alchian, Karl Brunner, Allen Meltzer, Warren Nutter, Haberler, Demsetz, Tullock, Meiselman, and, of course, our hosts—Henry Manne and Roger Miller. But it is indicative of the promise of the new Center that the economists were much more influenced than they expected to be by, of all things, a bunch of brilliant young lawyers. And the lawyers, though they wouldn't admit it under oath, doubtless gained something from the exchange as well.

The focus of the conference was a massive and rigorous history and analysis of the actions taken by the government in 1933, forbidding private trading in gold and abrogating gold clauses in existing contracts. That paper was presented by James Buchanan and Nicolaus Tideman of the Center for Study of Public Choice at Virginia Polytechnic Institute. It was followed by comments by two lawyers, Ralph Winter and Gerald Dunne, and by two economists, Milton Friedman and Harry G. Johnson. The entire proceedings are to be published in book form soon, and it is impossible in this space to do more than touch lightly on some high points.

On June 5, 1933, Congress passed a Joint Resolution which, in Buchanan and Tideman's words, "abrogated gold clauses in all contracts, public and private, past and future." Gold clauses said that you would receive whatever number of dollars were required to buy a certain weight of gold. By calling in all privately-held gold (really only about half) at $21.67 and then revaluing it to $35 under the Gold Reserve Act of January 1934, the government made a tidy windfall profit of $2.8 billion. Buchanan and Tideman conclude that these actions were probably necessary and certainly legal, given FDR's disastrous starting point (1933), and the institutional arrangements of the time.


From the discussion that followed, it became clear that the legal status of property rights in gold, even more so than that of property rights in general, is in an extremely restrictive and precarious state. Richard Epstein, of the University of Chicago Law School, noted that contracts can be set aside for reasons of "fraud, duress, mistake, or frustration" of the intent of contracting parties. Since the intent of gold clauses was to provide protection against inflation, not to profit from devaluation, there was no frustration of intent in abrogating such contracts. David Meiselman, however, noted that gold clauses were contained in highly negotiable bonds, which may have been purchased just before the devaluation, so the intent of the original parties would be somewhat irrelevant in such cases.

Henry Manne noted that the Constitution's delegation of authority to regulate money would only be applicable if courts attributed moneyness to gold, which would be rather contradictory at the present time. Ralph Winter, of the Yale Law School, countered that government could do just about anything about gold under the commerce clause, since gold affects interstate commerce. Warren Nutter, of V.P.I., noted that since the government had virtually unlimited powers of taxation, it could achieve the same effect as expropriation by simply levying a confiscatory tax on gold. Felix Wormser suggested defending gold by the Ninth Amendment's right to life provision, but Mark Holzer said that he had tried it in court with no success. Holzer believes gold ownership could be made illegal tomorrow, under existing emergency legislation, without even an act of Congress. The legislation to legalize gold does not, according to Holzer, undo the Joint Resolution's refusal to enforce gold clause contracts.

In short, the discussion tended to show, as Manne put it, "why it will always be unconstitutional to avoid inflation." This did not go down easily with the economists—not even the monetarists. Israel Kirzner agreed that even Milton Friedman sounded like a gold bug in this context. "The U.S. would have been far better off," said Friedman, "if the Federal Reserve had never been established." Kirzner himself noted that the public goods argument—that all of us benefit from using the same money—"assumes that we know what is required, but this is only revealed through the trial and error process of the market." Armen Alchian agreed that "there is nothing about the public goods argument that says public goods should be supplied by the government." "Asking the government to control money," added Ben Rogge, "is like asking an alcoholic to run the liquor store."

Gordon Tullock of V.P.I. is fondly disposed toward gold as a potential source of competition with legal tender, but Davis Keeler wonders why we don't see this happening in countries where gold ownership and trading have long been quite legal. All it would take is warehouse receipts issued in bearer form, but gold is invariably held as an asset rather than used as a medium of exchange. Karl Brunner, of the University of Rochester, is nonetheless quite right when he says that "gold is a permanent embarrassment to misbehaving monetary and fiscal authorities."


Some monetarists took refuge in the idea that indexing contracts in terms of several commodities would be more reliable than a gold clause—which is essentially just a single commodity index. The lawyers thought that such indexed contracts could be invalidated as easily as gold clause contracts. But Friedman noted that the government itself has indexed its own pensions and the like (bureaucrats aren't as dumb as they act), which would make it hard for the government to violate comparable protection in the private sector.

In the end, we are left with the necessity of major reform in institutions in order to secure the blessings of liberty against capricious attenuation of property rights. Law, as it stands, grants enormous discretionary authority over "economic" rights, confining some protection only to "individual" rights. The distinction, as Ralph Winter pointed out, is "wholly artificial except as part of a personal value system. One may personally prize sexual gratification over economic gratification and thus regard the former as more essential to the exercise of individual rights than the latter. That is a matter of personal preference, however, and not of constitutional dimensions.…Those who argue that the abortion decisions can be justified as a facet of the right to do as one pleases with one's body are hard pressed to justify compulsory seatbelts as 'economic' regulation. And those who would rubber stamp 'economic' regulation have lately been nervously arguing that welfare regulations fall outside that category.…Not only does the distinction break down in both directions but it also fails to recognize that 'economic' regulation is a potent device to infringe other rights, e.g., regulating the price of abortions." "Under present precedents," says Winter, "a serious challenge simply cannot be made to government's setting the price of any product or service, redistributing income, inflating or deflating the economy, nationalizing any industry and, a fortiori, prohibiting index clauses." There we are. One could scarcely ask for a better illustration of why libertarian lawyers and economists have to start listening to each other, and why one of the finest economists of all time, F.A. Hayek, has devoted the latter part of his life to a rediscovery of the philosophy of law.

Alan Reynolds is an associate editor of National Review as well as a REASON contributing editor. He is a graduate of UCLA where he majored in economics. His articles have appeared in publications ranging from the New York Times to The New Guard and The Alternative.


• E. Furobotn & S. Pejovich, The Economics of Property Rights (Ballinger, 1974).
• J. Buchanan, The Limits of Liberty (Univ. of Chicago, 1975).
• R. Miller and R. Williams, Inflation and Unemployment (Grid, 1974).