Will Gold Clauses Return?


As the United States proceeds through its bicentennial year many agree that the most serious problem confronting the nation is that of inflation. 1974 produced the first year of double digit inflation in living memory, and when the records are written for 1975, similar results are expected; projected government deficit spending presages more of the same.

The effects of the inflation are tearing at the unity of the country and one wonders whether we can long endure as a nation if it is allowed to continue. One can readily call to mind the recent protest demonstrations of housewives against sharply higher prices in supermarkets; some economists blame oligopolistic big business for "administered prices;" others blame labor union negotiators for contract settlements beyond productivity increases; but all of these are wide of the mark; by far and away the cause most responsible is government, running the money printing press, creating greater and greater amounts of money to compete for available goods and services.

Since our country has a government of laws which are derived from the consent of the governed, how did it come about that the government is empowered to create the volume of money which it is printing in ever greater amounts? What is the legality of the monetary arrangements under which the country operates? The following overview of the monetary actions of the Federal government and courts is intended to suggest answers to these questions.


Article I of the Constitution states that "Congress has the power to coin money and regulate the value thereof. Although by Supreme Court interpretation this clause has been used as a basis for devaluation of the dollar, this was by no means the generally accepted interpretation of the clause at the time of its adoption. But by prohibiting the states from making anything but "gold and silver Coin a Tender in Payment of Debts," a reasonable inference may be drawn that the Founding Fathers did not have fiat money in mind when they drew Article I. That the framers were well aware of the hazards of paper money is clear:

Keynoter Edmund Randolph inveighed against the "havoc of paper money" in his indictment of the Articles of Confederation. The audience needed no reminder. Every man present could personally testify to the convulsive monetary situation. Some could speak of its compounded injustice, as for example, Washington, who had refused compensation for his Revolutionary service, then came home to have the mortgages he held paid off in Virginia paper worth ten cents on the dollar.

Madison later summed up the general sentiment in his excoriation of pre-constitutional paper money as a pestilence which inflicted nothing but destruction on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government. Yet the audience also included theorists, who were able to distinguish between the excesses of a paper currency and the obvious role that this medium would have to play in any future national monetary mechanism. Certainly, Franklin and Hamilton, who possessed intellectual and practical genius of the highest order, grasped the three dimensional monetary problem: the linkage of money and government finance; the indispensability of money to economic expansion, and the destruction potential of money as an "instrument of expropriation." [Gerald T. Dunne, Monetary Decisions of the Supreme Court (New Brunswick, N.J.: Rutgers University Press, 1960), pp. 11, 12]

Two other constitutional provisions may be said to bear on the subject, the Tenth Amendment, reserving all powers not specifically delegated to the states or the people, and the "necessary and proper clause" of article I, section 8.


Prior to enactment of the first Coinage Act in 1792, Congress asked Alexander Hamilton to make recommendations. In his report Hamilton proposed that the money unit of the United States be a dollar. He related that the Continental Congress had declared the money unit to be a dollar and had fixed it at 375.64 grains of fine silver, but he recommended a dual unit based on silver and gold, stating that if preference were to be given either metal, then it should be gold.

Congress, however, enacted a coinage act providing for a single unit, of silver, which became the unit of value. The act authorized "Dollars or Units…of the value of a Spanish milled dollar as the same is now current and to contain 371 and 4/16 grains of pure silver or 416 grains of standard silver." It also provided for gold coins consisting of the eagle, the half eagle, and the quarter eagle, silver coins consisting of the half dollar, the quarter dollar, and the disme or dime, and copper coins consisting of the cent and the half cent. The act required each eagle to be "of the value of Ten Dollars or Units," each half eagle to be of the value of five dollars, and each quarter eagle to be of the value of two and a half dollars, and stated the amount of gold to be contained in each. (1 Stat., Nos. 9, 11, 14, 20.) By defining the gold coins in terms of their values as multiples of the "Dollar or Unit," and the latter in terms of a specific amount of silver, the act made the silver dollar the "Unit."

