Washington Lawyer - April 2019 - 40

WORTH READING

THE
FALL
OF
GOLD
& THE RISE OF THE AMERICAN ECONOMY
Review by Richard Dean

A

merican Default: The Untold Story
of FDR, the Supreme Court, and
the Battle over Gold by Sebastian
Edwards explores a 1935 U.S. Supreme
Court decision addressing whether
the deviation from the gold standard
was constitutional given widely used
contractual clauses calling for loan
repayment in gold.
A treasure trove for the economic historian, the
book tells us how the United States got out of the
Great Depression, how the long-running national
debate over gold versus silver was resolved, and
how the monetary policy put in place in the 1930s
remains in effect today. American Default also
provides great insight into the legal arguments of an
important yet long-forgotten Supreme Court case
that has not been given such an in-depth analysis
until now.
In 1933 the country was in economic crisis, so
Congress gave President Franklin D. Roosevelt
authority to stimulate the economy by devaluing
the dollar in relation to gold. However, FDR's initial
efforts led to immediate legal complications.
Government debt and most private loans had a
"gold clause." Debts were "payable in U.S. gold coin
at the present standard of value." But when debts
became due, were they to be paid in devalued
dollars or in the value of gold? Billions of dollars
were at stake.
This was a public issue before it inevitably became
a legal one. FDR directly addressed it in his second
Fireside Chat. He argued that the total gold in the
world amounted to only about 11 billion dollars
- far less than what was owed in all the debt contracts. As a result, there was no way all creditors
could expect payment in gold.

Book cover, courtesy of Princeton University Press

40 WASHINGTON LAWYER

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APRIL 2019

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When the gold standard was abandoned, debtholders lost up to one-half the value of their
"assets." After a handful of lower court decisions,
the Supreme Court agreed to address the key issues.
Oral arguments were held in January 1935 and
lasted three days. The arguments were simple and
straightforward. The government declared that (1)
there was an economic crisis that required devaluation and (2) Congress had a strong basis to believe
that the clauses were contrary to public policy. The
opposing arguments were keyed to the sanctity of
the contract - the government cannot annul contracts retroactively. To do so amounted to taking
property without compensation.
Financial markets held their collective breath for the
answer. In a 5-4 decision, the Court found that the
abrogation of the gold clauses in private contracts
was constitutional. Eight justices concluded that it
was unconstitutional to annul public debt contracts,
but by a 5-4 majority the Court held that such abrogation had not caused any damage to public bondholders. The majority reasoned that if bondholders
had received gold for their bonds, they would
have been forced to sell it to the Treasury for the
devalued price since they could not export gold
at market price.
Most of the justices in the majority - Charles Evans
Hughes, Harlan Fiske Stone, Oliver Wendell Holmes
Jr., and Benjamin Cardozo - gained notoriety over
time. The four in the minority (The Four Horsemen)
faded into obscurity as individuals, but they were a
cohesive and powerful group in the 1930s. Likewise,
the lawyers are not well known today, so recording
their efforts provides a valuable service to legal historians. This is a well-told story of how economics,
public policy, legislation, and the law intersected
in the real world to bring the country back from
the abyss.
Richard Dean is a partner at Tucker Ellis LLP in
Cleveland. He has been a D.C. Bar member for more
than 25 years.
http://dcbar.org
Washington Lawyer - April 2019

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