NO MORE GOLD CLAUSE: A CONTEMPORARY STUDY

MONETARY OBLIGATIONS UNDER THE CONFLICT OF LAW

PRIVATE INTERNATIONAL LAW

SUBMITTED To:
MS. NANDINI CP
Submitted by:
AKSHAYA
2016009
VIII SEMESTER

DAMODARM SANJIVAYYA NATIONAL LAW UNIVERSITY, VISAKHAPATNAM

1
 Acknowledgment
I have taken efforts in this project. However, it would not have been possible without the kind
support and help of many individuals and organizations. I would like to extend my sincere thanks
to all of them.

I am highly indebted to MS. NANDINI CP for her guidance and constant supervision as well as
for providing necessary information regarding the project & also for their support in completing
the project.

I would like to express my gratitude towards my parents & member of organization for their kind
co-operation and encouragement which help me in completion of this project.

I would like to express my special gratitude and thanks to the Judges, Magistrate, and court room
officer for giving me such attention and time.

My thanks and appreciations also go to my colleague in developing the project and people who
have willingly helped me out with their abilities.

2
Contents
Acknowledgment ............................................................................................................................ 2
INTRODUCTION .......................................................................................................................... 4
ORIGIN OF THE GOLD CLAUSES ............................................................................................. 5
THE GOLD CLAUSE CASES....................................................................................................... 8
CONTEMPORARY IMPLICATIONS ........................................................................................ 11
CONCLUSION ........................................................................................................................... 23

3
 INTRODUCTION
The federal government’s promises to fulfil its financial obligations are central to the way in which
we think about budgeting and fiscal policy, yet there is little consensus about when the government
may repudiate, modify, or otherwise fail to live up to its commitments. Under what circumstances
will government default be excused? Does this depend on the type of obligation at issue, the degree
of delinquency, or other factors?

History provides little guidance in answering these questions. “The legislative and executive
branches have largely avoided clarifying the legal bindingness of the government’s various
financial commitments, whether these concern obligations to repay holders of treasury securities,
duties to fulfil contracts with private parties, or promises to provide retirement, health, and
disability benefits to qualified residents and citizens.”1

“The legal murkiness surrounding government delinquency is partially the result of constraints on
the federal government’s ability to incur unfunded obligations” 2, as well as the fact that
entertaining the possibility of default would raise questions about the nation’s creditworthiness.
Because the federal government has tended to live up to its financial commitments, courts have
also had little occasion to weigh in on the legality of government delinquency.

The Gold Clause Cases are an exception to this trend. As part of its efforts to end the Great
Depression by taking the U.S. off the gold standard, in “1933 Congress passed a Joint Resolution
invalidating contractual provisions requiring reimbursement of obligations in gold or an equivalent
amount of dollars (so-called gold clauses), providing instead that such debts could be discharged
only on payment in dollars.” 3

1
http://isites.harvard.edu/fs/docs/icb.topic1379255.files/GovernmentsShutdowns_10.pdf
2
“make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the
expenditure or obligation [or] involve either government in a contract or obligation for the payment of money before
an appropriation is made unless authorized by law.” 31 U.S.C.A. § 1341 (West)
3
H.R.J. Res. 192, 73d Congress (1933).

4
 ORIGIN OF THE GOLD CLAUSES
WHAT ARE GOLD CLAUSES?

For many years, parties included provisions in contracts that allowed a creditor to obtain payment
in a specific commodity, such as gold, rather than in currency. These provisions were designed to
protect creditors against inflation, which reduces the real value of debt.

Provisions providing that a creditor paid in a commodity like gold whose value is more likely to
remain stable over time ensure that creditors are not punished when inflation reduces the real value
of outstanding obligations. Although gold clauses rarely exist today, modern contracts are
sometimes structured to achieve similar ends. For instance, the U.S. government issues treasury
inflation-protected securities (TIPS) in which loan principal is adjusted upwards with inflation and
downwards with deflation. These securities are protected against inflation because the amount the
creditor is repaid upon maturity is equivalent to the greater of the adjusted or original principal. 4

In the United States, anti-inflationary provisions became widely used in the years after the Civil
War. The introduction of paper currency unbacked by gold (greenbacks) by the Union as part of
its effort to finance the conflict produced significant inflation in the postbellum era. As a result,
most long-term financial contracts of the period included gold clauses.

Prior to 1935, courts upheld the legality of these provisions. The Supreme Court first considered
gold clauses in “Bronson v. Rodes” 5. At issue in the case was whether a bond between private
parties that provided for repayment in gold and silver dollar coins could be discharged through
payment in the equivalent amount of paper currency. The Court held that “the Congressional
recognition of greenbacks as valid legal tender did not abrogate the terms of the contract and, as
such, payment must be rendered in the medium of exchange specified in the contract.”

Three years later, the Court in Trebilcock v. Wilson6 affirmed the validity of gold clauses by
holding that “a promissory note requiring that payment be made “in specie” could not be
discharged through payment in the equivalent amount of paper currency.”