In 1803 France went on the gold standard, and in 1816 Great Britain did likewise. In terms of the value of gold fixed by those countries, the intrinsic value of the subsidiary (gold) coinage of the United States was greater than face value, resulting in the exportation of the gold coins. In 1834 a resolution was introduced in Congress to appoint a committee to consider what was necessary "in the value of the gold coined at the Mint of the United States so as to check the exportation of that coin and to restore it to circulation in the United States" (10 Giles and Seaton, Debates in Congress, p. 1206).

The committee reported that it would be desirable "to raise the relative value of gold so as to approximate its estimate in general commerce and preserve silver as the practical standard." In principle, the committee held:

That gold or silver is the only sound, invariable and perfect currency that human wisdom has as yet devised…and if both metals are preferred, the like relative proportions…will be preserved, subject to frequent changes from gold to silver, and vice versa, according to the variations in the relative values of these metals.…

The committee thinks that the desideratum in the monetary system is a standard of uniform value; they cannot ascertain that both metals have ever circulated simultaneously, concurrently and indiscriminately in any country where there are banks or money dealers, they entertain that the nearest approach to an invariable standard is the establishment in one metal, which metal shall compose exclusively the currency for large payments.

In other words, if a country decides upon a monetary policy of bimetalism, then, due to the constant variations in the relative values of the two metals, arbitrage operations of banks and money dealers will always drive either one or the other of them out of circulation.

The committee continued:

Silver is the ancient currency of the United States; the metal in which the money unit is exhibited, the money generally used in foreign commerce.…The committee, upon due consideration of all attendant circumstances, are of the opinion that the standard value ought to be legally and exclusively, as it is practically, regulated in silver.…

Although the committee have recommended the standard of value to be regulated by silver alone, they are not insensible to the utility of using gold coins also, but their convenience cannot be obtained without hazarding the loss of silver as the chief measure of value, unless gold be subject to a seignorage and restricted to small payments.

…when coins circulated freely in the United States, silver composed the chief part of the currency; it has at all times formed a large part of our specie fund; our money unit was founded upon the computed value of a Spanish silver dollar; it has ever been the actual or implied measure of contracts.

Among the committee's conclusions were the following:

…that there are inherent and incurable defects in the system which regulates the standard of value in both silver and gold…that if it should hereafter be deemed advisable to maintain both gold and silver coins in steady circulation and to preserve silver as the measure of commerce and of contracts, gold must be restricted to small payments.…that if it is the intention to preserve silver as the principal measure of exchange permanently and securely, it will be necessary to estimate the relative value of gold under its present average or probable future value in commerce.


What Congress then enacted in 1834 was a measure regulating the value of United States subsidiary coinage. Since the law required the eagle to be worth 10 dollars or units, and its intrinsic value at that time was $10.60, the Congress made those eagles legal tender for their actual value and provided that future eagles, half eagles, and quarter eagles would contain correspondingly less pure gold to reflect the increase in the price of gold in the world market. The act caused no loss to anyone; it facilitated the performance of every existing contract stated in money terms in accordance with a standard of value consisting of the units or dollars that had been established in 1792.

What had happened was that the 1792 ratio of gold to silver of 15 to 1 was changed in 1834 to 16.002 to 1. This ratio soon became incorrect, and in 1837 Congress changed it to 15.988 to 1. Neither the 1834 act nor the 1837 act affected the dollar or unit, since this was stated in terms of silver. There was no such thing as a gold dollar until 1849, at which time Congress authorized one with a value of one dollar or unit.

After the Franco-Prussian War of 1870, Germany collected a huge reparation payment in gold from France, demonetized silver, and went on the gold standard. France, Belgium, Italy, Switzerland, and Greece followed suit. Sensing a threatened depreciation of silver, Congress, in 1873, denominated the gold dollar as the unit of value. In 1900 Congress denominated that gold dollar "the standard unit of value" and ordered the Secretary of the Treasury to maintain all forms of money at a parity with that standard (31 Stat. 45). This policy continued until 1933.

