Landmark Supreme Court Case: Gold Clause Cases (1935)
Gold Clause Cases (1935) is the 62nd landmark Supreme Court case, the 26th in the Economics module, featured in the KTB Prep American Government and Civics series designed to acquaint users with the origins, concepts, organizations, and policies of the United States government and political system. The goal is greater familiarization with the rights and obligations of citizenship at the local, state, national, and global levels and the history of our nation as a democracy. While there is overlap, these landmark cases are separated into cases addressing:
- Foreign Policy
- Science & Technology
- Public Safety
- Death Penalty
- Speech, Press, and Protest
- Criminal Justice
- Politics, Society, Freedom, and Equality
The Supreme Court
The Supreme Court is the highest court in the United States. Article III of the U.S. Constitution created the Supreme Court and authorized Congress to pass laws establishing a system of lower courts. The Constitution elaborated neither the exact powers and prerogatives of the Supreme Court nor the organization of the Judicial Branch as a whole. Thus, it has been left to Congress and to the Justices of the Court through their decisions to develop the Federal Judiciary and a body of Federal law.
The number of Justices on the Supreme Court changed six times before settling at the present total of nine in 1869. Since the formation of the Court in 1790, there have been only 17 Chief Justices* and 102 Associate Justices, with Justices serving for an average of 16 years. On average a new Justice joins the Court almost every two years.
The Supreme Court of the United States hears about 100 to 150 appeals of the more than 7,000 cases it is asked to review every year. That means the decisions made by the 12 Circuit Courts of Appeals across the country and the Federal Circuit Court are the last word in thousands of cases.
Court of Appeals
In the federal court system’s present form, 94 district level trial courts and 13 courts of appeals sit below the Supreme Court. The 94 federal judicial districts are organized into 12 regional circuits, each of which has a court of appeals. The appellate court’s task is to determine whether or not the law was applied correctly in the trial court. Appeals courts consist of three judges and do not use a jury.
The appellate courts do not retry cases or hear new evidence. They do not hear witnesses testify. There is no jury. Appellate courts review the procedures and the decisions in the trial court to make sure that the proceedings were fair and that the proper law was applied correctly.
A court of appeals hears challenges to district court decisions from courts located within its circuit, as well as appeals from decisions of federal administrative agencies. In addition, the Court of Appeals for the Federal Circuit has nationwide jurisdiction to hear appeals in specialized cases, such as those involving patent laws, and cases decided by the U.S. Court of International Trade and the U.S. Court of Federal Claims.
The nation’s 94 trial courts are called U.S. District Courts. At a trial in a U.S. District Court, witnesses give testimony and a judge or jury decides who is guilty or not guilty — or who is liable or not liable. District courts resolve disputes by determining the facts and applying legal principles to decide who is right.
Trial courts include the district judge who tries the case and a jury that decides the case. Magistrate judges assist district judges in preparing cases for trial. They may also conduct trials in misdemeanor cases.
There is at least one district court in each state, and the District of Columbia. Each district includes a U.S. bankruptcy court as a unit of the district court.
Federal courts have exclusive jurisdiction over bankruptcy cases involving personal, business, or farm bankruptcy. This means a bankruptcy case cannot be filed in state court. Bankruptcy Appellate Panels (BAPs) are 3-judge panels authorized to hear appeals of bankruptcy court decisions. These panels are a unit of the federal courts of appeals, and must be established by that circuit. Five circuits have established panels: First Circuit, Sixth Circuit, Eighth Circuit, Ninth Circuit, and Tenth Circuit.
Gold Clause Cases (1935)
Gold Clause Cases Facts:
Until the 1930s, business contracts in the United States regularly included gold clauses that allowed creditors to demand payment in gold or gold equivalents. The tightening of Federal Reserve policy in 1928 and the cessation of German World War I reparations in 1930 prompted a global unwinding of credit as governments, businesses and individuals began to hoard money in the form of gold or currency. A wave of bank failures in the United States ensued, and the governments of France and the Netherlands moved urgently to increase their domestic gold reserves.
Franklin Delano Roosevelt started his presidency with banking suspended in most states and domestic gold reserves seriously depleted. With support from Congress, he enacted a series of banking and currency reforms that effectively nationalized monetary gold. These included the Emergency Banking Act which empowered the President to prohibit international gold payments, Executive Order 6102 which required the surrender of all privately held monetary gold in exchange for currency, and the Gold Clause Resolution (Pub. Res. 73–10) which voided all gold clauses within the United States.
Multiple lawsuits were filed in response and made their way to the Supreme Court.
Q: Are bondholders entitled to receive an amount in legal tender currency in excess of the face amount of the bond?
A: No. Bondholders were only entitled to the dollar amount of the bond, not the weight of the gold.
Gold Clause Cases Conclusion
5-4 decision ruling Congress has power expressly to prohibit and invalidate contracts, although previously made and valid when made, when they interfere with carrying out any monetary policy Congress is free to adopt. The government”s power to regulate money is plenary.
While the Roosevelt administration waited for the Court to return its judgment, contingency plans were made for an unfavorable ruling. Ideas floated about the White House to withdraw the right to sue the government to enforce gold clauses. Attorney General Homer Cummings opined the court should be immediately packed to ensure a favorable ruling.
Roosevelt directed Treasury Secretary Henry Morgenthau to step back from regulating exchange and interest rates to provoke a public outcry for federal action, but Morgenthau refused. Roosevelt also drew up executive orders to close all stock exchanges and prepared a radio address to the public.
Congress responded to the ruling with an additional resolution (Pub. Res. 74–63) that provided sovereign immunity of the federal government against claims for damage resulting from the devaluation of currency or other federal obligations. The future of gold as a basis for money remained unsettled for nearly the entire Roosevelt presidency.
In 1944 the Allies of World War II developed the Bretton Woods system under which each participating nation would maintain a stable international gold price. This system continued until 1971 when President Richard Nixon, in what came to be known as the “Nixon Shock,” announced that the United States would no longer convert dollars to gold at a fixed value even for foreign exchange purposes, thus abandoning the gold standard. As part of the subsequent reforms to Bretton Woods institutions, President Gerald Ford signed an act that terminated legal prohibitions on private gold transactions as of December 31, 1974.
The Gold Clause Resolution was amended in 1977 to again permit enforcement of gold clauses in private obligations issued after the date of the amendment. This amendment has been held to apply even to lease contracts that originated earlier and were transferred. However, in cases involving railroad bonds that spanned the entire gold ownership ban, courts have rejected the argument that the amendment reactivated the obligation to pay in gold, on the grounds that bonds are “issued” only to their original holders.
In 1986 the federal government introduced the American Gold Eagle coin series, the first gold money produced by the United States since the Great Depression. These coins are legal tender at their face value, but the Mint offers them only as collectibles at their much higher bullion value, not as a form of payment by the government.
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