4
https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm.
5
74 U.S. 229 (1868).
6
79 U.S. 687, 695 (1871)

5
THE GREAT DEPRESSION

Questions regarding the legitimacy of gold clauses re-emerged in the 1930s because of the federal
government’s decision to take the U.S. dollar off the gold standard. 7

To reduce inflationary pressures while promoting wider use of paper currency, in “1879 the U.S.
government declared that dollars would be convertible in gold.”8 This decision ensured that
greenbacks were no longer supported simply by belief in government, as they had at the time of
childbirth. Instead, the adoption of a gold standard ensured that provincial government lenders
would repay their debts by paying in a stable exchange.

Debates followed about “whether the government should allow the dollar convertibility of silver
as well as gold or even adopt a paper currency unbacked by either precious metal.” Doing so would
increase inflation and thereby assist borrowers repay their debts.

By the late 19th century, “bimetallism” had become a central part of the agenda of the Populist
movement. After the Populists were defeated at the polls, in 1900 Congress passed the Gold
Standard Act affirming “gold as the only metal capable of convertibility with the dollar”. Although
the adoption of the gold standard provides financial stability, it is limited in the fiscal capacity of
the provincial government. The decline in the level of gold was evident during the banking collapse
of the late 1920s and early 1930s. During this time, the public gold produced the greatest impact
of the economic downturn, aggravating further declines.

Gold-dollar convertibility also meant that the federal government could not easily increase the
money supply to counteract economic contraction. The United States was not alone in being
constrained by these “golden fetters.” Other countries which operated on a gold standard
experienced similar difficulty.

For example, in the early 1930's there was gold piled up in British banks, which depleted state gold
stocks and left the pound open to speculation attacks. As a result, in 1931, the United Kingdom
became the first major industrial power to leave gold. 9

7
https://fas.org/sgp/crs/misc/R41887.pdf
8
https://fas.org/sgp/crs/misc/R41887.pdf
9
https://www.billjaneway.com/the-1931-sterling-crisis.

6
The U.K.’s decision put significant pressure on other countries to follow suit. Unpegging the pound
from gold allowed the U.K. government to engage in expansionary policies that helped soften the
impact of the Depression. At the same time, the devaluation of the pound placed other countries
in an adverse position in terms of the international competitiveness of their export sectors.

Abandoning the gold standard was a key part of President Franklin Roosevelt’s early agenda.
“Upon taking office in March 1933, FDR declared a bank holiday that, among other things,
suspended banks’ ability to pay out gold to their depositors and creditors. The following month,
the President signed Executive Order 6102 criminalizing the possession of gold used for trade or
exchange. Then in June, Congress enacted a Joint Resolution that invalidated as against public
policy gold clauses in public and private contracts. The Joint Resolution was followed in 1934
with passage of the Gold Reserve Act. The Act outlawed most private possession of gold and
required U.S. residents to turn over gold holdings to the Treasury for payment in dollars at a rate
of $35/ounce, which represented a 41% devaluation of the dollar compared to the previous nominal
price of gold of $20.67/ounce.” 10

10
https://www.federalreservehistory.org/essays/bank-holiday-of-1933.

7
 THE GOLD CLAUSE CASES
Norman v. Baltimore & Ohio Railroad Co. with United States v. Bankers' Trust Co. 11

The holder of the $ 22.50 coupon for Baltimore and Ohio Railroad wants to be paid $ 38.10, the
value of a gold coupon bond depending on the official gold price. Separately, the provincial
government and the Reconstruction Finance Corporation, as lenders of the Iron Mountain Railway,
are intervening in a case brought by the Missouri Pacific Railroad to pay extra on Iron Mountain
obligations. In both cases, the district courts and the appellate courts upheld the Gold Clause
Resolution Resolution and rejected the other charges. The cases came before the Supreme Court
which met with a certiorari hearing.

Nortz v. United States12

The owner of $ 106,300 in government gold certificates surrendered them as required by Executive
Order 6102, which only gets their face value in cash. He filed a case in the United States Claims
Court for an additional $ 64,000 representing the loss of the dollar compared to gold. That court
sent affidavits to the Supreme Court, the first of whom asked if the plaintiff could claim the amount
of gold given that he was not entitled to the gold itself.

Perry v. United States13

The owner of the $ 10,000 Liberty Bond filed a lawsuit in the Court of Appeal for an additional $
7,000 in damages. Again, the Court of Appeals sent a question as to whether it could consider the
claim more than the bond value.

While Roosevelt's management was awaiting the Court's reversal, arrangements were being made
to deal with the emergency. Opinions were circulating about the White House withdrawing the
right to sue the government for enforcing gold categories. Attorney General Homer Cummings
suggested that the court should be directed immediately to ensure a good decision. Roosevelt
instructed Finance Secretary Henry Morgenthau to return to regulating interest rates to raise public

11
294 U.S. 240 (1935).
12
294 U.S. 317 (1935)
13
294 U.S. 330 (1935)

8
concerns about the government's action, but Morgenthau refused. Roosevelt also executed high
orders to shut down all stock exchanges and set up a public radio address.

