178. The Gold Clause Cases
The Court's 1935 rulings effectively allowing the federal government to override the contractual consequences of devaluing U.S. currency were viewed in apocalyptic terms at the time, but aren't today.
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Every Monday morning, I’ll be offering an update on goings-on at the Court (“On the Docket”); a longer introduction to some feature of the Court’s history, current issues, or key players (“The One First ‘Long Read’”); and some Court-related trivia. If you’re not already a subscriber, I hope you’ll consider becoming one—and upgrading to a paid subscription if your circumstances permit:
Given that it’s the middle of September, the Court had a remarkably busy (public-facing) week last week, at least some of which I already covered in last Thursday’s bonus issue. But this newsletter is—and has always been intended to be—not just about current events, but also about broader lessons from the Supreme Court’s history. To that end, I thought I’d use this week’s “Long Read” to briefly tell the story of the Gold Clause Cases—which have to be a strong contender for the most important Supreme Court ruling(s) when they were decided that most folks don’t know about today.
In those three rulings, handed down on Monday, February 18, 1935, the same 5-4 majority effectively (but, in the most important case, not formally) cleared the way for Congress to abrogate “gold clauses” in both private and government contracts—provisions that would’ve required the buyer to make payment in gold or its “equivalent.” The rulings were immensely significant (and controversial) at the time; Justice James McReynolds closed his heated dissent from the bench by asserting that “The Constitution as many of us understood it, the instrument that has meant so much to us, is gone.” Instead, he concluded, “[s]hame and humiliation are upon us now. Moral and financial chaos may be confidently expected.”
That chaos never materialized—and the Gold Clause Cases faded (with shocking speed) into the pages of history. But they remain an interesting lesson today—not just of how the Court of days past navigated stormy political waters or of how close we came to the specter of presidential defiance of an adverse Supreme Court decision, but of the extent to which predictions that a particular ruling will lead to “financial chaos,” like the claim currently being advanced by the Trump administration in the tariffs cases, don’t always pan out.
More on all of that below. But first, the news.
On the Docket
The biggest news of the week was, without doubt, Monday’s grant of the Trump administration’s emergency application in Noem v. Vasquez Perdomo—the Southern California ICE “roving patrols” case. Although the order itself was wholly unexplained, I wrote about (and was fairly critical of) Justice Kavanaugh’s concurring opinion for Thursday’s bonus issue.
Monday also brought with it the first of three “administrative” stays to come down last week from circuit justices—this one from Chief Justice Roberts in the Slaughter case (about whether President Trump can fire without cause the last Democratic member of the Federal Trade Commission). Given that the FTC was the specific agency at issue in Humphrey’s Executor, the administrative stay (clearing the way for Slaughter’s removal, which lower courts had blocked) sure seems an ominous portent for the remaining vitality of that unanimous, 90-year-old precedent. Then again, the (lack of) writing has been on the wall.
Chief Justice Roberts issued a second significant administrative stay on Tuesday—pausing the latest ruling from Judge Ali in the ongoing battle over whether federal courts can compel the Trump administration to spend any of the billions of dollars in foreign-aid funding Congress has obligated (and that President Trump is currently attempting to withhold through “pocket rescissions,” which have not previously … been a thing). Unlike in Slaughter, this administrative stay could potentially just be a play for time—to give the full Court more time to figure out what to do next in this case. Or not.
Tuesday also brought with it the Court acquiescing in the joint proposal from the parties in the tariffs case—to grant certiorari on a very expedited basis, have very accelerated briefing, and hold oral argument on the merits the first week of November. A lot of folks online were critical of the Court for moving so quickly here when it hadn’t in, e.g., the presidential immunity case. I’ll just note that, when the Court knows that it’s going to take a case anyway, and the parties are in complete agreement as to the timing, the justices usually just do what the parties ask—without necessarily conveying any deeper message about how they’re likely to rule. That’s not to condone the differential treatment, but at least to describe it.1
On Wednesday (because we’re at the point where the Court is making news almost every day), the justices turned down an emergency application from South Carolina—which had sought to stay a Fourth Circuit injunction that will require a South Carolina high school to allow a single transgender student to use a bathroom that corresponds with their gender identity. The otherwise unexplained order came over the public dissents of Justices Thomas, Alito, and Gorsuch, and still went out of its way to stress that “The denial of the application is not a ruling on the merits of the legal issues presented in the litigation. Rather, it is based on the standards applicable for obtaining emergency relief from this Court.” Once again, the equities do matter—at least when the Trump administration isn’t a party.
