Some commentators foresaw far thornier, even dire, consequences. While few predicted that personal ownership of gold would be prohibited, it was obvious that if a currency devaluation was going to happen it would make gold scarce. Already in 1931 and 1932, demand for gold had hit unprecedented levels, and the metal was disappearing from the country, as we have seen, faster than the government could count it. Thus, if gold clauses were upheld as valid, private corporations would very likely not be able to get enough gold to meet their contractual debts, which would trigger a massive wave of foreclosures. Imagine, too, the complexity that could arise at the state level; at least five states at the turn of the century passed contradictory laws about the ability or inability of private parties to demand payment of a contract in a specific type of money. And finally, there was the question of gold clauses in government bonds held abroad. If foreign bondholders in countries not on the gold standard were not required to make interest payments in gold, what would prevent them from making payment in a local currency that was possibly even more devalued than the dollar? And if the US government repaid its bond debt in depreciated dollars, would bondholders have the right to sue—and in which nation’s courts?
In the summer of 1932, James Truslow Adams, one of America’s best-known historians—he coined the phrase the American dream—warned that a government failure to uphold the gold clause would represent “a great breach of faith.” As part of an in-depth exchange in the financial weekly Barron’s, Adams foresaw the crisis that evidently eluded Roosevelt’s team as it plotted its early steps on gold. “If we went off gold and Congress ruled either that the gold clauses were valid or invalid, suit would be brought by interested parties on one side or the other, rising eventually to the United States Supreme Court.”6 Adams continued, “In view of the enormous property value at stake, and the fact that such a decision would transfer that property from one mass of citizens to another mass, the decision would be the most fateful, perhaps, in the history of the Court.”
Some legislators tried to treat the gold-clause issue with the gravity it merited. In February 1933—that is, a month before Roosevelt was inaugurated and the emergency banking legislation was passed—an Iowa congressman introduced a bill to nullify gold clauses.7 Nonetheless, congressional leaders were unwilling to devote much time to the gold-clause issue, in part because they doubted that nullifying the clauses was constitutional. By contrast, Roosevelt and most of his advisers do not appear ever to have discussed the issue of gold clauses until April 1933—more than a month after Roosevelt declared, at least to his intimates, that the country had left the gold standard and Congress had already prohibited private gold ownership. One exception was an outside adviser named Alexander Sachs, a Lithuanian-born Lehman Brothers economist, who drafted a memo in February about the “serious legal complications” that could arise from devaluing the dollar; it is unclear how widely read or considered Sachs’s memo was.8
When the Thomas Amendment to the agriculture relief law passed in May, it gave the president the power to regulate the value of the currency, and made US currency legal tender for all debts public and private. But the amendment had at least two holes: it failed to address whether currency could now be used to pay debts in existing gold-clause contracts, and whether gold-clause contracts would be valid in the future. (Bizarrely, the Thomas Amendment may also unintentionally have made coins from the Philippines legal tender in the United States.) In an effort to fill these holes, a resolution was introduced into both houses of Congress on May 26 to abrogate existing gold clauses and prevent their use in the future. The resolution declared gold clauses to be contrary to public policy and declared them null. The Senate report supporting the resolution made the issue sound both matter-of-fact and urgent: “The Government should have specific authority to control its gold resources.” It also clearly took a side in the creditor versus debtor debate: “Private debtors with gold clause obligations are entitled to protection and a prompt and clear definition of their legal position.”9
These assertions were vigorously interrogated and denounced in the ensuing Senate debate. Faced with the proposition that the United States would try to wiggle out of its debt obligations by substituting paper money for gold, Republican senator David A. Reed of Pennsylvania used the same insult his nineteenth-century counterparts had; the bill was “repudiation” and a blow to the American character: “This is the most serious question of national dishonor since I entered the Senate,” Reed declared. “We are saying to the peoples of foreign countries that the sacred promise of this country is merely a scrap of paper. The national honor is about to receive a stain we cannot erase for 100 years. . . . for generations to come Americans will grow red around the ears when they think of what this Congress did.”10 The legislation, he and several colleagues argued, was unconstitutional.
The resolution passed and, as predicted, lawsuits quickly ensued. Several of these made it to the Supreme Court in 1934, and the cases were consolidated into three categories: those dealing with railroad bonds, grouped under Norman v. Baltimore & Ohio Railroad Company; a case over the gold clause in US Treasury gold certificates, Nortz v. United States; and a case concerning the gold clause in Liberty Bonds, Perry v. United States.
The oral arguments began on January 8, 1935. Cummings did his best to re-create the desperation that reigned when the Roo-sevelt administration took office in March 1933, when the economic situation in the United States and much of the world was teetering between chaos and disaster. Banks were closing daily. Prices were plummeting. Bankruptcies were mounting. Millions were out of work. International trade had all but dried up. Cummings told the Court justices that in 1933 “our people were slipping to a lower level of civilization.”11
This invocation was meant not only to explain the expediency of the government’s initial policies but to warn what could recur if, overnight, an additional $69 billion were to be added to the public and private debts of the nation. “The stupendous catastrophe envisaged by this conservative statement is such as to stagger the imagination. It would not be a case of ‘back to the Constitution.’ It would be a case of ‘back to chaos,’ ” Cummings intoned.
