Key Takeaways

  • A gold clause is a contract provision requiring payment in gold or currency equivalent to a specified gold value, offering protection against inflation and currency devaluation.
  • Once banned during the Great Depression, gold clauses became legally enforceable again in 1977, although certain restrictions still apply.
  • Modern gold clause contracts are typically used in long-term agreements to safeguard purchasing power and mitigate monetary policy risks.
  • They can specify payment in particular types of gold coins or foreign currencies and are sometimes upheld even when standard currency fluctuates significantly.
  • Despite benefits, gold clauses can raise legal concerns related to usury, enforceability, and federal restrictions on monetary regulation.

A gold clause is a provision within a contract that requires consideration to be paid in gold or another particular type of currency upon request. The creditor can insist on payment either in gold or another type of currency equivalent to gold.

Why Insist on Gold?

Creditors involved in long-term contracts benefit from gold clauses when there are concerns about inflation, changes in government, war, or other events that may change the value of commonly exchanged currency. These clauses were popular in the early 1900s until President Roosevelt issued regulations aimed at helping the country recover from the Great Depression.

In 1913 the Federal Reserve act mandated that all Federal Reserve Notes, also known as “paper money” needed to be backed by the gold that was in the possession of the federal government. Roosevelt believed that issuing more money would help the economy, so he banned the private ownership of gold and required that it be given to the federal government in exchange for paper money. It became illegal to possess more than 5 ounces of gold.

As a result of this regulation, Congress passed a resolution that made it no longer possible to enforce any gold clauses written into contracts. In 1974, President Ford made it legal again to own gold, and therefore made it possible to enforce gold clauses in contracts.

Historical Evolution and Legal Status of Gold Clauses

The legal treatment of gold clauses has undergone significant changes over the past century. Originally common in bonds, leases, and loan agreements, gold clauses ensured that creditors received repayment with the same purchasing power despite currency depreciation. However, during the Great Depression, the U.S. government suspended the gold standard and invalidated gold clause contracts to stabilize the economy.

Congress passed the Joint Resolution of June 5, 1933, declaring gold clauses unenforceable. This was upheld in a series of Supreme Court cases, collectively known as the Gold Clause Cases (e.g., Perry v. United States and Norman v. Baltimore & Ohio Railroad Co.), which confirmed Congress's authority over monetary policy.

Legal perspectives shifted again with the Par Value Modification Act of 1972 and, more decisively, the 1977 amendment to 31 U.S.C. § 5118, which allowed private parties to include and enforce gold clauses in contracts executed after October 27, 1977. This marked the restoration of gold clauses as a legal mechanism to preserve contractual value amid inflationary pressures

Gold Clauses and Usury Laws

Gold clauses are rarely included in contracts today because many states have ruled that they violate usury laws. The U.S. government is prohibited from paying out gold coin; people who have U.S. coins and paper money may exchange them only for coins and paper money of equal value. Because it is illegal to demand unreasonable amounts of interest on an obligation, and requiring payment in gold might constitute a violation of that law, the government does not give consent for any of its agencies or employees to enforce gold clauses.

Currency's value no longer rests on the metallic content of the coin. Claims for payment by the U.S. government may not involve any payments of amounts greater than the face value of coins or currency. Even obligations from loan contracts with gold clauses are only subject to payment in the U.S. currency that is considered legal tender at the time payment is rendered.

Enforceability and Practical Considerations Today

While gold clauses are legal in private contracts entered into after 1977, several considerations affect their enforceability and use:

  • Federal Restrictions: The U.S. government still refuses to be bound by gold clauses and will not honor them in government-issued obligations. Private parties, however, may include them to specify payment terms, including the requirement to tender payment in gold coins, bullion, or equivalent value.
  • State Law Limitations: Some states restrict or scrutinize gold clauses under usury laws or public policy doctrines. Courts may deem such clauses unenforceable if they effectively impose interest beyond legal limits or conflict with statutory currency laws.
  • Contractual Clarity: Gold clause contracts must be drafted with precision, clearly stating the form of payment, valuation method, and procedures for determining gold’s value at the time of payment. Ambiguities may lead courts to default to payment in legal tender.

Despite these challenges, courts in some jurisdictions have upheld gold clauses that explicitly name a form of payment — for example, specifying payment in American Eagle gold coins or an equivalent weight of gold.

Why Gold Clause Contracts Are Beneficial

In the 1930s, both federal and state governments were in chaos due to the struggle to maintain economic stability and liberty. A Supreme Court ruling in 1934 in Homebuilding and Loan Association v. Blaisdell determined that it was legal for states to change contract terms when needed, due to difficult economic conditions.

When President Roosevelt signed the order to confiscate privately owned gold, four cases referred to as the Gold Clause Cases were ruled on by the Supreme Court:

  • Norman v. Baltimore & Ohio Railroad Co.
  • United States v. Bankers Trust Co.
  • Nortz v. United States
  • Perry v. United States

The point of these cases was to make gold clauses invalid and unenforceable. The result of the Supreme Court's decision was that the concept of “sanctity of contracts” was not a reality, but just empty words. Based on this decision, if the government did not approve of the terms of a contract, it might not be enforced in a court of law. Therefore, the contract itself would be invalid.

Although there have been court cases ruling that states did not have the power to make contracts invalid, the result of these four “gold clause” contracts was that Congress had the power to regulate money, and gold clause contracts fell into this category. The ruling stated that gold clauses affected Congress' ability to control the monetary system.

States, however, can take steps to protect gold clause contracts and their enforcement. In two recent cases, Bronson v. Rodeo and Butler v. Horowitz, the court's decision stated that contract clauses were allowed to name specific types of payment and to not accept any substitutes. Payment requirements can be specific, such as mandating gold or silver coin, even as much as a specific type of coin or a specific country's currency. This type of guarantee is the most important, central factor in gold clause contracts' usefulness and reliability.

Modern Applications and Strategic Use Cases

In today’s economy, gold clauses are most commonly found in specialized financial agreements, long-term commercial leases, and private loans where parties seek to:

  • Hedge Against Inflation: By tying payment to a stable commodity, gold clauses help protect creditors from the eroding effects of inflation and currency devaluation.
  • Stabilize Long-Term Value: They provide a predictable standard of value in contracts lasting decades, reducing exposure to monetary policy changes.
  • Facilitate International Trade: Gold clauses are sometimes used in cross-border contracts to avoid volatility in foreign exchange rates.
  • Signal Financial Strength: For certain institutions and investors, using gold clauses demonstrates confidence in contractual performance and commitment to preserving value.

These contracts can even specify payment in a particular type of gold coin or foreign currency, making them a flexible tool for asset-backed payment terms. However, parties should consult legal counsel to ensure compliance with state and federal law when drafting such provisions.

Frequently Asked Questions

  1. Are gold clauses legal in the United States today?
    Yes, gold clauses are legal and enforceable in private contracts executed after October 27, 1977. However, they remain unenforceable against the U.S. government.
  2. Why would a contract include a gold clause?
    Gold clauses help protect creditors from inflation, currency devaluation, and monetary policy risks by ensuring payment retains its purchasing power.
  3. Can gold clause contracts require payment in specific coins?
    Yes. Contracts can specify payment in certain types of gold or silver coins, such as American Eagle coins, or require an equivalent market value in legal tender.
  4. Do gold clauses violate usury laws?
    In some states, gold clauses may face scrutiny under usury laws if they effectively result in excessive interest. Clear drafting and legal review are essential.
  5. Are gold clauses used in modern business contracts?
    While uncommon, they are sometimes used in high-value, long-term agreements, private loans, and international contracts to safeguard against economic instability.

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