Somehow, Thursday came and went without any public action from the Court. But Friday saw Justice Sotomayor grant an administrative stay in the New Jersey Transit case—a dispute over whether the transit agency is entitled to sovereign immunity, which the Court has already agreed to hear on the merits later this term. The petitioners were seeking to prevent the trial in that case from proceeding, although the respondents have what certainly seem to be decent arguments for why the full Court should not intervene. One way or the other, I suspect we’ll hear more about this dispute later this week.
In addition to some kind of full Court action in New Jersey Transit, we may also hear from the full Court this week on the other two cases with pending administrative stays—Slaughter and the foreign-aid funding dispute (which is back to its original caption, Department of State v. AIDS Vaccine Advisory Coalition). It’ll also be interesting to see if the Trump administration tries to get the justices to weigh in on President Trump’s attempt to remove Lisa Cook from the Federal Reserve Board of Governors, which a district court blocked and which the D.C. Circuit is hustling to hear on appeal—especially now that a Reuters report has poured rather cold water on the ground on which she was purportedly fired “for cause.”
Finally, Florida death-row inmate David Pittman has filed an emergency application seeking to block his execution, which is currently set for Wednesday at 6 p.m. (ET). It stands to reason the Court will act this week on that case, as well. And all of this is coming while the Court is, or at least ought to be, gearing up for the Long Conference on September 29. It’ll be yet another week that drives home just how much the Court’s work has been completely transformed by emergency applications in general, and by the Trump administration, in particular.
The One First “Long Read”: Courting Gold
Attempting to tell the full story of the economic crises arising out of the Great Depression, or the Roosevelt administration’s efforts to address them upon entering office in March 1933, would take a series of newsletter posts unto themselves. To make a very long story shorter (for an accessible and somewhat succinct explainer, see this history from the Federal Reserve), the Gold Clause Cases arose from one particular feature of the government’s effort to curb the severe deflation (and associated banking crisis) of 1933—by effectively eliminating gold as a medium of exchange, so everyone would be forced to rely upon paper currency.
This program included taking steps to remove gold from circulation; to prohibit exports of gold; to bar both the government and private banks from converting currency and deposits into gold coins and ingots; and to abolish “gold clauses” in both private and government contracts, including bonds—so that, whatever the value of U.S. (paper) currency, that would be the relevant means of payment. (The whole point of gold clauses was, of course, to insure against such potentially inflationary effects.) The coup de grace came in 1934, when President Roosevelt changed the official price of gold from $20.67 per ounce to $35. Together, these moves dramatically reduced the economic values of any contracts with gold clauses—provoking a series of lawsuits challenging the measures.2
Professor David Glick summarized why gold clauses were such a big problem for the Roosevelt administration—and a critical target for the government’s reforms—in a 2009 essay in the Journal of Politics:
In essence, the creditor was owed the quantity of gold that corresponded to the dollar value of the loan when the bond was purchased. There was approximately $168 billion of debt outstanding at the time, and more than an estimated $100 billion of it contained gold clauses. Since the paper equivalent of the gold value implicit in the initial contract (e.g., 50 ounces) grew as currency devalued, debtors, including major corporations and the U.S. Government, were now obligated to pay creditors more nominal dollars. This eventuality threatened to increase the debt burden, catalyze bankruptcies, and endanger the Government’s entire monetary recovery program because debtors were conducting business in the inflated currency but obligated to pay preinflation value.
Ultimately, the Court agreed to take up five of the cases challenging the abrogation of gold clauses (three of which were consolidated)—and heard oral argument across four days in January 1935.3 On February 18, 1935, it handed down three decisions:
In Norman v. Baltimore & Ohio Railroad (which was consolidated with two other disputes), a 5-4 majority upheld Congress’s abrogation of “gold clauses” in private contracts—holding that Congress’s economic powers, including the power to abandon gold as a de facto currency, necessarily overrode whatever contractual obligations state laws could create. In Nortz v. United States, the same 5-4 majority rejected the claim that an individual who traded in gold certificates at the government’s demand was entitled to compensation based upon the market price of gold abroad, rather than the lower price set by the Treasury—because the value of gold abroad was irrelevant given that the government had (lawfully) shut down imports and exports.