In contrast to the president’s soothing fireside reassurances, Cummings’s opening argument was one of the few instances in which the Roosevelt administration publicly acknowledged the radical change it had made to the nation’s historical idea of money. “Gold is not an ordinary commodity,” Cummings told the Court, peering through his rimless eyeglasses. “It is a thing apart, and upon it rests, under our form of civilization, the whole structure of our finance and the welfare of our people.” His point was that gold was separate from money, gold was a powerful tool to measure the value of money—but that the federal government had the constitutional authority to regulate money. Nonetheless, his invocation of gold’s unique historic financial role must have pushed at least some of his listeners in the opposite direction from what he intended. Cummings also elaborated on a concept that had been central in the second Legal Tender case: that the ability to regulate the value of currency is a fundamental aspect of sovereignty. This, he insisted, was the clear intent of the Constitution’s framers, who “took pains to see that this power, just like the power of the sword, this great attribute of sovereignty, should reside in one single authority.”
All of the justices seemed uncomfortable with the issues at stake. Justice Harlan Stone, a Republican World War I veteran, vowed that he would personally never again purchase securities from a government “so faithless to its obligations.” Chief Justice Charles Hughes, who was generally in favor of government regulation and not blindly opposed to the New Deal, brought up the instance of a war bond, designed to raise money for the military. It contains a promise to pay a certain amount of gold at a prescribed degree of weight and fineness. “What is the power in the contract to alter it to the detriment of the one who bought the bond?” Assistant Solicitor General Angus MacLean answered that Congress had the right to decide wh
at the money in the contract should be. Hughes, who sported an immense walrus-like white mustache and beard, demanded, “Where does Congress get that right?” MacLean’s answer: “From its constitutional power to coin money and regulate the value thereof.”12 It was the same right that the government invoked in defending the constitutionality of greenbacks not backed by gold—but it was as hotly contested in 1935 as it had been in 1869. Once again, the idea of money that was worth only what the government says it is worth was not merely offensive but deemed to be immoral.
The following day, in front of a packed courtroom with half a dozen US senators in attendance, the justices burst out laughing at the government’s argument, a rare lapse in manners. Pierce Butler threw questions and statements at government attorney Stanley Reed that one newspaper labeled “savage.” Butler thundered: “Under that theory Congress could stamp the word dollar on a dime and make it legal tender for the discharge of gold obligations. What were the words put there for? There can be no confusion of meaning. It was intended to pay so much gold.”13
Justice Louis Brandeis, generally a critic of big business and one of the Court’s liberals, conspicuously asked no questions in the oral arguments over three days. Shortly thereafter, Harvard law professor Felix Frankfurter, a friend of Brandeis’s and an adviser to Roosevelt, met with Brandeis and asked him about his silence. He responded that he knew already what his legal conclusions were, and that he was “so completely out of sympathy on matters of policy with what [the government] did that I thought it best to say nothing.” He added that while he found the economics of the case “doubtful at best,” he thought its “morals were plain and most important. I don’t know whether we shall recover.”14
The fear created by the Court’s treatment is what led the White House to consider, on January 10 and 11, expanding the number of justices on the Court. Not long after, the idea began to surface prominently in the press, in what read as calculated shots across the Court’s bow. The New York Times on January 13 ran a front-page Associated Press story revealing that “Some Congressional inflationists were studying the possibility of increasing the membership of the Supreme Court from nine to eleven or twelve.” While that was deemed a last resort, the story said, “all were agreed that certainly President Roosevelt would leave nothing undone to offset a decision which would destroy the new monetary system built up by the administration.”15 For its part, the Chicago Tribune noted that “talk of packing the court has been heard in the corridors of the capitol, the treasury and other government buildings since the opening of the gold clause cases last Tuesday.” Few would speak on the record, the Tribune noted, because “the possibility of a citation for contempt for such talk during the pendency of a case was obvious.” Nonetheless, Senator Elmer Thomas averred for the paper that “undoubtedly there will be a program” to pack the Court if the decision were to go against the government.16
Roosevelt had an additional, Machiavellian tactic in mind: roil the markets. After lunch with Morgenthau on January 14, the president called Attorney General Cummings to join them, which began what Morgenthau called “one of the most unpleasant hours I have had since I have been in Washington.”17 Roosevelt asked Morgenthau to use the newfound powers of the Exchange Stabilization Fund—an emergency Treasury reserve created by the 1934 Gold Reserve Act—to create as much discord in the markets as possible until the Court made its decision. “I want bonds to move up and down,” Roosevelt said. “The only way that the man in a taxicab can become interested in the gold case is if we kept the story on the front page.” The president continually turned for support to Cummings, who agreed with everything he said. Morgenthau “argued harder and more intensely than I have ever before in my life.” Not only did Morgenthau object to the president’s suggestions as a matter of conscience, he saw them as destructive: “Mr. President, you know how difficult it is to get this country out of a depression and if we let the financial markets of this country become frightened for the next month it may take us eight months to recover the lost ground.” Morgenthau, realizing he would have to resign if asked to manipulate markets this way, pointed his finger at Roosevelt and said: “Mr. President, don’t ask me to do this.” Roosevelt responded, “Henry, you have simply given this thing snap judgment. Think it over.” Morgenthau returned to his office, steaming. “I felt that the President was making a terrific mistake and that I did not know whether my advice or influence would prevail.”
