The Gold Clause Cases–Part One
Lately I’ve been fascinated by how the Supreme Court addressed the constitutional challenge to the decision taking the United States off the gold standard (for practical purposes) in 1933. I thought I’d talk about this in two posts, as one would be too long.
One action taken by Congress during FDR’s “Hundred Days” was a Joint Resolution holding that obligations denominated in gold could instead be paid back with fiat money. This was a windfall for private debtors, since they could now pay creditors with devalued (or inflated) dollars. And it constituted a partial default by the United States on its bonds, which contained “gold clauses.”
From a constitutional perspective, this act marked a sharp break with the first principles established by the generation created by the realignment of 1896. The campaign between William McKinley and William Jennings Bryan, of course, turned on whether we should have a gold standard or bimetallism (gold and silver) as the basis for the monetary system. McKinkley’s decisive victory began an era of Republican dominance (Woodrow Wilson was the only Democrat elected president between 1896 and 1932) and set the gold standard as the . . . er . . . gold standard of economic policy. This was all turned upside-down by the realignment of 1932.
Various private debtors and bondholders sued claiming that this gold repudiation (or devaluation) violated the Due Process Clause. These cases reached the Court in January 1935 and marked the first major test of a New Deal measure. Naturally, the oral argument drew intense interest, and things did not go well for the Administration. While there was ample precedent for Congress’s authority to change the monetary system for future contracts, doing the same for existing ones was viewed with much greater skepticism.
In practical terms, a decision invalidating the Joint Resolution would have been a disaster. It would have more or less ripped up two years of contracts and/or forced the Federal Government to pay a lot more money to service its debt. As a result, the President and his Cabinet explored their options. Robert Jackson wrote a memo suggesting that the United States invoke sovereign immunity against any suits by bondholders. The President suggested to the Treasury Secretary that the financial markets be disrupted to pressure the Court to do the right thing. When that request was rejected, FDR responded that was just “kidding,” though one wonders.
Eventually, the Administration settled on a two-pronged strategy for the post-argument period. First, it orchestrated a series of media leaks indicating that the Court would face severe consequences if the decision was “wrong.” Hints were dropped about Court-packing or an outright refusal to obey. Second, the President and his advisers drafted an address to be given in case of a bad outcome in which FDR would have told the nation that he could not accept the Court’s decision.
On Monday, I’ll talk about how the Court handled these cases.