Bringing Back Gold Clause Contracts: A Challenge to the Fed

By: Mike Maharrey

 

One of the ways the government maintains its fiat money system is by throwing up legal and regulatory roadblocks to those wanting to use real money. Bringing back gold clause contracts removes one of those barriers. 

The principle behind a gold clause contract is simple. It requires that payment must be made in a specific amount of gold or its paper equivalent. For example, a mortgage might stipulate that repayment must be in the form of 30 ounces of gold.

Gold clauses protect the parties to a contract from currency debasement. If I enter into a contract where I receive a $1,000 payment in five years, inflation will likely eat away at least 10 percent of the purchasing power if I’m paid in Federal Reserve notes. (This is assuming the Fed’s target 2 percent inflation rate.) By requiring payment in gold (or a gold equivalent), I will preserve the purchasing power of my money.

To mitigate the inflation problem, many modern contracts include inflation adjustment clauses. The problem with this approach is nobody knows how severe price inflation will get in a given period. This makes clauses adjusting for a predetermined price inflation rate arbitrary and inaccurate.

On the other hand, as the government creates more dollars, it will take more dollars to buy an ounce of gold. A gold clause provides a more stable hedge against inflationary dollar depreciation.

Gold clause contracts were common in the United States until the early 1930s when Congress and Franklin D. Roosevelt launched a multi-pronged attack on gold.

It started with FDR’s Executive Order 6102 on April 5, 1933, commonly known today as his gold confiscation order. Congress followed this with a joint resolution on June 5, 1933, voiding all current gold contracts and banning them in the future.

Voiding contracts was a radical move, but the Supreme Court ultimately validated the policy in four separate cases. The Court held that the federal government’s plenary power to regulate money empowered Congress to control the ownership and use of gold.

“Congress, by virtue of its power to deal with gold coin as a medium of exchange, was authorized to prohibit its export and limit its use in foreign exchange, and the restraint thus imposed upon holders of such coin was incident to their ownership of it, and gave them no cause of action.”

This was all part of FDR’s scheme to remove gold from private hands, which enabled the Federal Reserve to fire up the printing press.

More broadly speaking, these various moves in the 1930s created the foundation for the government’s monopoly on money of today by forcing everybody to use Federal Reserve notes instead of gold and silver.

It also, as noted above, enabled the Federal Reserve to print more paper money. The Federal Reserve Act required the central bank to hold enough gold to back at least 40 percent of the notes in circulation. But the central bank was low on gold and up against the limit. By transferring gold from public to private hands, the Roosevelt administration could create more paper currency.

During a Fireside Chat, Roosevelt assured Americans that “not to let any of the gold now in the country go out of it” would strengthen the fiat currency. He also promised debtors that the “administration has the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed.”

But as Wendy McElroy pointed out in an article published by the Future of Freedom Foundation (FFF), “Gold clauses prevented Roosevelt from fulfilling his objective. If such contracts were widely used, then the ‘controlled’ inflation would have a diminished impact because dollar payments would simply rise to reflect the dollar equivalent of the specified gold. The gold clause constituted a free-market version of a gold standard.”

The right to own gold was effectively banned for more than four decades but was finally restored in 1975.

In 1977, President Jimmy Carter signed a bill repealing the joint resolution abrogating gold contracts – making them once again enforceable.

If gold clauses were used more often, it would effectively create currency competition. As Edwin Vieira, Jr. explained to Jp Cortez of the Sound Money Defense League, “If enough people in a particular area did begin to employ gold-clause contracts on a routine basis, the relentless forces of competition would drive the economy in that area away from depreciating paper currency.”

In a paper on gold contracts, Hans Sennholz wrote, “Surely, a wide use of gold in contracts would greatly advance the importance of gold and degrade that of government money. It could conceivably lead to a universal rush to gold out of depreciating paper, which may force the monetary authorities to halt the depreciation and once again resume payments in gold.”

There is still one barrier to employing gold clauses in many states – usury laws that limit the amount of interest that can be charged on a loan.

Because the price of gold can rise significantly over the course of a contract, a debtor could be required to pay back far more in equivalent dollars than the initial face value of the contract, if they decide to pay in U.S. dollars. Some mistakenly interpret this devaluation of fiat dollars as “interest” and argue usury laws prohibit or limit gold contracts. McElroy called gold clauses in states with strict usury laws “a legal grey area.”

According to UpCounsel, a legal aid service, “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.”

The path forward is for states to amend their laws to require state courts to give gold clauses full effect and enforceability.

A provision in a new Louisiana law that makes gold and silver legal tender does just that.

“No person shall incur any liability for refusal to accept recognized legal tender for the payment of debts, except as provided by contract.”

In practice, including the contract clause would mean if parties voluntarily agree to be paid, or to pay, in gold and silver coin or bullion, the Louisiana courts could not substitute another currency, e.g. Federal Reserve Notes, as payment.

Opening the door to gold clauses would knock down a barrier to using sound money – gold and silver – in the marketplace, and would serve to limit the Fed’s monopoly fiat money system. Then it would just be up to people to take advantage of the more free legal framework and use sound money.