And in the biggest of the three cases, Perry v. United States, the Court held, 8-1(ish),4 that the nullification of gold clauses in government contracts (including government bonds) was unconstitutional—for the not-especially-controversial reason that the federal government had to honor its contracts (and couldn’t repudiate its own debts). But the 5-4 majority from the first two rulings also concluded that, the unconstitutionality of the nullification aside, the challengers were not entitled to any remedy—based on the fiction that, because gold was no longer a viable medium of exchange, there was no way to actually make the challengers whole. (Of course, this reasoning rather shirked the obvious point that the challengers could seek to be paid in the currency equivalent of the originally promised value of gold.) As Professor Gerard Magliocca wrote in 2012, “Hughes was using the actual damages suffered (zero) as the relevant sum rather than the difference between what was promised and what was received, which was most definitely not zero.” To quote Professor Henry Hart, writing months after the ruling in the Harvard Law Review, “Few more baffling pronouncements, it is fair to say, have ever issued from the United States Supreme Court.”
Given the widely accepted un-persuasiveness of the Perry majority’s reasoning as to the lack of a remedy, there is a rich debate not as to whether the Court blinked, but why. As Professor Magliocca has suggested, the Roosevelt administration had seriously considered defying a ruling that would have required the federal government to honor gold clauses in government contracts—to the point that President Roosevelt had even drafted a “Fireside Chat” explaining his reasons for not abiding by such a mandate. Perhaps the justices caught wind of the administration’s planning. It’s also possible that the justices in the majority themselves implicitly agreed with the administration as to the potentially ruinous economic consequences of forcing such payments—and otherwise interfering with the federal government’s efforts to combat Depression-era deflation. This was, after all, the same 5-4 majority that had (somewhat surprisingly) upheld Minnesota’s mortgage moratorium against a Contracts Clause objection one year earlier—based largely on its perceived economic necessity.
Indeed, debate continues today over the efficacy of the Roosevelt administration’s monetary policies—and, with it, over what broader effects, if any, the Perry ruling had. In the short term, Congress moved quickly to cement the federal government’s sovereign immunity in any suit seeking damages based upon the merits analysis in Perry—which effectively converted Hughes’s analytically fragile remedial holding into a categorical statutory bar. And the “chaos” that McReynolds had predicted never fully materialized; although plenty of holders of government debts and other contracts were forced to take something of a bath as a result of the ruling, the economy slowly (but surely) edged away from the seeming abyss that had led to the March 1933 bank “holidays.” Perhaps part of why Perry (and the Gold Clause Cases, more generally) aren’t a larger part of our understanding today is because it/they didn’t lead to the cataclysm that some (on both sides) had predicted.
As for a confrontation between FDR and the Court, the Gold Clause Cases managed only to kick the can down the road. Just over three months after the three decisions, on May 27, in what is often described as “Black Monday,” the Court handed down a trio of major rulings against the administration (including, ironically, Humphrey’s Executor). Those rulings, in turn, helped to push FDR to run against the Court in the Election of 1936—and to propose the Court’s expansion on the far side of his landslide victory. In that respect, the Gold Clause Cases may simply have been a false start to the interbranch confrontation that was, by that point, necessarily coming.
But perhaps the most significant point about the Gold Clause Cases, with 90 years of hindsight, is the very different type of interbranch confrontation they reflected: There, it wasn’t the President going it alone (despite Justice McReynolds in his oral dissent comparing FDR to Nero); it was the political branches acting in concert. Just about every significant feature of the monetary policies at issue in the cases came from statutes Congress had enacted for the specific purpose of giving the administration the power it was exercising. The stakes may therefore have looked different to the justices than if, for example, they were facing a President seeking to defend an unprecedented extension of a much older statute—the situation the justices will shortly confront in the tariffs cases.
If nothing else, it seems to me that the Gold Clause Cases are an object lesson in the Supreme Court being part of, and not aloof from, interbranch constitutional politics at the highest level. We’ll debate until the end of time whether the Court got the politics “right.” But no one can plausibly look back at what the Court did in February 1935, especially in Perry, and seriously argue that the justices were just calling balls and strikes.
SCOTUS Trivia: The Court Tips off the Press
As noted above, there was sustained public interest in when the justices would hand down their ruling in the Gold Clause Cases. At that time in the Court’s history, when the Court was in session, the justices typically met for their weekly conference on Saturdays—and would then hand down whatever decisions were ready the following Monday.
On Saturday, February 2, 1935, the Clerk of the Supreme Court, Charles Elmore Copley, made an unprecedented announcement to the press: “The Chief Justice, in order to avoid an unnecessary crowding of the court room on Monday, directs the clerk to announce that the court is not ready as yet to announce a decision in the gold clause cases and hence there will be no announcement on that day.” (A similar announcement would be made on Saturday, February 9.)
As the New York Times reported in its (page 1, above-the-fold) stories on the two announcements, the statements were entirely unprecedented; the Court had never before (and, to my knowledge, would never again) make advance public statements about the timing of any specific decisions. As they were understood at the time, the statements were a relatively transparent attempt by Chief Justice Hughes to avoid spooking the markets.