All three cases were announced on February 18, 1935, all in favour of the government by a
majority of 5–4. Chief Justice Charles Evans Hughes wrote a statement on each case, citing the
government's ability to control money. It was only in Perry's case that the Court concluded the
Gold Clause Resolution Constitution. It concluded that Congress acted unconstitutionally by
removing previous government obligations, but not by curbing gold trade. As a result, he held that
the bondholder had no reason to act because he would not show any amount of gold he might have
received, other than a dollar-dollar grant.

Justice McReynolds gave a dissenting judgement in which he stated that the gold standards were
binding on the contracts and that allowing the policies of the management to stand in jeopardy
could permanently undermine the government's confidence in keeping its contracts and those of
private parties. McReynolds dismissed the tender laws, saying in the past the government wanted
to continue working until it could meet its obligations, and Roosevelt's management was trying to
get rid of them.

AFTERMATH

1. Legal consequences

“The primary consequence of the Gold Clause Cases was the invalidation of gold clauses in public
and private contracts. Without expressly affirming the legality of the Joint Resolution, the
decisions rendered such provisions unenforceable. As such, the Cases be marking a turning point
in the Court’s treatment of contractual rights and duties. Whereas the judiciary had long respected
the ability of parties to include gold clauses in contracts, the Court’s recognition of Congress’
ability to invalidate such provisions signalled a recognition that public policy considerations may
sometimes override freedom of contract principles. Thus, the Gold Clause Cases be an indication
of the Court’s rethinking of economic regulation post Lochner.” 14

14
https://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1026&context=flr.

9
2. Economic consequences

The Gold Clause Cases also had significant economic impacts. Economic historians generally
consider the abandonment of the gold standard an important factor in lessening the extent and
duration of the Great Depression, both in the United States and in other countries that did
likewise.15

While these reductions have encouraged competition concerns and thus had some effect,
abandonment of the gold standard is generally considered to reduce debt, increase overall demand,
and thus revitalize economic activity. By refusing to undermine the government's monetary policy
efforts, therefore the Gold Clause Cases can be thanked for contributing to a public process that
reduced some of the effects of Depression.

3. Political consequences

The Gold Clause Cases case also resulted in the political victory of Roosevelt's administration. As
noted above, in the weeks leading up to the announcement of the decisions, there had been a
reasonable apprehension among key officials that the Supreme Court may overturn the Joint
Resolution decision and thus undermine a key part of the administration's recovery process. The
fact that the majority did so on narrow, technical grounds was likely of little import to an
administration focused on substance rather than form.

Moreover, the possibility that the whispering campaign influenced some of the Justices may have
emboldened administration officials, including the President, to use their bully pulpit to influence
the Court over the coming years. The most notorious example of this was the President’s plan,
announced in February 1937, to expand the membership of the Court in the hopes of ensuring a
reliable liberal majority. As such, the Gold Clause Cases not only constitute a rare example of the
Court upholding New Deal legislation before the “switch in time that saved nine” but may also
have encouraged the administration to proceed with its court packing plan two years later. 16

15
http://gattonweb.uky.edu/faculty/hankins/conf2019/GKP_gold.pdf
16
https://digitalcommons.buffalostate.edu/cgi/viewcontent.cgi?article=1049&context=history_theses

10
 CONTEMPORARY IMPLICATIONS
Henry M. Hart, Jr., who later went on to be known as one of the founders of the legal process
theory of jurisprudence, wrote the most extensive analysis of the Gold Clause Cases when he was
a junior faculty member at the Harvard Law School. Writing just three months after the decisions,
Hart noted the novelty of the issues and the existence of significant authority supporting both the
plaintiffs and the defendants. Hart took issue with the Court’s willingness to pass on the
constitutionality of government default. In Hart’s view, the question presented in the Gold Clause
Cases concerned the ability of Congress to regulate the country’s currency, not “whether
obligations of the United States can be repudiated altogether.”

Hart also criticized the majority’s conclusion that the Joint Resolution was unconstitutional as
inconsistent with earlier decisions recognizing the legality of the government’s policy to eliminate
gold as a medium of exchange.17 Hart based his reasoning on the special character of government
obligations. Although he felt it evident that private parties should be held to the terms of their
contracts, Hart argued that a different legal framework prevails in sovereign debt matters. In Hart’s
words, “the fact that sovereigns may be able to shirk duties that would be legally binding on a
private party constituted the very nature of sovereignty.”

Thus, Hart explained that instead of holding the invalidation of gold clauses in public contracts
unconstitutional, the Court could have used the occasion to explain how the government’s financial
obligations differ from private obligations. “The cases involved the freedom of government to
govern,” Hart wrote, and the Court should have taken care to make “candid recognition of the
peculiar character of governmental undertakings and of the inapplicability to such undertakings of
conceptions too easily drawn from the imperfect analogue of undertakings between private
individuals.”

