When the Feds Repudiate Lawful Debts: the Gold Clause Cases

by David Crocker on December 5, 2013, 4:47 pm

in Economics,History,Law,Politics

Has the United States government ever repudiated its lawful debts? You bet – in 1933. And would Uncle Sam do it again? I think he would.

The story goes like this. To finance the First World War, the U.S. government issued bonds. Because the bondholders were worried that the government could, through currency manipulation, devalue any repayment in paper money, the bonds contained a clear and unambiguous promise to repay the debt in gold at the bondholder’s option.

Fast forward to 1933, with the Great Depression at its absolute nadir. Currency devaluation was very much on the mind of the Roosevelt Administration, which saw inflation as a way to stimulate the economy and permit debtors to dig out from under their debts in a period of steep deflation. But there was that pesky gold clause, which pinned the government down to gold payments at a fixed value.

Enter the Congress. In its “Joint Resolution to Assure Uniform Value to the Coins and Currencies of the United States” both houses of Congress explicitly agreed to repudiate all “gold provisions” in any any public debt. There were two key provisions in the resolution:

(1) “Provisions of obligations which purport to give the obligee a right to require payment in gold obstruct the power of the Congress” and

(2) “Every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold is declared to be against public policy.”

Boiled down to essentials, here it is: legal obligations mean nothing when that obligation is deemed to “obstruct the power of Congress”. Any promise made by the U.S. government can – by the magic of the joint resolution – be re-written into a “purported” promise. And upholding a lawful – and unambiguous – contract can be declared “against public policy”.


Naturally, the bondholders sued the government and the three consolidated “gold clause cases” were eventually decided by the Supreme Court, which held in favor of the government on a 5-4 vote. Neither the majority nor the minority was happy with the government’s action. Even the majority castigated the government for being a dishonorable deadbeat and recognized that this was an exercise of raw power with scant reference to principle. Five of the nine justices labeled the government’s actions a “repudiation”.

It’s called arbitrary government, boys and girls. Doesn’t exactly inspire confidence.

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