To put the legislative enactments into perspective then, from 1792 to 1873 the dollar or unit of value was defined in terms of silver; gold was a subsidiary coinage. Congress twice regulated the value of the gold subsidiary coinage, in 1834 and 1837, to reflect its value relative to silver, the dollar or unit at the time. After 1873 the gold dollar became the unit of value of the United States; silver became the subsidiary currency and could only be used as legal tender to pay debts in amounts not in excess of $5. In 1933 the country was taken off the gold standard and fiat paper money was made legal tender, the Supreme Court going along.


At the beginning of the War Between the States, the Federal government was short of money, its credit was deteriorating, and the demand for funds to finance the war was enormous. Salmon P. Chase was then Secretary of the Treasury, having been appointed by Lincoln in 1861. When initial bond issues did not have the anticipated success, Chase's recommendations to the House Ways and Means Committee were ignored and the committee reported out a bill providing for a $150-million issue of non-interest-bearing Treasury notes (greenbacks) to be legal tender for all debts public and private, except duties on imports and interest on Government bonds. (For the reaction of one state to the new greenbacks, see Carl Watner's "California Gold, 1849-65" in REASON, Jan. 1976.)

Though Chase disapproved of the provision making the notes legal tender, he favored their issuance, and the bill was enacted, although by a close vote. Due to mounting fiscal pressures, Chase had to go back to Congress repeatedly to request new issues. Ironically, when the Legal Tender cases came before the Supreme Court, it was Chase who was Chief Justice, having been appointed by Lincoln when Chief Justice Taney died in 1864.

The first case was squarely presenting the question of the legality of the greenbacks as legal tender was Hepburn v. Griswold (1870) in which there was an action on a debt contracted prior to the Civil War. The creditor had refused payment in greenbacks, and the Court decided in favor of the creditor. Chief Justice Chase, basing his decision on the grounds that compelling citizens to accept a depreciated currency was an unconstitutional impairment of contract and a taking of property without due process of law, stated:

If such property cannot be taken for the benefit of all, without compensation, it is difficult to understand how it can be so taken for the benefit of a part.…A very large proportion of the property of civilized men exists in the form of contracts. These contracts almost invariably stipulate for the payments of…the sum specified in gold and silver coin…the holders of these contracts…are as fully entitled to the protection of this constitutional provision as the holders of any other description of property.…[This Act compels] all citizens to accept, in satisfaction of all contracts for money, half or three quarters or any other proportion less than the whole value actually due.…It is difficult to conceive what Act would take private property without due process of law if such an Act would not. [75 U.S. 523-25.]

The foregoing decision was decided by a split court (five to three), and not long afterward, in March of 1870, there were two new appointments to the court—William Strong and Joseph P. Bradley. Two cases that came up immediately thereafter (1871), Knox v. Lee and Parker v. Davis, involving demands for payment in coin and rejection of tender of payment in greenbacks, were decided in favor of the debtors, the new appointees to the court siding with the minority in Hepburn.

The reasons advanced in Justice Strong's majority opinion in Knox were: wartime necessity, that the right to pass legal tender laws was possessed by every other government, and that the right to do so was implicitly granted in "the aggregate of the powers conferred upon the Government, or out of the sovereignty instituted" (79 U.S. 307).


A fourth reason given by Justice Strong was that by the act of June 28, 1834, about 6 percent was taken from the weight of each dollar, subjecting all creditors to a corresponding loss and that the day after the act took effect, the creditor was entitled to a smaller number of silver dollars than theretofore. Justice Bradley's concurring opinion stated that the metallic standard of value had been altered in 1834. As has been previously pointed out, however, the standard of value or the unit, in terms of silver, had not been affected at all by the act of 1834, nor had any creditor lost a thing on his obligations. This latter basis for the legal tender decisions was false.