Hart concluded by noting that, while the government has a responsibility to live up to its financial
commitments, the judiciary might not be the best institution to ensure that it does so.

17
https://scholarship.law.unc.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1412
&context=nclr

11
It does not mean that the Government owes no obligation of good faith, it is only to say, as this
decision itself bears witness, that the obligation perforce is different. The obligation needs to be
defined, but the definition loses its usefulness if it overlooks or conceals the differences.
Consideration must be given in this connection not only to the peculiar position of the United
States in making contracts but to the peculiar position of the courts in enforcing them. Subsequent
events confirmed many of Hart’s conclusions.

As detailed below, courts have afforded the federal government significant leeway when the
government fails to live up to its financial commitments. Among of things, the continued salience
of Hart’s analysis exemplifies the ways legal process theory has come to define the scope of
modern adjudication. For instance, Hart’s conclusion regarding the inadequacy of the judiciary as
a check on government default anticipated what he and Albert Sacks would come to term “the
principle of institutional settlement” under which authority to settle legal questions are allocated
to different government institutions depending on their comparative institutional competencies.
When it comes to questions of government delinquency, the general trend has been for the judiciary
to cede authority to the elected branches.

Thus, while the U.S. government’s history of repayment has meant that challenges to debt default
are rare, nonlegal forces constitute the primary reasons why the federal government has fulfilled
its financial obligations. Nevertheless, this has not always been true, and the laws governing the
federal government’s financial obligations have evolved in some important ways since the Gold
Clause Cases were decided.

In part, this is because the size and scope of federal obligations have expanded tremendously over
the past years. Before 1935, the government’s financial obligations were largely limited to various
debt instruments that it sold to private parties, as well as the contracts it entered with private parties.

These include both explicit and implicit government guarantees, as well as statutory commitments
to pay individual citizens certain retirement, disability, and health benefits.

12
DEPT REPUDIATION

Most of the scholarly attention on the Gold Clause Cases has centered over the constitutionality of
federal debt repudiation. As stated in one of the case laws above, the majority in Perry articulated
two bases by which the federal government is constitutionally obligated to fulfill its debt
obligations: The Borrowing Clause of Article I, Section 8, and the Public Debt Clause of Section
4 of the 14th Amendment. Although some scholars have taken the Court’s decision in Perry to
stand for the proposition that government default is inexcusable, the majority’s reasoning and its
subsequent application by courts shows that this is not uniformly true.

1. Borrowing Clause

The Perry Court based its conclusion that Congress could not constitutionally repudiate public
debt on a particular reading of Article I, Section 8, Clause 2 of the Constitution. The Court did not
engage in a textual analysis but rather pointed to what it considered the problematic consequences
of the government’s position. Allowing the federal government to abrogate its debts would render
“the credit of the United States . . . an illusory pledge,” a conclusion the Court considered plainly
at odds with the Constitution.

This argument has a great deal of merit from both a constitutional and policy perspective. To the
extent the federal government is not obligated to repay its debts according to terms specified in the
debt contract, the public credit of the United States is undermined. Moreover, there is little basis
for exempting the government from the duties facing other creditors borrowing on the private
market. As such, the Borrowing Clause can be read as including a requirement that the government
faithfully repay its debts. Indeed, though the Court in Perry did not explicitly state this, Article I,
Section 8, Clause 1 gives Congress the power to “levy and collect taxes, duties, imposts, and
excises” in part as a means “to pay the Debts” of the government.

2. Public Debt Clause

In addition to the Borrowing Clause, the Perry Court based its claim that the Constitution
prohibited Congress from repudiating government debt on the Public Debt Clause of the 14 th
Amendment. This part of the opinion has attracted most recent attention, largely because of its
potential implications for the federal debt ceiling. Some scholars have viewed the Court’s

13
conclusion regarding the applicability of the Public Debt Clause to government default as a basis
for claims that the debt ceiling is unconstitutional, since by placing limits on the federal
government’s ability to borrow money prevents the Treasury from meeting the government’s
existing obligations.

In Perry, the Court held that the Public Debt Clause had applicability beyond the Civil War
context. In Hughes’ words, the Clause’s “language indicates a broader connotation” than just the
repayment of the Union’s Civil War debts. Rather, the majority considered Section Four of the 14th
Amendment “confirmatory of a fundamental principle which applies as well to the government
bonds in question, and to others duly authorized by the Congress, as to those issued before the
amendment was adopted,” that the public debts of the United States could not be repudiated. The
Court further held that “public debt” referred not just to the explicit debt obligations of the federal
government but, rather, “embraced whatever concerns the integrity of the public obligations.”

