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Gold and Our Honor

ISSUE:  Autumn 1933

We Americans are prone to distrust ourselves. Despite our assurance in the realm of numbers, we still give a nervous ear to criticism from abroad in matters involving our manners and our morals. The latest accusation, made in Europe and echoed in America, is that when we went off the gold standard the nation lost its honor. In the usual case involving a charge of dishonor, the defense has a hard time, because the very accusation has a paralyzing effect. But in the present instance the defense is fortunate for two reasons. In the first place, the claim deals with realities and not nebulosities of the sort that on previous occasions made us take action for fear of losing our honor. We are not concerned now with the sale of munitions, pacific blockades, or loans to relieve starving nations. The question is simply whether the action we have taken involves defaults on debts. Secondly, we may find absolution in the places where it has comforted so many of us to look for guidance. If we have lost our honor, then our brethren on the other side of the water, French and English, lost theirs quite a while ago. But when we read what they have had to say on the the subject, perhaps we will appreciate that our own impulse was right, and as to this at least, there is an entente that will endure.

First of all, let us see what has happened. When we “went off the gold standard,” there remained but one kind of money with which debts lawfully could be paid, instead of two. Formerly there were gold and “paper money,” that is, notes of our national banks and treasury notes, redeemable, however, in gold. As the result of our recent action, no note is redeemable in gold; nor is it lawful (without a Treasury license) to export gold coin or conduct business transactions that involve the transmission of it, or even to possess it. But there are outstanding many obligations, public and private, in which the debtor agrees to pay a sum expressed in United States dollars, but with this proviso, that payment shall be made “in gold coin of the United States of the present standard of weight and fineness.” Because of this, our professional reviews already bristle with discussion of constitutional theory. Excellent articles have appeared in the Columbia, Yale, and Harvard Law Reviews, and there are others, doubtless, which have not yet come to my attention. Then, of course, this action of our government has provoked essays in economics. Generally speaking, excursions into the technical phases of either of these sciences, at least one of which has been described as dismal, are not of interest to the layman. But when it is claimed that the inability of a creditor to enforce in our courts the “gold clause” of any obligation he may hold, whether it be the obligation of an American citizen of one of our States or of the nation, is something of which we should be ashamed, this calls for a discussion of quite another sort. If we have covered ourselves with dishonor, we had better know it; if such is not the case, then there is equal reason why we should be advised. And when it comes to the simple matter of a man or a nation meeting a debt when due, surely there should be some method of approach that is understandable by all. Perhaps it may be found in legal history.


On this point of honor, as on most others, there are two methods of approach; one savoring of the ideological (one might almost say sentimental), the other practical. The ideological technique is French; the English have found the practical satisfying enough. In logical order, the French method should be presented first. But it may not hurt us to reverse an order of trial to which both lawyers and laymen are accustomed. To adopt the words so happily used by Lord Coleridge in a celebrated case, it is not only necessary but restful for a jury to turn from the oratory of advocates to “the humble jog trot” of a judicial summing up. So it may help us, as men in the box, first of all to examine the pattern with which our English brethren have furnished us in the course of a history that is longer than ours, and also more colorful. The newspapers have informed our public of the decision made last winter in London, first by a judge sitting in the Chancery Division and then by the Court of Appeal, wherein the gold clause received its “nihil.” But it may help us to assay the values that lie in the proposition if we recall a few simple ideas with which English judges made our forefathers familiar long ago. Let us then, with that humble jog trot to which Lord Coleridge referred, start our journey.

The first thing to do is to clear up the distinction between public and private debt. The former, it is often said, is an engagement of honor. If, then, a State agrees to pay in gold and then offers paper, has it not done a shameful thing? But just what is meant by saying that public debt is an affair of honor? The answer is afforded by a memorial presented to the King of Prussia in 1752 by a commission which included the most eminent legal authorities of England, Lord Mansfield himself being among them. There it was said that “a private man lends money to a Prince upon the faith of the engagement of honor, because a Prince cannot be compelled like other men by a court of justice.” This memorial, which has passed into the list of basic writings on international law, shows the point, not only to a lawyer, whether he be English speaking or Continental, but also to the ordinary citizen. Government’s debt is one of honor, simply because Government cannot be sued. Hence the engagement of honor on Government’s part is to act as though it could be sued. But when a State gives permission to be sued (secured in England by means of a petition of right with the ancient form of royal endorsement, soit fait droit al partie, and with us, in certain cases, by means of a Court of Claims), it does not follow that the State is deprived of any defense it may have. Hence our common law mode of thinking, as expressed by English speaking courts in suits between private persons where the gold clause is concerned, is of as much value on this “point of honor” as if the defendant had been a Sovereign.

From this English speaking, or common law, point of view, money is only what the State says is money, namely, what shall be lawful as payment when offered by a debtor in satisfaction of his obligation. It follows that even negotiable paper, bills of exchange, notes, if made payable in foreign money, must be translated, according to the prevailing rate of exchange, into domestic currency, before judgment can be entered on the obligation in our courts. What an English judge said, in the pleasant “law French” of the Middle Ages, nous ne somus apprise de 6 I. Flemish come somus de cent nobles (we can’t recognize six pounds Flemish as we can one hundred nobles English) remains true to this day.