As it happened, the markets were already jittery over the uncertain outcome of the gold-clause cases. On that very day, January 14, the New York Times had published a front-page story reporting that “Federal experts” were discussing whether an adverse Court decision would cause Congress to restore the gold value of the dollar to its earlier level. On the next day, the foreign exchange markets had a vigorous session of trading, and the dollar unexpectedly shot up in value while stocks and commodities declined. Traders were nervous and Morgenthau, already struggling with his boss, was as furious with the banks as he was with the Court. “Now what the hell has the Supreme Court got to do with the price of gold?” he asked a colleague in frustration. The weaknesses in the operation of the Exchange Stabilization Fund were beginning to show; while Treasury relied on international banks to buy and sell gold and dollars to protect the value of the dollar, there was nothing Treasury could do to keep the banks from betting in the other direction. Morgenthau was incensed. “This demonstrates to me that when the United States Government is in difficulty the international speculator sells its government short in order to make a penny and when there’s a little doubt and they just don’t know—they’re scared and they’re yellow,” Morgenthau fumed. “They haven’t got any guts, they haven’t got any backbone and they haven’t got any flag that they follow.”
A few days later, Treasury drew up an action plan in case the Supreme Court restored the clauses.18 There would be an immediate embargo on export and import of gold. The administration might not be able to avoid the Court’s order that contracts be paid in gold, but it could make it all but impossible to do so by taking all the gold. Treasury proposed to “make gold practically contraband, so that even in the unlikely event that the Supreme Court granted specific performance in gold of a gold clause obligation, the gold paid out could be simultaneously seized and returned to the Treasury.”
A domestic stock market crash was obviously also a concern. On January 21, Morgenthau phoned SEC commissioner James Landis, and asked “whether he would cooperate with him in closing all the exchanges should the Supreme Court render an adverse opinion and, therefore, the stock market go to pieces.”19 Landis agreed, and Morgenthau even arranged to have an additional telephone installed in the cabinet room so that he could have direct access to Landis’s office if the exchanges were closed. Within a few days, unnamed sources were reminding the press that the SEC and the president had the legal authority to shut down the stock exchanges for up to ninety days if they felt they had to—which seemed like a direct message to the Court justices.20
The administration was faced with a delicate task—it wanted to convey to the Court that, one way or another, a path around an unfavorable decision could be found. At the same time, too much pressure could be counterproductive. Alexander Sachs, a Wall Street adviser who played various roles within the administration, tried to dissuade the White House from using tactics that were too heavy-handed. He wrote to a presidential aide: “It seems to me that there should be a certain discouragement of the talk of how an adverse decision could be nullified. For obviously it does not improve the atmosphere in which a conscientious quest by members of the Court is proceeding. They are fully aware of the long and checkered fight on the Legal Tender cases, in which the Government was finally upheld, and so they realize that Governments do find ways of getting their position vindicated.”21
If, however, the government were to lose the cases, there would be no room for subtlety, and very little time to act. Roosevelt would have to speak to the public directly and ex
plain why his government was willing to provoke a constitutional crisis by defying the Court. Roosevelt’s draft speech is fascinating in part because it represents a heroic effort to explain complicated, abstract financial ideas to a mass audience. He offered a hypothetical case in which an investor bought a railroad bond for $1,000, and now, because of the Court striking down Congress’s abrogation of gold clauses, would be able to collect $1,690 from the railroad. “Not only is it unconscionable for the individual investor to make an unexpected, unearned profit of that kind, but . . . a letter of the law enforcement of this decision will automatically throw every railroad of the United States into bankruptcy.”22 And not only private companies would be stricken: many towns, counties, and states would also be forced to default.
Still closer to home, Roosevelt noted that most mortgages contained a gold clause. If that clause could now be enforced, then most homeowners would now have an immediate 69 percent hike in their monthly mortgage payments, and would owe 69 percent above the monthly price in back payments for nearly two years. Finally, Roosevelt pointed out the ultimate absurdity: there was simply no way that $169 billion in contracts could all be paid off in gold—the Earth did not possess anywhere near enough of the stuff. “There exists in the United States a total of about eight and one half billion dollars of gold and in all the rest of the world—Europe, Asia, Africa, Australasia and the Americas—there is not more than twelve billions of dollars of gold.” Roosevelt appealed to authorities presumably greater than the Supreme Court: “I want every individual or corporation, public or private, to pay back substantially what they borrowed. That would seem to be a decision more in accordance with the Golden Rule, with the precepts of the Scriptures and the dictates of common sense.”
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