All Commentary
Saturday, November 1, 1980

Book Review: The Gold Clause: What it Is And How to Use it Profitably edited by Henry Mark Holzer

(Books In Focus, Inc., 160 E. 36 St., Suite 31B, New York, N.Y. 10016) • 381 pages • $19.95 cloth

Law professor Henry Mark Holzer has compiled an anthology of important articles about the legal standing of gold clauses in private and public contracts. A gold clause is the contractual requirement that a debt be repaid in a specified quantity of gold or in an amount of currency equal to that quantity of gold. Gold clauses existed at least as far back as the latter middle ages, and though their formulation has differed from age to age, they have been used for one reason only—to protect contracting parties against debasement of coin or currency by the state.

The book points out the significant difference between the Legal Tender Cases (1871) and the Gold Clause Cases (1935). The 1871 Cases did not rule out the use of gold clauses in private contracts, although they did uphold the issuance of Civil War greenbacks as constitutional; gold clauses continued to appear in all long-term contracts and obligations, as well as in many shorter term agreements. The real damage done to sound money by the legal tender decisions was not apparent until 1935 when they were relied upon by the U.S. Supreme Court to uphold the Congressional resolution prohibiting gold clauses in contracts, private and public.

Readers interested in the Constitutional protections for hard money will gain much from reading chapter 5 which contains the anti-gold clause analysis of Angus D. Mac- Lean who had the primary responsibility for the government’s brief in the Gold Clause Cases, as well as Associate Justice James C. Mc-Reynold’s short, but penetrating dissent which includes his now famous exclamation: “The Constitution as many of us have understood it, the instrument that has meant so much to us, is gone.”

Holzer’s last chapters take up, in turn, the revival of gold ownership in 1974, and the relegalization of gold clauses in 1977. But, a troublesome question remains. Why, if gold clauses are now legal once again, are citizens not generally making use of them to avoid the ravages of inflation?

Holzer provides one legal answer to that question. Long-term loan contracts which require the borrower who repays in paper currency to repay more of the cheaper dollars, may violate state usury laws even where there has been a waiver of the defense of usury in advance. Holzer suggests a way that such a problem can be overcome by drafting a clause which states that “a given number of ounces of gold (either bullion or coins) of a certain fineness is being loaned and that exactly the same weight and fineness will be repaid.”

In just forty-seven years, ignorance of gold clauses and the gold standard has become widespread. But, perhaps, the financial necessities of this Age of Inflation and the rebirth of knowledge about gold clauses, to which Professor Holzer has made such an important contribution, may revive these old contractual barriers to monetary tyranny.

  • John Sparks is chairman of the department of business administration, economics, and international management at Grove City College in Pennsylvania.