Because of this fact, that money is only what the State says is money, the State may enlarge or restrict its definition as needs dictate. In the days when people thought only of coin as money, governments often debased the coinage by clipping wedges out of the pieces, or by remelting and adding an alloy,—”pollarding” or “mixing,” as our ancestors called it. Incidentally, we must not forget that although in 1792 Congress fixed the content of the coin dollar, that content was distinctly lowered in 1834. In more civilized times, a nation is apt to add to its currency a new token, “paper money,” either of its own issue or by utilizing the paper of a national bank. Not only is this established law with us through decisions dating back to the “legal tender” that was authorized during the Civil War, but it was also recognized in England at an even earlier date, and in a rather picturesque situation. Louis Kossuth, one of those revolutionary wanderers of 1848 who found London quite comfortable, conceived of a plan to harass the Austro-Hungarian government by preparing notes in the name of his revolutionary government. Of course Kossuth did not intend to stop there. These notes were to be sent into the Empire; and, there circulating, they would injure the currency of the Empire itself, also of a paper nature. So the Emperor of Austria (also King of Hungary) asked the English Chancery for an injunction restraining the consummation of this scheme by requiring Kossuth’s engravers, Messrs. Day & Son, “the well known lithographers,” of London, to deliver up their plates for destruction. The court held that the right of coining money, which belongs to every State, embraces also the issue of paper money. This decision came some thirty years after Bank of England notes had been made legal tender by Act of Parliament. Some years later the Supreme Court of the United States reached the same result, holding that the right of coining money, conferred by the Constitution upon Congress, included the issue of paper money, although a clause expressly granting Congress that power had been stricken from the original draft of the Constitution.

But the case of Kossuth also illustrates another proposition. Kossuth’s paper had nothing back of it but the hope of a revolution being successful, in which respect it differed from the Imperial currency. Paper money of a civilized nation is backed by a gold accumulation, and behind that lie national powers of action, of recuperation. And, that being so, it is a fair conclusion that, since two kinds of currency may circulate at the same time by command of the State, the latter at all times has the power to retire one and leave the other. At least, paper and coin both being in circulation, all the State has to do to “go off the gold standard,” is to say that the bank or treasury shall never be called upon to exchange its notes for the coin they are stated to represent. As the Sovereign has this power to say what is money, it has the right also to change the definition, as to coin or paper indifferently.

Such being the power of a nation as to money, it follows that whoever takes an obligation payable in the money of a particular State, necessarily has that power in view and also the possibility of its being exercised. As for the foreign holder of an American bond, be its nature public or private indifferently, this person knows that to get his money he must, in ultimate recourse, resort to our courts. But as courts administer the laws of their own country, the holder of the obligation must take those laws as they are. We are no strangers to this proposition. The very idea of inheritance taxes rests upon it. The heir takes because the law of the State allows him to take and protects him in the taking; and it may, therefore, exact a price in the shape of an inheritance tax. Whoever takes an obligation, payable in the money of a particular State, has no more right to talk of dishonor, when that State retires gold, than a foreign-born heir might have in case our death duties should be raised.


With this in mind, I think we can understand the common sense approach which the English courts made last winter to a suit brought by a Belgian upon a bond, payable in London, but with the gold clause attached. When these people, said the court in effect, declared their obligation to be payable in London in money, that meant money which should be money by English law. At the time the agreement was made, England, like ourselves, had two kinds of money; she had coin and she also had Bank of England notes redeemable in coin. But when the bond became due, England no longer had two kinds of money, but only one. So when the foreigner sought an English judgment for English money, he had to take the kind of money that the law of England provided at that time. In so saying, the court was merely emphasizing a theory expounded as far back as the era of Elizabeth. In those spacious times an Irish merchant agreed to pay an English creditor one hundred pounds, not in London, but at the tomb of Earl Strongbow in Christ Church, Dublin. It was held that the debtor could pay in the “mixt moneys” with which meanwhile the thrifty Elizabeth had flooded Ireland in paying off her armies, because the virgin’s proclamation had required that this debased coin should be taken in Ireland as legal tender. And to the same effect is legal thought in France, if we may depend upon a learned jurist of that country who will be quoted again later. Referring to similar legislation in France, of both 1870 and 1914, this writer says:

The principle of the non-retroactivity of laws cannot be raised as an objection. The nature of the law as to obligatory currency as a public measure makes it affect all payments, even of prior debts. Otherwise, this measure would not produce its intended results. It was in a case of this kind that the Court of Cassation made a decree on February 11, 1873.