In Julliard v. Greenman (1884) the Supreme Court again rendered judgment in favor of the debtor, as it had in Knox v. Lee and Parker v. Davis. The plaintiff had demanded coin payment on a note, and the Court, citing Knox numerous times, ruled that greenbacks were proper legal tender and that Congress had the right to make them so.

Finally, in 1871 in Trebilcock v. Wilson, the Court ruled that the greenbacks could not be used as legal tender when a contract called for payment "in specie." In such cases, only coin could be used for payment. This case, along with the 1878 Silver Purchase Act, which permitted circulation of a depreciated silver dollar, led to the practice of putting gold clauses into contracts. This device became almost universal in subsequent years and, in fact, a gold clause appeared in all Liberty Bonds used to finance the U.S. effort in World War I.

A final comment on the Legal Tender cases: the majority did not think it was imposing a fiat paper money for all time:

What we do assert is that Congress has power to enact that the Government promises to pay money shall be, for the time being, equivalent to the representative of value determined by the Coinage Act, or to multiples thereof. [Legal Tender cases, 313.]


Following World War I and the economic expansion of the roaring twenties, the country found itself in deep economic distress, part of a worldwide depression. The stock market crash of 1929 was followed by massive unemployment and a collapse of confidence. Gold was being exported from the country, creditors were foreclosing on debtors, and the banking system was on the brink of collapse. The country had elected a new administration and expected it to take a strong position in order to halt the trend toward disaster.

Two days after he was inaugurated, March 6, 1933, President Roosevelt, acting pursuant to powers granted him in the Trading With the Enemy Act, closed all the banks. His position was that a national emergency existed and that he could therefore regulate or prohibit transfers of credit among banking institutions. Three days later, Congress validated the President's act by Federal legislation. In April 1933, by Executive order, the government directed all gold coin, bullion, and certificates to be delivered to the Federal Reserve banks, the banks being required to pay an equivalent amount of any other form of coin or currency issued under the laws of the United States.

On May 12, 1933, Congress authorized the President to devalue the gold dollar not in excess of 50 percent and enacted that all currencies theretofore or thereafter issued should be legal tender for all debts public and private. Apparently the motivation for the proposed debasement of the currency was to ease the situation of debtors, Senator Thomas, who proposed the legislation, saying:

It will be my task to show that if the amendment shall prevail, it has potentialities as follows:

It may transfer from one class to another in these United States, value to the extent of almost $200,000,000,000.00. This value will be transferred, first, from those who own the bank deposits. Secondly, this value will be transferred from those who own bonds and fixed investment. [Congressional Record, Vol. 77, Part II, p. 2217.]

On June 5, 1933, Congress passed a joint resolution providing as follows:

a. To assure uniform value to the coins and currencies of the United States.

b. That provisions in contracts that required payment in gold or an amount of money measured by gold obstructed the power of Congress to regulate the value of the money of the United States.

c. That every provision calling for payment in gold or in an amount of money measured in gold was against public policy and that any such provision was prohibited in future obligations.

d. That every obligation shall be discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment was legal tender for the payment of debts and that all coins and currencies of the United States, including Federal Reserve notes, and notes of Federal Reserve banks, should be legal tender for all obligations.

Early the following year, on January 15, 1934, the President issued a message recommending the abolition of coined money. On the 30th Congress passed a law abolishing gold coins, transferring title to such gold to the United States and authorizing payments "in equivalent amounts in dollars." The law prohibited redemption of currency with gold, except under conditions approved by the President, and authorized the President to debase the gold dollar by 40 percent. Then, on January 31, 1934, the President proclaimed that he had reduced the gold weight of the dollar from 25.8 grains of 0.90 fine gold to 15 15/21 grains of 0.90 fine gold.

Here indeed was fiat money, pure and simple, the abolition of coined money, abolition of redemption of notes for specie, abolition of a fixed unit of value. What would the courts do about this? The answer was not long in coming.

