Sifting for Gold

The Gold Clause: What It Is and How to Use It Profitably, by Henry Mark Holzer, New York: Books in Focus, 1980, 352 pp., $21.00.

A mixture of ignorance and fear have prevented all but a few Americans from using the freedom they have had since October 1977 to make contracts payable in or valued in terms of gold. A book telling how to make use of "the gold clause" is long overdue; Henry Mark Holzer's only begins to fill that need.

The book is of immense interest to students of American economic history. It traces back over 100 years the origins of the current monetary muddle. And conceivably, any attorney who already has an interest in writing inflation-proof contracts could make use of the detailed case law and legislative history contained in this book. Holzer technically is more editor than author of the work, seven out of nine of the chapters being written by other legal experts. Over half of the book consists of footnotes and an appendix of court cases involving gold clause contracts.

Unfortunately, however, the book has very limited practical value to the layman who wants to know how to go about implementing gold payment clauses in leases, loans, mortgages, and so forth. Only one brief chapter addresses the area, whereas ideally, a series of examples detailing how people in various circumstances can use gold clauses should be given.

Holzer may have avoided this because of a feeling that gold clauses are still in doubt, notwithstanding legalization. Aside from the obstacle of usury laws in some states, which have been interpreted to construe inflation-indexed increases in the principal as additional interest, Holzer worries, justifiably, about historical precedent.

Prior to 1933, according to the book, nearly all contracts specified payment in gold of "standard weight and fineness" prevailing at the time the contract was executed. The practice had become prevalent after the Civil War, when the federal government for the first time made paper—some $450 million in "greenbacks"—legal tender. Those fiat currency units reached a low point of 38 cents on the gold dollar.

Following the war, the courts ruled in the "Legal Tender Cases" that only those prewar contracts that had clearly specified payment in gold coin (or the value thereof) were enforceable. All other contract obligations were to be settled at the whim of the debtor in "greenbacks," even though the creditor may have originally assumed that he was contracting in terms of traditionally "hard" money. What's more, the Supreme Court made clear that the power of Congress "to regulate the value of money" took precedence over the sanctity of contracts.

Over 60 years later, when President Roosevelt and Congress seized privately owned gold, devalued the dollar, and abrogated hundreds of billions of dollars in gold clause contracts, the same precedent was cited. In the "Gold Clause Cases" it was determined that gold clauses were against the public interest as Congress, with its power to "regulate the value of money," defined it.

On this history, the book contains some very enlightening passages. A 1934 law journal article that makes up one chapter reveals that some legislators supported the resolution abrogating gold clauses in order to redistribute income. Decrying "those who own the bank deposits and fixed investment bonds and mortgages," Senator Thomas of Oklahoma urged passage in order to "transfer that $200,000,000,000 in the hands of persons who now have it, who did not buy it, who did not earn it, who do not deserve it, who must not retain it, back to…the debtor class of the Republic."

Another chapter, written for a 1937 law journal, justifies repeal of the gold clause on the grounds that devaluation of the dollar (taking the official gold price from $20.67 to $35.00 per ounce) was designed to bring about "a prompt and spontaneous rise of internal commodity prices." Wrote one Angus McClean in the North Carolina Law Journal: "Until a corresponding rise has occurred [in the general price level] the enforcement of the gold clause in private contracts would result, as in the case of public obligations, in the creditor's 'unjust enrichment.'" The book also contains a transcript of Supreme Court Justice James C. McReynolds's vigorous dissent in the Gold Clause Cases. Noting that right up until the moment of gold confiscation and suspension of dollar convertibility the government had been selling bonds containing gold clauses, McReynolds bitterly charged Congress with deliberately trying "to bring about confiscation of private rights and repudiation of national obligations."

"The Constitution," lamented McReynolds, "…is gone.…Shame and humiliation are upon us now. Moral and financial chaos may confidently be expected."

It is only realistic, given such precedent and given a current legislative and judicial climate that is even less morally scrupulous than in the past, to have doubts about the viability of new gold clause contracts. Still, for shorter-term contracts, the risks might be worth taking. Unfortunately, all Holzer offers to would-be users of the clause is a briefly stated suggestion to make contracts in kind, that is to lend or otherwise contract in actual gold—in order to avoid objections about congressional power over currency values.

Despite its many interesting academic aspects, more practical exposition is needed.

Steve Beckner is REASON's Money columnist and the author of "The Promise and Perils of Gold Clauses," in the June 1978 REASON.