Soon after his first inauguration, President Franklin D. Roosevelt tried to close the gold window. At the time, the American currency was tied to the value of gold, and the financial crisis was putting serious pressure on government gold reserves. To deal with the problem, the government devalued the dollar. As an emergency measure, Congress passed a joint resolution declaring that the federal government would no longer recognize any debts that required “payments in gold or a particular kind of coin or currency, or in an amount of money of the United States measured thereby.” During World War I, however, the U.S. Treasury had issued Liberty Bonds that provided that the “principal and interest hereof are payable in United States gold coin of the present standard of value.” Some of those bonds were now due, and creditors filed suit against the federal government demanding payment in the promised gold coin.
The case was of extraordinary economic, political, and legal importance. The government’s outstanding obligations were substantial. The Treasury calculated that the difference between paying in gold and paying in deflated dollars was worth over $50 billion dollars to the government, and the attorney general warned the justices of the U.S. Supreme Court that there would be economic “chaos” were the government to lose the case. The case involved one of the new president’s first and most consequential actions to try to climb out of the Great Depression. The government had already lost other cases involving New Deal policies, but the economic stakes seemed far higher in the Gold Clause Cases. Losses on other New Deal policies were disappointing, but there were options for adjusting to the Court’s rulings and trying again. The financial fallout from a negative ruling in the Gold Clause Cases would be immediate and severe. The administration did not shy away from communicating the gravity of the situation to the Court. The government’s presentation to the justices relied as much on economic arguments as on legal arguments. The press was filled with speculation on what the government would do if the Court ruled against the administration. In public, it was credibly rumored that the president would declare martial law and disband the Court in the case of a loss. In private, the attorney general was advising the president that he should immediately pack the Court with new justices and demand a rehearing of the case.
The constitutional case against the government was clear, but not necessarily decisive. The Constitution empowered Congress to regulate the value of the currency, and it did not explicitly prohibit the federal government from interfering with contracts. It did, however, explicitly prohibit the state governments from impairing the obligations of contracts, and the Court had long interpreted that provision as meaning that the state governments could not renege on their own contracts and had generally assumed that the spirit of that prohibition applied to the federal government as well as the states. Privately, the justices thought it was horrifying and shameful that the federal government might effectively repudiate part of the national debt. Publicly, Chief Justice Charles Evans Hughes wrote for the Court that the constitutional authority that empowered Congress to borrow on the public credit simultaneously obligated the government to be bound by the promises it made when borrowing money. The four dissenters in the case were even more emphatic that the Constitution protected individuals from having their property taken by the federal government, and repudiating or devaluing public debt was effectively taking private property.
Despite their displeasure with the government, a narrow five-justice majority found a way to rule in favor of the government in the Gold Clause Cases. Although the federal government had a sacred obligation to repay its debts in full, the chief justice argued that the courts were not free to provide a perfect remedy for the government’s creditors. In this case, the courts had to take into account the fact that the government had sharply curtailed what private individuals could do with gold, and as a consequence of those regulations the government had effectively reduced how valuable gold actually was. When accounting for damages from the government’s failure to pay its debt in the promised gold coins, the courts were constrained to recognize that gold coins were no longer as valuable as they had been. Since the Court was unwilling to strike down those regulations on the private ownership and exchange of gold, then it could not award significant damages to bondholders who received paper currency instead of gold. The dissenters thought the result was “appalling” and an obvious legal dodge. Justice James McReynolds paused from reading his written dissent to simply declare, “the Constitution as many of have understood it has gone.” The administration breathed a sigh of relief, but the president promptly leaked a radio address that he had prepared to deliver had the Court decision gone in the other direction. The president had been prepared to announce that the government would not stand “idly by” as the Court brought about an economic disaster and would instead continue to deal with its creditors as if the Court had never spoken.
Gold Clause Cases (1935) Supreme Court decision: https://www.oyez.org/cases/1900-1940/294us330
Keith E. Whittington is the William Nelson Professor of Politics at Princeton University.