The purpose of the program was to keep gold from flowing out of the country to be lost to the monetary base, to restore that which had been previously lost, to prevent future outflows, to increase the price level, and to make all the readjustments uniformly effective, both as to past and future transactions, thus invalidating all gold clauses in contracts.


The legal tests of the program were presented in three cases in 1935, one involving a railroad bond, the second a gold certificate, and the third a Liberty Bond.

On February 18, 1935, Chief Justice Charles Evans Hughes handed down the opinion of the five-to-four majority rejecting the claims of all three creditors and upholding the government's monetary program in its entirety.

In the gold bond case (Norman v. The B. & O. RR. Co.), the creditor had attempted to recover the stipulated gold coin interest payment after Congress had devalued the dollar. The Court conceded that the gold clause had been put into the contract for the very purpose of protecting the creditor against a devaluation but decided that gold clauses in contracts could not stand if they interfered with the power of Congress to establish a monetary standard. The Court decided that such interference did exist. The gold clauses were determined to concern methods of payment, and a method of payment requiring the transfer of gold obviously is at variance with a method using inconvertible paper money.

The Court adverted in considerable detail to the Legal Tender cases and referred to the powers granted to Congress to lay and collect taxes, to borrow money, to regulate commerce, to coin money, to regulate the value thereof, and to make all laws necessary and proper for carrying into execution the other enumerated powers.

As to the argument that invalidation of the gold clauses resulted in the taking of property without due process of law, the Court adopted the mistaken reasoning in Knox v. Lee that the act of June 28, 1834, had subjected all creditors to a six percent Joss across the board.

In Nortz v. The United States the Court turned back the pleas of the owner of gold certificates for the postdevaluation gold coin value thereof on the ground that there had been no showing of damages resulting from the government's refusal to surrender gold coin. The Court stated that it did not have to consider the issue as to whether property had been taken without due process of law, but it did cite Norman and Knox, where the issue had been considered. In both of those cases the Court had endorsed the proposition that, when done in exercising the monetary power, it is constitutionally permissible to expropriate property without due process.

In Perry v. The United States the holder of a $10,000 Fourth Liberty Loan 4 1/4 percent Gold Bond of 1933-1938 sued for payment of the principal in the amount of $16,931.25 on the ground that, by reason of the change in the weight of the dollar, he was entitled to $1.69 in the new currency for every dollar promised by the bond. The Court held that he failed to show any actual damages and that, if judgment were rendered in the amount sought, he would have received an unjust enrichment.

This case was a bit different. Here the government itself had entered into a contract containing a gold clause. It had promised to pay "10,000 gold dollars each containing 25.8 grains of gold .9 fine." The value of those dollars in terms of the new currency was certainly $16,931.25. How could the Court justify the repudiation of the express promise of its own government? The opinion quoted with approval from the Sinking Fund cases (1879):

Punctilious fulfillment of contractual obligations is essential to the maintenance of the credit of public as well as private debtors.…To abrogate contracts, in the attempt to lessen government expenditure, would not be the practice of economy, but an act of repudiation.

The Court further stated:

The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issuance of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations.…We conclude that the Joint Resolution of June 5, 1933, insofar as it attempted to override the obligation created by the bond in suit, went beyond congressional power. [294 U.S. 358.]

Yet the Court upheld that exercise of congressional power, permitted the destruction of the contractual obligation, and put its stamp of approval on the act of repudiation by holding that there were no actual damages!

Mr. Justice Stone, in a separate concurring opinion, stated the conclusion more succinctly:

It is the prohibition, by the Joint Resolution of Congress, of the increased number of depreciated dollars required to make up the full equivalent, which alone bars recovery…the prohibition…is…a constitutional exercise of the power to regulate the value of money.

