Gold Clause

Gold Clause

A clause in a contract allowing payment to be made in gold instead of currency. A gold clause is placed in a contract if it is suspected that payment in currency may be rendered impossible due to inflation, war or some other reason. Gold clauses were common at the first part of the 20th century, but were illegal in the United States between 1934 and 1977.
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These stemmed from the fact that a number of European countries had issued dollar-denominated debt in the United States, subject to the gold clause. The question at hand was whether these foreign powers should pay in gold terms, or if they should take advantage of the abrogation of the gold clause and the devaluation, and pay in depreciated paper dollars.
Edwards argues that the United States defaulted on federal debt during the 1930s when it withdrew monetary gold from circulation and abrogated the gold clause in both public and private contracts.
This harkens once again to the so-called Gold Clause cases decided by the Supreme Court.
Anyone can transact business with what are called "gold clause contracts" (see Title 31, United States Code, Section 5118(d)(2)).
The Federal Reserve rationalized the major reduction of the money supply during the early 1930s as necessary to protect the gold clause. At the height of the Cold War, President Kennedy was prepared to sanction our allies to avoid an outflow of gold.
But since their other titles include such classics as The Gold Clause, The Great Dollar Deception and The Paper Aristocracy, it's probably safe to say that they find most things mysterious and sinister.
Congress undid the final link between the gold standard and the domestic economy when it abrogated the gold clause in government and private contracts.
The cases challenging the invalidation of the gold clause were making their way through the court system and would eventually be combined in the Gold Clause Cases.
Timberlake closes with a recount of the Gold Clause Cases, which centered on the Franklin Roosevelt administration's outlawing of private gold holdings.
McReynolds noted that the intention of the gold clause was "to protect against a depreciation of the currency and against the discharge of the obligation by payment of less than that prescribed." He cited the recent gold devaluation of more than 59 percent--the gold dollar went from 25.8 grains to 15.24 grains--and added: "The calculation to determine the damages for failure to pay in gold would not be difficult" (294 U.S.
But I do remember quite vividly the first time I met Henry, which was at a conference devoted to the question of gold clauses, held in November 1973 just at the time when the sale of gold was about to be again made legal in the United States.
Second, due to the gold clauses that occurred in most bond indentures, coupon and principal payments were stipulated in gold, which helped to integrate these securities into the international markets.