When no similar announcement was made after the justices’ private conference on Saturday, February 16, everyone assumed that the decisions in the Gold Clause Cases were nigh. Sure enough.
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Interestingly, the Court also granted certiorari “before judgment” (i.e., leapfrogging the D.C. Circuit) in the challenge to the tariffs that was filed in the D.C. district court (as opposed to the Court of International Trade), and consolidated that case with the Federal Circuit case that has received more of the headlines. I don’t read too much into the move—other than that the Court is covering its bases, just in case there’s some question as to which lower court these cases should have come from.
For those preferring a longer treatment of the background, you might enjoy UCLA Professor Sebastián Edwards’ 2018 book, American Default. Edwards is an economist, not a law professor—but that may be a feature, rather than a bug.
Two of the cases reached the Court via writs of certiorari; two came on “certificates” from the Court of Claims—a mechanism for exercising appellate review that the Court used to use more often, but hasn’t since 1981.
Justice Stone wrote a short concurring opinion to express his agreement with the other four justices in the majority as to the remedy, while taking at most an equivocal position on the merits (which, he suggested, did not need to be reached).
Very well done. Steve! Thanks.
I was wondering if we could start a “Show Your Work” campaign to encourage the Supreme Court to do the minimum we expect of elementary schoolers learning problem solving? Thoughts?
Also, wondering what happened to simplicity in the Trump emergency order matters. It seems to me that the equities should rarely fall in favor of the government where fundamental rights are at stake. After all, simply stated, the Constitution was written not only to organize government but more importantly to protect We the People from government overreach and abuse. The assessment of the equities in these unexplained orders is just wrong on its face. To keep the analysis in the dark is to confirm the Court’s siding and abetting the overreach and abuse. Again, they Must Show Their Work! Else, they are mere instruments of the King’s dictates. That’s not the job!
Back when my wife was in law school, we went to a... coffee?... where Paul Freund, then 76, talked about his time as a 27-year-old working for the RFC and co-writing the government's briefs for Norman and Perry, and more generally about the Roosevelt administration's desperate strategy to try to figure out how to peel Hughes and Roberts off from Sutherland, Butler, McReynolds, and Van Deventer.
I (dimly: I did not pay as much attention as I should have) think I remember some things in particular:
- The decision not to seriously try to win Perry, but rather to "shadow docket" it—to focus on how the important thing was to delay serious consideration of damages until the Depression had ended, precisely because of fears of immediate financial crisis, and so to try to push Hughes and Roberts only to the point of not making their judgment self-executing. (After all, a remedy could be found later—and, if the Republicans won the 1936 election, the political branches would legislate a remedy into being.)
- The fact that the United States was sufficiently divided that the "clean" way of implementing what Roosevelt and the Congress had decided to do with the First New Deal—Constitutional amendments—was not possible in the time needed.
- The Establishment's strong desire not to confront the 70-person Democratic Senate and the 320-person Democratic House caucuses, but rather to hope what they saw as the anti-constitutional political fever to break in the 1936 election, or at least to hope that by 1937 enough Southern Democrats would recall that they were Bourbon Conservatives first and Populist-Progressives second.
- A definite feeling inside the New Deal that Roosevelt's court-packing campaign was a great success—that with the Switch in Time That Saved Nine, they had gotten everything they really wanted and more, and that pretending it was a big defeat for the administration was seen within the administration as a face-saving gift to Hughes.
- The resources that Cravath and company were pouring into their anti-New Deal litigation strategy, and how Freund had never figured out whether they were genuine pro bono on Cravath's part (how does a Brooklyn kosher butcher acquire Cravath as their counsel, anyway?), or whether there was shadow funding on a large scale.
- Admiration for Cravath for its success in turning Schechter not into an economic-regulation but an exercise-of-religion case.
> **Steve Vladeck**: 178. The Gold Clause Cases: 'The Gold Clause Cases faded (with shocking speed) into the pages of history. But they remain an interesting lesson today—not just of how the Court of days past navigated stormy political waters or of how close we came to the specter of presidential defiance of an adverse Supreme Court decision, but of the extent to which predictions that a particular ruling will lead to “financial chaos,” like the claim currently being advanced by the Trump administration in the tariffs cases, don’t always pan out.... The Gold Clause Cases are an object lesson in the Supreme Court being part of, and not aloof from, interbranch constitutional politics at the highest level. We’ll debate until the end of time whether the Court got the politics “right.” But no one can plausibly look back at what the Court did in February 1935, especially in Perry, and seriously argue that the justices were just calling balls and strikes...