Gold, Money and the U.S. Constitution

Even knowing that it actually happened, it still is almost unthinkable that the United States government would nationalize the personal assets of its citizens, give paper in exchange at 60% of the value of the assets - and book a profit. The public begrudgingly recognizes that the government can take private property as long as the taking is accomplished by due process (such as an eminent domain proceeding) and the owner receives just compensation. However, we expect those cases to be relatively isolated and infrequent. In 1933, the U.S. government devalued the dollar by 40% in less than eight months, but not before it ordered a docile population to exchange their gold for paper and banned gold ownership and transactions in gold to keep citizens from escaping the devaluation. The combined actions operated as a confiscation of the property of every citizen, all at once, with no compensation.

The constitutional validation of these actions followed a similar pattern to the validation of the legal tender laws: (1) unchallenged legislative precedent falling into accepted custom, (2) incremental changes in constitutional interpretations over a period of time and (3) the precipitation of a major crisis that the government chose to address by assuming theretofore unexercised and unauthorized power.

The gold standard had been re-established in 1879 and was firmly in place by 1896 when the free silver movement ended. Between 1879 and 1933, gold coin circulated domestically as money although a wide variety of other forms of money were created and used on different levels - among consumers, in commercial transactions, among banks, in foreign commerce and among nation states. While justifiable criticism may be levied against a banking and currency system that creates leveraged or unbacked money, it must be conceded that the system until 1933 still allowed individuals to enjoy the convenience of paper currency and demand deposits yet with relative ease to convert the paper to gold at any time at the teller's window. To be sure, some banks failed and others had occasional liquidity problems. But - quite apart from the economic wisdom or morality of fractional reserve banking, or mixing it with a gold standard - the system at least operated to allow the individual to control his own destiny - to hold hard assets or to trust his bank and the government to produce them on demand. Even though the system did not operate to perfection in practice, the individual nevertheless had the legal capability and right in theory to protect his wealth from irresponsible government and unsafe banks. Unfortunately, by 1933 that right had been circumscribed in a way that laid the groundwork for its elimination.

In 1910, the Supreme Court decided an obscure case against a Chinese national, Ling Su Fan, over the individual's right to export his silver from the Philippines. At the time, the U.S. occupied the Philippines. In the law establishing the Philippine Mint the U.S. Congress granted the Philippine Commission authority to pass additional measures to preserve the value of the silver peso against the gold peso. Because silver was trading in Hong Kong at 9% greater than the face value of the peso, the Commission forbade export of silver pesos and bullion made from coins upon penalty of forfeiture, fines and imprisonment. Ling Su Fan attempted to export his silver contrary to the law, his silver was seized and he was criminally prosecuted. He challenged the law as a taking of his property without compensation or due process. The Supreme Court upheld his conviction with the following words:

The power to 'coin money and regulate the value thereof, and of foreign coin,' is a prerogative of sovereignty and a power exclusively vested in the Congress of the United States. The power which the government of the Philippine Islands has in respect to a local coinage is derived from the express act of Congress. Along with the power to strike gold and silver pesos for local circulation in the islands was granted the power to provide such measures as that government should 'deem proper,' not inconsistent with the organic law of July 1, 1902, necessary to maintain the parity between the gold and silver pesos. Although the Philippine act cannot, therefore, be said to overstep the wide legislative discretion in respect of measures to preserve a parity between the gold and silver pesos, yet it is said that if the particular measure resorted to be one which operates to deprive the owner of silver pesos of the difference between their bullion and coin value, he has had his property taken from him without compensation, and, in its wider sense, without that due process of law guaranteed by the fundamental act of July, 1902

Conceding the title of the owner of such coins, yet there is attached to such ownership those limitations which public policy may require by reason of their quality as a legal tender and as a medium of exchange. These limitations are due to the fact that public law gives to such coinage a value which does not attach as a mere consequence of intrinsic value. Their quality as a legal tender is an attribute of law aside from their bullion value. They bear, therefore, the impress of sovereign power which fixes value and authorizes their use in exchange. As an incident, government may punish defacement and mutilation, and constitute any such act, when fraudulently done, a misdemeanor. . . .

However unwise a law may be, aimed at the exportation of such coins, in the face of the axioms against obstructing the free flow of commerce, there can be no serious doubt but that the power to coin money includes the power to prevent its outflow from the country of its origin. To justify the exercise of such a power it is only necessary that it shall appear that the means are reasonably adapted to conserve the general public interest, and are not an arbitrary interference with private rights of contract or property. The law here in question is plainly within the limits of the police power, and not an arbitrary or unreasonable interference with private rights.

The Court takes three important positions here. First, the power to coin money includes the power to prevent its outflow from the country. Second, even though the bullion is the property of the individual, by its conversion to legal tender, it has been impressed with the interest of the sovereign and thus becomes something over which the government has the right to exercise control as part of the prerogatives of sovereignty. Third, depriving the owner of the opportunity to realize the difference between the face value and the bullion value of coins is not an unconstitutional taking of property without due process.

