What Is a Gold Clause?
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. 3 min read
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.
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.
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.
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