The Court’s reading of the Public Debt Clause holds some interesting implications. Under this part
of Perry, a plaintiff would be able to challenge a U.S. government policy to repudiate its debt, if
that plaintiff suffered a redressable injury because of the action. For instance, should the U.S.
government be late in making an interest payment on a Treasury security, a bond holder could
bring suit alleging a violation of Section 4 of the 14th Amendment. This is because such securities
undoubtedly constitute “public debt of the United States, authorized by law” and because such
delinquency would likely be considered a “questioning” of that debt.

The contemporary significance of Perry in this respect is unclear given the range of federal
financial commitments and the subsequent jurisprudence on the Public Debt Clause. While
scholars have viewed Perry as standing for the proposition that government debt obligations are
legally binding,18Perry has not exposed the government to liability for breaches of its financial
commitments. The handful of courts considering the meaning of the Public Debt Clause have not
followed Perry in finding that it imposes constraints on the government’s ability

Still, it is worth pondering when the Public Debt Clause might limit federal government
delinquency. This inquiry would seem to focus on two questions: “whether the obligation at issue

18
https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=2500&context=faculty_scholarship

14
constitutes “public debt” and whether the delinquency amounts to a “questioning” of that debt.

With respect to the first issue, courts could take hugely different approach to the meaning of
“public debt.” The phrase is not defined in the U.S. Constitution and the meaning varies on one’s
perspective. Depending on one’s perspective, “public debt” could be taken to mean only “federal
debt instruments or, at the other end of the spectrum, all federal financial and nonfinancial
commitments “authorized by law.””19 Between these two poles lie a range of government
obligations and promises the legal bindingness of which are unclear.

Similarly, it is unclear what would constitute a “questioning” of the public debt within the meaning
of Section 4 of the 14th Amendment. The Court in Perry considered a statute invalidating anti-
inflationary provision in a government debenture to be such a questioning of the public debt. Thus,
under Perry, the Public Debt Clause seems applicable to cases in which the government expressly
repudiates terms in a debt contract

However, this tells us little about different types of federal obligations and degrees of delinquency.
As Michael W. McConnell has stated, “default is not the same as repudiation. If Congress
repudiated the debt, it would be declaring that the debt is not owed. If Congress defaulted on the
debt, the [debt] would still be owed; it would simply go (in part) unpaid.” 20

That under Perry the government's cancellation of the loan obligation would be tantamount to
questioning the public debt remains an open question whose answer may seem to depend on the
level of government wrongdoing. Therefore, while the Gold Clause Cases may have breathed a
sigh of relief into the neglected part of the Fourteenth Amendment, the modern significance of the
Public Debt remains unclear.

MONETARY POLICY

Another important aspect of the Gold Clause Cases is the way the decisions both affirmed and
limited Congress’ power to regulate the nation’s monetary system. In addition to authorizing
Congress to borrow money, Article I of the Constitution gives Congress “the power to … coin

19
U.S. Constitution Amendment XIV
20
Michael W. McConnell, Origins of the Fiscal Constitution, in IS U.S. GOVERNMENT DEBT DIFFERENT? 45, 50
(Franklin Allen et al. eds., 2012).

15
money [and] regulate the value thereof. 21 The government based much of its argument in 1935 on
the Coinage Clause, responding to the challengers’ claims that the Joint Resolution effected an
invalid exercise of congressional authority by noting that the Constitution empowered Congress
to regulate the nation’s monetary affairs. In the government’s view, the Joint Resolution was
needed to eliminate the possibility that private parties would be allowed to contract around the
unitary system of exchange decided upon by Congress. As noted above, the Court in the Gold
Clause Cases adopted a more modest view of Congress’ monetary powers.

While the Court affirmed that the Constitution gave Congress the power to regulate national
financial matters, it held that this power could not be used to undermine government debt
obligations. The Court reached this conclusion on the grounds that allowing Congress to change
the rate at which its debts are “settled” would mean changing the amount of debt it has already
paid.

Compared to the Court’s formulation of the Borrowing and Public Debt Clauses, the implications
of the Court’s decisions in terms of Congress’ monetary powers have gone largely unnoticed.
Nevertheless, the Gold Clause Cases stand as one of the few occasions in which the Court has
ruled on the extent of Congress’ monetary powers. Among other things, the decisions raise
questions about the federal government’s legal ability to breach its financial obligations through
inflation. While the Court may have declared explicit debt repudiation unconstitutional, the
outcome of the Cases indicates that the federal government may use its power to regulate the
nation’s monetary system to informally default on its obligations.

BINDINGNESS OF GOVERNMENT OBLIGATIONS

Although the state's failure has been a relative matter, courts have at times considered the extent
to which some financial promises are legally binding. In general, the government has a greater
right to unilaterally change legally defined tax benefits, "new assets," than to refuse to fulfill
obligations imposed on it by means of certain contractual claims or credit agreements.