In 1913, the Federal Reserve System was chartered to oversee a more "elastic" currency and to help avoid occasional and seasonal liquidity crises. What exactly caused the stock market to crash 16 years later and the economic and banking crisis that followed remains to this day a subject of discussion among economists. In his treatise, America's Great Depression, Professor Murray Rothbard, with an inclusive definition of money, demonstrates that the crash arose in classic Austrian business cycle fashion from an inflation of the money supply ending with an abrupt monetary contraction. Professors Friedman & Schwartz, with a somewhat narrower definition of money simply describe a contraction resulting in the crash, indicating that the stable price levels in the 1920's do not evince any inflation. History reveals a debate in Washington about how to quell stock market speculation, a signal that, indeed, there was excess liquidity coming from somewhere in the '20's. Whatever the cause of the crash, the view is almost unanimous that it was indecision and squabbling within the Fed that killed all chances for a quick recovery and brought on a major banking crisis. See Walker F. Todd, "The Federal Reserve Board Before Warner Eccles," Working Paper 9405 (Federal Reserve Bank of Cleveland 1994).

During the First World War Congress passed a number of war measures, including the 1917 Trading With the Enemy Act, that were designed to marshal the economy to support the war effort. The laws gave much power to the executive branch and were generally acknowledged to be authorized under the constitutional war powers. As originally enacted, Section 5(b) of the Trading With the Enemy Act, 40 Stat. 411, provided:

That the President may investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, export or earmarkings of gold or silver coin or bullion or currency, transfers of credit in any form (other than credits relating solely to transactions to be executed wholly within the United States), and transfers of evidences of indebtedness or of the ownership of property between the United States and any foreign country, whether enemy, ally of enemy or otherwise, or between residents of one or more foreign countries, by any person within the United States; and he may require any such person engaged in any such transaction to furnish, under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody or control of such person, either before or after such transaction is completed.

A 1918 statute expanded this power to allow the President to prohibit the hoarding of gold, but the statute provided that it was to expire two years after the termination of the war with Germany and it was never used to prohibit domestic hoarding.

In 1932-33, as the Hoover Presidency was ending and the banking crisis was worsening, the Federal Reserve Board attempted to persuade Hoover to declare a bank holiday. The Fed's counsel, Walter Wyatt, drafted a proclamation to that effect based upon the Trading with the Enemy Act. But Hoover, who was in favor of less drastic measures to bolster confidence in the banking system, rejected the idea of a bank holiday as well as the notion that the Trading with the Enemy Act was still in force. Roosevelt, following his election but before his inauguration, declined to work with the Hoover administration for a measure to diminish the crisis and allowed it to continue deteriorating. As related in Mr. Todd's Working Paper, cited above, there was considerable disagreement whether the Trading with the Enemy Act could support the banking holiday proclamation proposed by the Fed. But Roosevelt was not deterred. Apparently working behind the scenes with the Fed, knowing that he could very quickly secure the legal support from the Democrat Congress, he declared a bank holiday on March 6, 1933, two days after his inauguration. (Proclamation No. 2039). Three days later, without seeing the bill and with only 38 minutes of debate, Congress ratified the new President's Proclamation in the Emergency Banking Act, 48 Stat. 1, and amended section 5(b) of the Trading with the Enemy Act to read as follows:

(b) During time of war or during any other period of national emergency declared by the President, the President may, through any agency that he may designate, or otherwise investigate, regulate, or prohibit, under such rules and regulations as he may prescribe, by means of licenses or otherwise, any transactions in foreign exchange, transfers of credit between or payments by banking institutions as defined by the President, and export, hoarding, melting, or earmarking of gold, or silver coin or bullion or currency, by any person within the United States or any place subject to the jurisdiction thereof; and the President may require any person engaged in any transaction referred to in this subdivision to furnish under oath, complete information relative thereto, including the production of any books of account, contracts, letters or other papers, in connection therewith in the custody of or control of such person, either before or after such transaction is completed. Whoever willfully violates any of the provisions of this subdivision or of any license, order, rule or regulation thereunder, shall, upon conviction, be fined not more than $10,000, or, if a natural person, may be imprisoned for not more than ten years, or both; and any officer, director, or agent of any corporation who knowingly participates in such violation may be punished by a like fine, imprisonment, or both. As used in this subdivision the term 'person' means an individual, partnership, association, or corporation. [Emphasis added.]

