Economics and The Public Welfare

Chapter 56

Supreme Court Decision on Gold Clauses, February, 1935

To the end of 1934 there had been no resistance of an effective kind to the President’s policies. His domination over the Congress seemed complete. The Supreme Court had no important cases before it which would test his powers. In early 1935 there came a test. Four cases came before the Supreme Court involving the constitutionality of the legislation of June 5, 1933, which abrogated the gold clauses in public and private contracts. It became evident that the Government in defending this abrogation of the gold clauses was to have hard sledding. The Supreme Court began its hearings on January 8, 1935. Some of the Justices manifested a very critical attitude toward the presentation of the Government’s case by the Government’s counsel. The decision was delayed and was finally rendered on February 18. There was a good deal of disquiet in the financial community pending the settlement of this case. Financial markets and the foreign exchange markets were disturbed. There was a great deal of disquiet, too, in Administration circles.

Uphold Abrogation in Private Contracts, Five to Four. The decision was finally made by a 5-to-4 vote upholding the abrogation of the gold clauses in private contracts, on the ground that to uphold the gold clauses would allow private contracts to interfere with the Government’s constitutional power to regulate the value of money.

But Not in Government Obligations—Unanimously. With respect to the Government’s own obligation under the gold clauses, all nine of the Justices concurred in holding that the legislation of June 5, 1933 was unconstitutional. The gold clauses in the Government’s own contracts were still binding on the conscience of the Government.

Where Loss Could Be Shown. The Court, however, refused to allow damages on the ground that “the plaintiff has not shown or attempted to show that in relation to buying power, he has sustained any loss whatsoever.” This reference to “buying power” was a departure from all precedent, but it left open to future litigants the possibility of collecting from the Government where they could show loss. In particular it left to foreign holders of United States Government bonds with gold clauses, who lived in gold standard countries, a very clear case. They could certainly demonstrate a loss. The President called upon the Congress to forestall this by closing the Court of Claims to suits of this sort, but the Congress, shamed and shocked by the rebuke of the Court, declined to do this immediately, and instead accepted an amendment offered by Senator McAdoo which left such litigants the right for a period of six months to bring suit in the Court of Claims. This legislation was approved on August 27, 1935. No successful suits were brought during this interval.1

Evaluation of Chief Justice Hughes’s Attitude. The decision of the Supreme Court in the gold cases represented a statesmanlike attitude on the part of the Court, concerned more with the preservation of constitutional government than with the rights of a particular litigant. On precedents the Court should have upheld the gold clauses, but there was, after all, the provision of the Constitution giving the Congress the right to coin money and to regulate the value thereof, and of foreign coins. The Court had yet to consider a great deal of legislation where the Congress had acted without any explicit constitutional sanction at all, and where the Congress had clearly acted in violation of the Constitution. It had to deal with a President impatient of constitutional restraints, who might well undertake to override the courts, and who in fact did in 1937 attempt precisely that thing. Chief Justice Hughes was taking a long view when he cast the deciding vote in favor of abrogating the gold clauses in early 1935. The Court must fight, the Court must defend the Constitution as far as it could, but the Court must also consider Congressional opinion and public opinion. In bowing before the storm at one point, it strengthened its case for a fight at other points.

Before considering the action of the Supreme Court, however, with respect to NRA and with respect to the processing taxes under the AAA, it is best first to discuss the first successful Congressional opposition to the New Deal financial programme. This came in the Banking Act of 1935.

• 1This point will be discussed at length in Chap. 34.