Protecting Against Inflation By Resuscitating The Gold Clause (Part III)

New Deal For the Gold Clause
Even though the gold clause was left standing after The Legal Tender Cases (see Bronson v. Rodes, an 1868 Supreme Court decision), it stood on shaky ground.

No gold clause exception which may have survived the Supreme Court rulings in Hepburn, Julliard and Knox was going to withstand the earthquake brought about by Franklin Delano Roosevelt’s “New Deal.”

Almost immediately after his inauguration on March 4, 1933, Roosevelt unleashed his attack on gold.

On March 6, 1933 he unilaterally declared a national “bank holiday,” a euphemism for simply locking the doors of every financial institution in the United States, thus preventing withdrawal of currency and, especially, gold.

On March 9, 1933 Congress enacted the Emergency Banking Act [sound familiar?], granting the new president absolute power over gold and executive orders, presidential proclamations, rules, regulations, and decrees followed swiftly.

By mid-May 1933 steps had been taken to devalue the dollar against gold, and to confiscate virtually all privately owned gold belonging to United States citizens: gold bullion, gold certificates, and some gold coin. (For a thorough historical discussion of the New Deal’s machinations, see my 1973 Brooklyn Law Review article “How Americans Lost the Right to Own Gold, and Became Criminals in the Process”: http://www.fame.org/PDF/Holzer%20Henry%20Mark%20How%20Americans%20Lost%20Their%20Right%20to%20Own%20Gold.pdf).

What had not yet occurred, however, was any overt political or legal move against the gold clause, which still existed in many long-term debt obligations.

Remember what the gold clause provided (See the cover of my book—The Gold Clause: What It Is and How To Use It Profitably—for a photograph of a Western Maryland Railroad Company registered gold bond, issued in 1914.) Like the Western Maryland bond, the gold bonds of that era provided that payment of interest and principal would be made “in gold coin of the United States of America of the present standard of weight and fineness . . . at the option of the holder thereof.” (Forty Year, $100.00, 5%, First Mortgage Gold Bond of The Aurora, Elgin & Chicago Railway Company, in my possession.)

With that kind of a creditor-friendly guarantee, and its implications for soft money, it did not take a clairvoyant to foresee that the gold clause’s days were numbered. The creditor-protection device was wholly antithetical to the New Deal’s gold policies, and speculation about its fate was intense in financial circles.

Interestingly, the principal question was not whether the Roosevelt Administration would attempt to illegalize the gold clause. That was assumed.

The real question was whether Congress possessed the power (or, more precisely, whether the Supreme Court would rule that Congress possessed the power) to abrogate the gold clause.

The New Deal’s frontal assault on the gold clause, and thus on the millions in debt it sought to protect from depreciated currency, began with a Joint Resolution of Congress on June 5, 1933.

The Joint Resolution unequivocally revealed the Administration’s attitude toward the gold clause, condemning it as being “against public policy” and simply expunging it from all existing contracts.

The Joint Resolution announced that gold “affect[s] the public interest, and that gold clauses “obstruct” Congress’s power to “regulate the value of the money of the United States.”

While not widely known even then, the New Deal’s attack on the gold clause was rooted in large part in an explicit congressional intent to engineer a transfer of wealth [sound familiar?]. Indeed, the floor debates reveal that one purpose of the legislation was to redistribute some $200,000,000,000 (two-hundred billion), a lot of money in those days, from creditors to debtors.

Even less known is the plan FDR had concocted if the Supreme Court—where the gold clause question was headed—went against him. The President was prepared to defy the Court, if that’s what it took to destroy the gold clause and American’s ownership of gold.

Before the Supreme Court decided the Gold Clause Cases, Roosevelt had prepared the following statement—just in case:

“I do not seek to enter into any controversy with the distinguished members of the Supreme Court of the United States who have participated in this . . . decision. They have decided these cases in accordance with the letter of the law as they read it . . . . It is the duty of the Congress and the President to protect the people of the United States to the best of their ability. It is necessary to protect them from the unintended construction of voluntary acts, as well as from intolerable burdens involuntarily imposed. To stand idly by and to permit the decision of the Supreme Court to be carried through to its logical, inescapable conclusion would so imperil the economic and political security of this nation that the legislative and executive officers of the Government must look beyond the narrow letter of contractual obligations, so that they may sustain the substance of the promise originally made in accord with the actual intention of the parties . . . . I shall immediately take such steps as may be necessary, by proclamation and by message to the Congress of the United States.”

Unfortunately, Roosevelt never had to make public his intention to destroy gold by attempting to nullify the Constitution of the United States of America. The Supreme Court did it for him, in The Gold Clause Cases—the subject of Part IV of this series.

To be continued.