Thus, what was solely a wartime measure that many believed had expired was converted into a statute granting war time powers to the President in times of "national emergency," a term which was not defined in the law (and which, if such an emergency existed in 1933, itself had been precipitated by government mismanagement). This law identified a new "enemy" - domestic "hoarders" who would be subject to imprisonment for violating any rule laid down by the President at any future time during a period of national emergency declared by him based on undefined criteria. Professor Henry Mark Holzer's monograph "How Americans Lost Their Right To Own Gold And Became Criminals in the Process" catalogues the events of 1933, and more; and it should be read as an adjunct to this article, which despite its appearances is a relatively superficial treatment of the subject.

On April 5, 1933, the President issued Executive Order No. 6102 forbidding the hoarding of gold under the newly amended Trading with the Enemy Act and requiring citizens to turn in their gold to Federal Reserve banks or member banks. Then, on June 5, 1933, the Congress passed a joint resolution, 48 Stat. 112, declaring gold clauses in all public and private contracts to be against public policy:

Whereas the holding of or dealing in gold affect the public interest, and are therefore subject to proper regulation and restriction; and

Whereas the existing emergency has disclosed that provisions of obligations which purport to give the obligee a right to require payment in gold or a particular kind of currency of the United States, or in an amount in money of the United States measured thereby, obstruct the power of the Congress to regulate the value of the money of the United States, and are inconsistent with the declared policy of the Congress to maintain at all times the equal power of every dollar, coined or issued by the United States, in the markets and in payment of debts.

Now, therefore, be it resolved that (a) every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold or a particular kind of coin or currency or an amount in dollars of the United States measured thereby, is declared to be against public policy; and no such provision shall be contained in or made with respect to any obligation hereafter incurred. Every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto shall be discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts.

On May 12, 1933, the Congress enacted the Thomas Amendment to the Agricultural Adjustment Act, 48 Stat. 51, that contained a provision authorizing the president to lower the gold content of the dollar by as much as 50 per cent. By mid 1933 Roosevelt was ready to devalue the dollar. His instrument for doing so was the Reconstruction Finance Corporation, which issued $150 million in short term obligations and began a gold purchasing program on behalf of the United States through the Federal Reserve Bank of New York. By January 1934 the market price of gold had been bid up from its pre-1933 value of $20.67 to over $34. On January 30, 1934, the Congress passed the Gold Reserve Act, 48 Stat. 337, establishing the Exchange Stabilization Fund, authorizing the President to fix the gold weight of the dollar between 50 and 60 per cent of its former official value and vesting in the United States title to all of the gold collected by and held by the Federal Reserve System, the Federal Reserve banks and their agents. The next day the President issued Proclamation No. 2072 fixing the official price of gold at $35.00 per ounce, devaluing the dollar to 59.06% of the $20.67 official value that had been maintained since 1834 - for almost a century.

Because the gold collected pursuant to the April 5 Proclamation was redeemed to its owners at $20.67, the devaluation enabled the United States to book a profit of $2.8 billion, $2 billion of which was assigned to the Exchange Stabilization Fund.

Forbidding the payment of private contracts in gold probably would not have created much of a stir if the dollar had not been devalued. But businessmen saw the abrogation of their gold clauses as a 40% confiscation of the agreed-to value of their contracts, contracts that were written by businessmen in time-honored language precisely to avoid their becoming victims of a devaluation.

United States v. Bankers Trust Co., 294 U.S. 240 (1935), was a suit to collect the coupon on a bond of a railroad that was in bankruptcy. 'The bond provided that the payment of principal and interest 'will be made ... in gold coin of the United States of America of or equal to the standard of weight and fineness existing on February 1, 1930.' The coupon in suit was payable on February 1, 1934." When the $22.50 coupon was presented for payment on February 1, 1934, the plaintiff asked for $38.10, representing the February 1, 1934 dollar value of the coupon in February 1, 1930 gold. The Reconstruction Finance Corporation and the United States, which were creditors of the railroad, intervened in the suit and asserted that the gold clause was invalid and that the interest and principal should be paid in the amount of $22.50 in legal tender currency, rather than gold, pursuant to the Joint Resolution of June 5, 1933. The bondholder challenged the constitutionality of the law and, losing in the lower court, appealed.

After a lengthy analysis, the Supreme Court (Chief Justice Hughes writing for the majority in a 5-4 decision) concluded that this clause was one for money and not for gold coin as a commodity and therefore fell within the ambit of the government's monetary prerogatives. At the same time the Court acknowledged that the clause was intended to protect the bondholders "against a depreciation of the currency and against the discharge of the obligation by a payment of lesser value than that prescribed." Nevertheless, the Court held that the government's money power trumps the individual's right privately to secure such protection, citing the Legal Tender Cases and Ling Su Fan as precedent. To the argument that the Congress was interfering with the private right to contract, the Court responded,

This argument is in the teeth of another established principle. Contracts, however express, cannot fetter the constitutional authority of the Congress. Contracts may create rights of property, but, when contracts deal with a subject-matter which lies within the control of the Congress, they have a congenital infirmity. Parties cannot remove their transactions from the reach of dominant constitutional power by making contracts about them."