1. Debt instruments

21
U.S. Constitution, Art 1, Clause 5.

16
As described above, the federal government’s debt instruments are legally binding contracts.
Despite the way’s courts have ignored or limited its holdings, Perry has not been overturned.
Accordingly, the government is constitutionally obligated to pay its debts according to terms
specified in the agreement. That said, the liability that the government might face if it defaulted on
its debt is limited. As discussed below, and as highlighted in the Gold Clause Cases, creditors may
face various hurdles in obtaining redress from the courts. Because government debt defaults are
most likely to arise in times of economic or political crisis, and may involve claims by large
numbers of individuals, courts may also be unwilling or unable to hear these cases. Further, default
would likely imply that the government does not have sufficient resources to meet its obligations.
In this case, creditors may be unable to obtain adequate redress, even if they are able to maintain
suit.

2. Non-debt contracts

Although the federal government might seem to have less ability to repudiate its debt obligations
than to abrogate other financial duties imposed on it through contract, the government is liable for
breaches of its nondebt contractual obligations.

Until 1887, a party seeking damages for a breach of its contract with the federal government had
to obtain a specific appropriation from Congress to that end.22The growth of federal contracting
highlighted the cumbersomeness of this system and led to passage of the Tucker Act in 1887. The
Tucker Act gives the United States Court of Federal Claims jurisdiction over claims “founded
ether upon the Constitution, or any Act of Congress or any regulation of an executive department,
or upon any express or implied contract with the United States. In so doing, the Tucker Act
“constitutes a waiver of the federal government’s sovereign immunity with respect to those
claims.”
Since the passage of the Tucker Act, courts have enforced various nondebt contractual obligations
of the federal government. For instance, in Lynch v. United States23, decided less than a year
before the Gold Clause Cases, the Supreme Court ruled against the government after it failed to
pay benefits to qualified individuals under insurance policies issued pursuant to the War Risk

22
RICHARD H. FALLON, JR., ET AL., HART AND WECHSLER’S THE FEDERAL COURTS AND THE
FEDERAL SYSTEM 859-61 (6th ed. 2009).
23
292 U.S. 571 (1934),

17
Insurance Act of 1917. At the same time, however, various defenses have limited the federal
government’s contractual liability. One of the most important of these has been the unmistakability
defense, which holds that to be enforceable, surrenders of sovereign authority, including promises
to refrain from subsequent regulatory changes, must appear in unmistakable terms in the contract.

The federal government’s ability to rely on the unmistakability defense to escape contractual
liability changed significantly because of the Supreme Court’s decision in United States v. Winstar
Corp24.

The dispute in Winstar concerned a commitment by Congress not to pass legislation that would
contravene the terms of a contract between a federal agency and private parties. As part of its effort
to help manage the fallout from the savings and loan crisis of the 1980s, the Federal Home Loan
Bank Board, which had been created in the Federal Home Loan Bank Act of 1932, had offered
“express agreements” to encourage investors to take over failing thrifts. These agreements
included various incentives, such as guarantees that they could use goodwill and capital credits in
meeting their reserve requirements. Congress subsequently passed a law forbidding the counting
of goodwill and capital credits towards reserve requirements, which had the effect of making some
of the taken- over thrifts “subject to seizure by thrift regulators.”

The government based its argument that the new law should be respected, and the breach excused
on the unmistakability defense, but the Court rejected this position on the grounds that the
government’s sovereign authority would not be affected by enforcement of the contractual
provision. As such, the Court held that the passage of the new law rendered the federal government
liable for breach under regular contract principles.

By limiting the availability of the unmistakability defence—as well as affirming background

24
518 U.S. 839 (1996).

18
3. New property

While the federal government may be obliged to comply with its debt and contractual obligations,
it has a significant way of changing the benefits it pays its citizens. Since 1935, the provincial
government has passed several laws that require it to provide certain people with certain benefits.
Social Security and Medicare are the most important and well-known programs and have been a
major and growing part of government spending since they were created in 1935 and 1965,
respectively.

The Supreme Court clarified the extent to which the government’s commitment to provide these
forms of “new property” are legally binding in Fleming v. Nestor25. There, the Court considered
the claim of an individual who had been denied Social Security benefits because of his deportation
from the United States. The appellee had become eligible for federal old-age benefits in 1955 but
was expelled from the country the following year for having been a member of the Communist
Party in the 1930s. Section 202(n) of the Social Security Act provided that old-age benefits could
be terminated for a person so deported, and the government accordingly cut off his payments. The
individual sued the government, claiming that the provision denying him benefits was
“unconstitutional under the Due Process Clause of the Fifth Amendment in that it deprived him of
an accrued property right.”

The Court by a 5-4 margin held for the government on the ground that the individual did not hold
an accrued property right. Although he had paid into Social Security, and as such might
conceivably have some claim on Social Security receipts, the Court defined the program as a “form
of social insurance, enacted pursuant to Congress’ power to spend money in aid of the created in
general welfare.” As Justice Harlan explained in the case law, “to engraft upon the Social Security
system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in
adjustment to everchanging conditions which it demands.”