What it boils down to is a judicial declaration that Congress, in exercising its power over the monetary system, can depreciate the currency, destroy obligations, and repudiate its contractual commitments. Besides Justice Hughes and Stone, the five-man majority consisted of Justices Cardozo, Brandeis, and Owen Roberts.

The four men dissenting were Justices McReynolds, Van Devanter, Sutherland, and Butler. Justice McReynolds wrote the dissent, applicable to all three gold clause majority opinions. He characterized the results as "confiscation of property rights," "repudiation of national obligations," and "spoliation of citizens by their sovereign." He wrote: "Under the guise of pursuing a monetary policy, Congress has really inaugurated a plan primarily designed to destroy private obligations, repudiate national debts and drive into the treasury all gold within the country, in exchange for inconvertible promises to pay, of much less value" (294 U.S. 369).

Thus the destination was reached: irredeemable fiat money for the United States. That the country could have come to such a pass is surprising in view of the framers' concept of a limited government of specific delegated powers and the disastrous experience with paper money under the Continental Congress. What the cases add up to is that the government has a plenary power, when exercising the monetary authority, that can be used to justify the taking of citizens' property through legislative enactment, the repudiation of national obligations, and the destruction of private obligations.

The reasoning used in the Gold Clause cases is fatally flawed. It is based on erroneous research: the mistake made in Knox is repeated in the Gold Clause cases and was, in fact, a part of the Congressional debate. The property of holders of the gold clause obligations was expropriated; the loss in purchasing power of their dollars during the interim is easily computed, with France supporting the price of gold at $170 per ounce; the acts of 1834 and 1837 regulated the value of the dollar in the sense intended by the framers and expropriated no property. Today the people of the United States are plundered whenever the government, runs the printing press. Private obligations are constantly being impaired when the government inflates the money supply so fast that obligors cannot fulfill their contracts at the prices stipulated. The current rate of inflation does precisely this.

It is submitted that neither the framers nor the people ever intended that such a situation exist in time of peace. The constitutional history, the legislative history, and the fundamental sanctity of private property in the view of the people at the time of adoption all point away from it. In a country founded upon moral imperatives it is inconceivable that economic expediency should take precedence over the sanctity of contract. To quote Hamilton in Federalist 78:

To deny this proposition would be to affirm, that the deputy is greater than his principal; that the servant is above his master; that the representatives of the people are superior to the people themselves; that men acting by virtue of powers, may do not only what their powers do not authorize, but what they forbid. [New York: Modern Library ed., 1937, pp. 505-06.]

As a historical footnote, all of these considerations were put into book form by a prominent St. Louis attorney, Paul Bakewell, Jr. (What Are We Using for Money? [New York: Van Nostrand, 1952]). Bakewell sent his manuscript to Justice Owen Roberts, one of the five-man majority in the Gold Clause cases. Judge Roberts, in a letter dated January 4, 1950, wrote Bakewell with regard to those cases:

Of course, I ought not to be quoted concerning a decision of the Court when I was a member of it, but I am inclined to think that, had I known the history you describe, I would have been of a different opinion than the one expressed. [This letter entered the public domain in 1974.]

Had Justice Roberts been apprised of the history described, the five-to-four majority for abrogating the gold clauses would have been transformed into a majority for upholding those very clauses.

Through a series of cases decided largely as a result of an error in research and a misapprehension of the power granted the government in the Constitution, the country has a monetary system of doubtful legality. As of January 1, 1975, U.S. citizens were granted the right to own gold. Although this provides, somewhat, for an escape from fiat dollars, what the government did once before—call in the gold—it could do again. Perhaps the practicing bar, somnolent through the years, will find a way to reverse the erosion, both monetary and moral, caused by fiat money.

David Fargo received both his B.S. and his J.D. from Northwestern University. He is a partner with the law firm of Hinshaw, Culbertson, Moelmann, Hoban & Fuller in Chicago. A member of the Illinois Bar, he has been admitted to practice before both the U.S. and Illinois Supreme Courts.