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The principle is not limited to the incidental effect of the exercise by the Congress of its constitutional authority. There is no constitutional ground for denying to the Congress the power expressly to prohibit and invalidate contracts although previously made, and valid when made, when they interfere with the carrying out of the policy it is free to adopt.

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Despite the wide range of the discussion at the bar and the earnestness with which the arguments against the validity of the Joint Resolution have been pressed, these contentions necessarily are brought, under the dominant principles to which we have referred, to a single and narrow point. That point is whether the gold clauses do constitute an actual interference with the monetary policy of the Congress in the light of its broad power to determine that policy. Whether they may be deemed to be such an interference depends upon an appraisement of economic conditions and upon determinations of questions of fact. With respect to those conditions and determinations, the Congress is entitled to its own judgment. We may inquire whether its action is arbitrary or capricious, that is, whether it has reasonable relation to a legitimate end. If it is an appropriate means to such an end, the decisions of the Congress as to the degree of the necessity for the adoption of that means, is final.

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We are not concerned with consequences, in the sense that consequences, however serious, may excuse an invasion of constitutional right. We are concerned with the constitutional power of the Congress over the monetary system of the country and its attempted frustration. Exercising that power, the Congress has undertaken to establish a uniform currency, and parity between kinds of currency, and to make that currency, dollar for dollar, legal tender for the payment of debts. In the light of abundant experience, the Congress was entitled to choose such a uniform monetary system, and to reject a dual system, with respect to all obligations within the range of the exercise of its constitutional authority. The contention that these gold clauses are valid contracts and cannot be struck down proceeds upon the assumption that private parties, and states and municipalities, may make and enforce contracts which may limit that authority. Dismissing that untenable assumption, the facts must be faced. We think that it is clearly shown that these clauses interfere with the exertion of the power granted to the Congress, and certainly it is not established that the Congress arbitrarily or capriciously decided that such an interference existed.

Thus, having bootstrapped its way (based on the Legal Tender Cases, which themselves were bootstrapped) into recognizing a plenary power that was not granted by the founders, the Court once again withdrew from any controversy over how Congress ought to exercise the power. The dissent was not especially helpful in its analysis disagreeing with the result:

There is no challenge here of the power of Congress to adopt such proper 'Monetary Policy' as it may deem necessary in order to provide for national obligations and furnish an adequate medium of exchange for public use. The plan under review in the Legal Tender Cases was declared within the limits of the Constitution, but not without a strong dissent. The conclusions there announced are not now questioned; and any abstract discussion of congressional power over money would only tend to befog the real issue.

The fundamental problem now presented is whether recent statutes passed by Congress in respect of money and credits were designed to attain a legitimate end. Or whether, under the guise of pursuing a monetary policy, Congress really has inaugurated a plan primarily designed to destroy private obligations, repudiate national debts, and drive into the Treasury all gold within the country in exchange for inconvertible promises to pay, of much less value.

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The authority exercised by the President and the Treasury in demanding all gold coin, bullion, and certificates is not now challenged [Note - this issue never came before the high court prior to or after this case]; neither is the right of the former to prescribe weight for the standard dollar. These things we have not considered. Plainly, however, to coin money and regulate the value thereof calls for legislative action.

And after some discussion, the dissenters opined that nullifying gold clauses was not necessary to the government's legitimate exercise of the monetary power. They ended their dissent with a similar complaint to that expressed by Justice Field at the end of his dissent in the Legal Tender Cases:

Under the challenged statutes it is said the United States have realized profits amounting to $2,800,000,000. But this assumes that gain may be generated by legislative fiat. To such counterfeit profits there would be no limit; with each new debasement of the dollar they would expand. Two billions might be ballooned indefinitely-to twenty, thirty, or what you will.

Loss of reputation for honorable dealing will bring us unending humiliation; the impending legal and moral chaos is appalling.

Legal and moral chaos notwithstanding, the Court unanimously endorsed the notion that the Constitution grants the Congress broad and unquestionable monetary powers. Despite the Constitutional Convention's elimination of the authority to issue paper money or make it legal tender, unbacked fiat money (now euphemistically called the "fiduciary standard") is the lawful currency of the United States. And the government's power divorce the currency from objective value and to confiscate gold bullion and coins pursuant to a monetary policy is well-established in the law - all without the government's following the required super-majority procedure of securing a constitutional amendment.

The 1974 reinstatement of the right of individuals in the U.S. to own gold, the 1977 repeal of the Joint Resolution forbidding gold clauses and the minting of new gold coins by the United States have not changed the constitutional rights of individuals. Gold ownership and its usage to avoid the ravages of inflation and currency devaluation now stands as a privilege that can be revoked at any time by new legislation.