Fleming stands for the proposition that government benefits do not constitute accrued property
rights, as in a contract, but are more akin to non-enforceable gratuities or promises. As such, the
federal government is relatively free at least in legal terms to alter the terms of benefit programs.
While the Court in Fleming did note that, despite the absence of an accrued property right,

25
363 U.S. 603 (1960).

19
“individuals are entitled to some due process before being denied their government benefits”, this
has not restricted Congress’ power to modify the terms of such programs. Courts have regularly
refused to hold the federal government liable for such modifications. For instance, in Bowen v.
Pub. Agencies Opposed to Soc. Sec. Entrapment26, the Supreme Court upheld Congress’ power
to amend the Social Security Act in a way that altered its relationships with state governments. In
so doing, the Court rejected the claim that the Social Security Act had created contractual property
rights for the states the suspension of which would constitute a Fifth Amendment taking.

THE JUSTICIABILITY OF GOVERNMENT DELINQUENCY

Perhaps the most important reference to the Gold Clause Cases, is what they say about the
determination of the courts to hold the government in its word. Courts have often been reluctant
to get involved in questions about the legitimacy of government financial obligations. Even after
hearing these cases, the courts often refrain from making decisions against the government. While
the lack of criminal misconduct in government is so clear that the US government is prone to
fulfilling its financial obligations, at least compared to other nations, it is possible that government
judges, public officials paid to the Treasury, may think twice about reducing government spending.
In addition, the courts may be reluctant to hold the government accountable for such offences if
government crimes may occur during times of political or economic hardship.

In disposing of claims against the federal government, courts have drawn on three principles of no
justiciability: sovereign immunity, standing and the political question doctrine. Taken together,
these doctrines severely limit the government’s liability for breaches of its financial commitments.

1. Sovereign immunity

The most important of these doctrines is sovereign immunity. As noted above, under the doctrine
of sovereign immunity, the government may be sued only when it explicitly consents. Sovereign
immunity is generally justified as a “structural protection for democratic rule. 27 Allowing courts
to pass judgment on executive and legislative actions may violate the separation of powers.

26
477 U.S. 41 (1986).
27
Harold Krent, Reconceptualizing Sovereign Immunity, 45 VAND. L. REV. 1531 (1992).

20
Moreover, sovereign immunity is seen as necessary to the proper functioning of government. If
private citizens could easily hale public officials or employees into court, the government might
struggle to carry out its tasks and to recruit competent individuals to government service. At a
more basic level, sovereign immunity arises from a belief that it is improper to subject the
lawmaker to the law. As Justice Holmes in Kawananakoa v. Polybank28, put it, “[a] sovereign is
exempt from suit, not because of any formal conception or obsolete theory, but on the logical and
practical ground that there can be no legal right as against the authority that makes the law on
which the right depends.”

Sovereign immunity may present a significant hurdle to claims of federal delinquency. While the
Court in the Gold Clause Cases summarily dispensed with a sovereign immunity analysis, other
courts have considered sovereign immunity a bar to suit in cases where a party alleges that the
federal government has failed to fulfill its financial commitments. For instance, in Orff v. U.S.29,
the Supreme Court denied a claim brought by farmers alleging that the federal government
breached a water supply contract on the grounds that the government had not expressly waived its
immunity to suit. Moreover, in considering cases of debt defaults by state governments, the
Supreme Court has used sovereign immunity to protect badly-off states from private lawsuits.

Thus, while the degree to which sovereign immunity might protect the government from suit in a
case where it defaults on its debts is an unsettled question, Steven L. Schwarcz has noted that such
“precedents suggest that when a government is faced with extraordinary debt demands, the
Supreme Court might flexibly interpret the Constitution to suit government needs.” 30

2. Standing

Even if sovereign immunity does not bar suit, standing requirements may make it difficult for a
party to bring a delinquency claim against the federal government. To have standing to bring a
lawsuit, a party must have suffered an injury in fact caused by defendant’s alleged conduct that
can be redressed by the court.31 An injury in fact is “an invasion of a legally protected interest

28
205 U.S. 349, 353 (1907).
29
545 U.S. 596 (2006).
30
Steven L. Schwarcz, Rollover Risk: Ideating a U.S. Debt Default, 55 B.C. L. REV. 1, 21 (2014).
31
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992)

21
which is:

(a) concrete and particularized and

(b) actual or imminent, not conjectural’ or hypothetical.”

Although standing has served as a greater bar to suit since the Supreme Court begin tightening
such requirements in the last decades of the twentieth century, the Gold Clause Cases demonstrate
that courts had considered standing-type issues dispositive before. Recall that while the Court in
Perry passed on the constitutional infirmities of the Joint Resolution, the dispositive issue
concerned the plaintiff’s lack of damages, an essential element of standing. Indeed, it is easy to
envision courts dispending with federal delinquency claims on standing grounds. For instance,
following Perry a court considering a case in which the government breached the terms of an
inflation-protected debt obligation by altering the way it calculates inflation may find that such
injuries are not redressable.