But how does this legalistic approach, it may be asked, help out on the question of honor? Well, in the first place, it shows us that the foreign bondholder is facing a question, not of repudiation, but of mode of payment. The debtor does not say, “I default.” On the contrary, he says, “I will pay with the only medium of payment available to me.” If the creditor asks more, he is really demanding that the debtor hand over, not money but a specific thing, namely gold coins. In passing it might be mentioned, in the case of a private debtor, that this demand, if complied with, would put the debtor in danger of the law. To deliver gold, when the antecedent but necessary possession of it is unlawful, would leave the debtor in the position of one who, under our prohibition laws (soon, it is to be hoped, of unhappy memory) would display his private stock to a revenue officer. But going beyond that, let it be noted that the holder of a bond or note, if he insists upon the gold clause, must face a logic from which his class has shrunk in the cases heretofore adjudged. He has never been willing, nor in his own interest should he be willing, to ignore the difference, known to every merchant and banker, between a commodity contract and negotiable paper.

This difference was not apparent in the days when this country, like others, had two kinds of money, paper and coin. So long as there are two kinds of money in circulation, each authorized as lawful for the payment of debts, it may well happen that if a security requires that payment be made in one kind of money rather than the other, the judgment should tell the sheriff to raise only that money when he seizes and sells the debtor’s assets. So it was held by our Supreme Court in a case antedating its “legal tender decisions.” But if there is only one kind of money available under the law for the payment of debts, a judgment can express itself in that form alone. The only way out would be for the Supreme Court to declare this law unconstitutional; and of course that can happen; but if it does, it will be because of a new approach, not one justified by the court’s previous utterances.

That possibility aside, the creditor’s only recourse is to claim that the gold clause gives him a contract, not for the payment of money at all, but rather for the delivery of a particular commodity,—gold coins, as it happens, but it might just as well be pigs of lead. But that will not help the creditor, for with a commodity contract, a court can do only one of two things, in our English speaking jurisdiction. If it so pleases, the court may compel specific performance of the undertaking. But action of this sort, which obviously lays a personal duty on the defaulter, was inherited by our courts from the equitable jurisdiction of the old English Chancery; and for various reasons, unnecessary here to discuss, this relief will not be given as of course. For example, it will be refused if such a direction would run counter to the policy of the nation as expressed in its legislation. The other remedy is a judgment for damages for the breach, based on the market value of the stipulated article. But when our legislation forbids dealings in gold, it is obvious that no measure of damages based on the market value of that commodity can be used, because the market itself would be as illegal as a bootleggers’ mart under the prohibition laws.

Of course there may be later a legalized open market for gold. But in the case of the gold clause, there is another reason why the holder of a note or bond would not ask for damages or specific performance. He is not apt to overlook the difference between a commodity contract and a negotiable obligation to pay money. For the benefit and protection of their holders, negotiable instruments are freely transferable, and when transferred in due course they are not open to many defenses otherwise available against the original holder. But, to be negotiable, a draft or note must be payable in money only. Such is the familiar rule, now embodied in Negotiable Instruments Acts and the like, but tracing to that irresistible tide described by an English Chancellor in 1473 as “the law of nature in chancery . . . which is called by some the law merchant, which is the law universal of the world.” Such is the rule that governs the merchant of today as it did the Lombards in Plantagenet times. Hence it is not surprising that neither in the recent English decision, nor in the cases decided under our old “legal tender acts,” did the holders of bonds or notes present themselves as having commodity contracts.


So much, then, for the humble approach that is charted by our English-speaking courts. But this discussion should not close without taking into account another method. This country did not “go off gold” just for the sake of doing it. We were confronted with an emergency tracing to events, war and post-war, which had affected the affairs of our citizens, Even from the standpoint of constitutional law, crisis has played its part in justifying action on the part of our government. Many of us can recall the laws, attributed to a “housing shortage” after the late War, which forbade a landlord raising the rent on the expiration of an outstanding lease. But at an earlier day, when we were neither at war nor had lately been at war, an Act of Congress settling a railroad strike by granting the demands of the men, was justified, at least partly, on the “emergency” theory. In March, in June, of this year we certainly were facing a crisis, relating to more than rents or a general tie-up of our carriers. Under such circumstances, have we stained our honor through making the gold clause inoperative?

For this, the reader is referred to an article which appeared, in translation, in the Columbia Law Review during the year 1922. That is eleven years ago; but the relevancy lies in the fact that France then had done what is now denounced as an act of dishonor on our part. In France then, as with us now, there were obligations extant which contained a gold clause. The subject of the article was “Compulsory Circulation of the Bank Note in France”; and the thesis to be defended in morals was French legislation of 1914, to the effect that “since the promise of 1000 francs in gold is transformed into an obligation to pay this sum in notes by the law imposing compulsory circulation, a creditor can only demand 1000 francs in notes.” The respected author was M. Rene de Mogue, who held chairs of law in the Universities of Paris and Lille, and previously had written many books. Speaking for France, as her interests appeared eleven years ago, M. de Mogue said:

The aim of the law is to avert an imminent economic crisis. Therefore it partakes of the character of police laws and laws guaranteeing order. Thus interpreted, it undoubtedly affects the public welfare and consequently its operation may not be encroached upon by private agreements. In fact, we believe that the exemption granted to the bank from refunding its notes is merely a special application of a very


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