3. Political question doctrine

Courts have also refused to hear claims of federal delinquency on the grounds that these are
nonjusticiable political questions. Like standing, the political question doctrine may be employed
by courts seeking to avoid reaching the merits of a case. The political question doctrine has roots
in Chief Justice Marshall’s decision in Marbury v. Madison to read the Constitution in a way that
limited the judiciary’s ability to pass on certain questions that implicated procedural or policy
issues best left to the elected branches.

In Baker v. Carr32, the Court laid out factors that might together or separately render a case
nonjusticiable on political question grounds:

1. “textually demonstrable constitutional commitment of the issue to a coordinate political

2. or a lack of judicially discoverable and manageable standards for resolving it;

3. or the impossibility of deciding without an initial policy determination of a kind clearly for

32
369 U.S. 186 (1962).

22
 nonjudicial discretion.

4. or the impossibility of a court’s undertaking independent resolution without expressing

5. or an unusual need for unquestioning adherence to a political decision already made; or the
potentiality of embarrassment from multifarious pronouncements by various departments
on one question.”

CONCLUSION
Considering the foregoing, which federal government financial commitments are legally binding?
While the executive and legislative branches have largely avoided answering this question, courts
have had some occasion to weigh in on the legality of various forms of government delinquency.
Generally, courts have found that the government has greater leeway to modify or abrogate
promised financial benefits to citizens than it does to fail to live up to those financial promises that
have been embodied in specific contracts or debt agreements.

Thus, holders of U.S. treasury securities are more likely to be able to legally enforce their rights
to be paid than are beneficiaries of government programs like Social Security. Yet even so, the
legal liability of the federal government may be severely limited by the fact that courts are hesitant
to rule against the government in such cases. The federal government may have a legal duty to pay
its bondholders on time, but it is hard to envision a court forcing Congress or the Treasury to do
so, particularly given the likelihood that debt repudiation would occur during a period of economic
or political distress.

The Gold Clause Cases illustrate this paradox. Although the Court considered the government’s
invalidation of gold clauses in public contracts to be an unconstitutional repudiation of the public
debt, it ultimately sided with the government on narrow, technical grounds. In Perry, the most
well-known of the Cases, the Court chastised Congress for passing a law that it considered violated
two separate constitutional provisions. Yet it then ruled for the government because it determined
that the plaintiff had not suffered any damages. In this way, the Gold Clause Cases exemplify some
of the limits of constitutional law. Specifically, the cases constitute an example of a situation in
which courts affirm constitutional rights without providing a remedy for the plaintiff. 196

23
The limitations of the law as a means of enforcing the federal government to live up to its financial
obligations highlights the centrality of economics and politics in federal budgeting and fiscal
policy. As detailed above, the federal government has significant legal room to refuse to meet it is
financial commitments. With the notable exception of claims for breach of contract, courts have
been hesitant to rule against the government in cases where a party alleges that the federal
government has failed to live up to its financial obligations. Of course, debt instruments are
contracts and, as such, the government might be susceptible to such legal challenge should it
default. Nevertheless, the peculiar nature of sovereign borrowing makes it unlikely that a
challenger could recover in such a case. A government in default has, by definition, limited
resources to repay its creditors. Moreover, courts are government bodies and, as such, may be
reluctant to rule against the sovereign. The sovereign may also simply refuse to waive its sovereign
immunity, as FDR sought to do should the Court rule against the government in the Gold Clause
Cases. This calculus changes in the context of international sovereign borrowing.

Creditors may make use of other countries’ judicial systems to enforce claims against the United
States, much as U.S. courts have intervened on behalf of holders of non-U.S. government bonds.
But the likelihood of such a scenario playing out is limited given the special nature of U.S.
government debt, which remains among the most valued in the world.

Importantly, the United States has established this creditworthiness largely because of the stability
of its economy and political system, rather than because of constitutional or other legal restrictions
on its ability to default. In the case of a default, the government would likely prevail in court, but
the officials who put the country in that situation would probably be voted out of office. Howell
Jackson has highlighted this dynamic by noting that “governmental obligations, are binding not
for purely legal reasons, but for political ones. In all cases, the government has the ‘legal’ option
of adjusting statutory entitlements or exerting sovereign immunity, but it just does not choose to
do so.” Thus, to the extent the federal government’s word is worth its weight in gold, politics—
not the law—is what matters.

24
 BIBLIOGRAPHY
Articles Referred:
1. Dam, Kenneth W. From the Gold Clause Cases to the Gold Commission: A
Half Century of American Monetary Law. 50 CHICAGO L. REV. 504 (1983).
2. Eichengreen, Barry. GOLDEN FETTERS: THE GOLD STANDARD AND THE GREAT
DEPRESSION, 1919-1939 (1996).
3. Hart, Henry M., Jr. The Gold Clauses in United States Bonds, 48 HARV. L.
REV. 1057 (1935).
Online Sources Referred:
1. www.heinonline.org
2. www.jstor.org

25