 Welcome to Free Thoughts. I'm Trevor Burris. Joining me today is Sebastian Edwards, the Henry Ford, the second chair in international management at the UCLA Anderson School of Management. From 1993 until April 1996, he was the chief economist for Latin America and the Caribbean region of the World Bank. He is the author of many books, the latest is American Default, The Untold Story of FDR, The Supreme Court in the Battle Over Gold. Welcome to Free Thought, Sebastian. Thanks for having me. It's a real pleasure. The book is a story of a time that is oddly forgotten when between 1933 and 1935, in your words FDR, Congress and the Supreme Court agreed to wipe out more than 40% of all public and private debts. But your interest in this somewhat forgotten period begin with some of your experiences working with economies of Latin America. How did that happen? Yeah, that is correct. So my background as an economist is as a development macroeconomist. And throughout my career, I spent a lot of time researching issues related to sovereign defaults in the developing world and mostly in Latin America. And in 2002, I got a phone call from one of the main law firms in New York. And I was asked by a law partner if I could help them write an expert report on the Argentine default of 2002, which was a major default. They ended up paying 23 cents on the dollar. And as I was reviewing the brief written by Argentina, I found one paragraph that said something along the following lines. By the way, there is an international precedent to what we have done. And that has to do with FDR and the US in 1933. And what the US did is that it changed retroactively all debt contracts. And then the Supreme Court said that that was okay. And I said, oh, God, how come I don't know about this? And I started asking around and almost to know and know about this episode. There were, of course, some economic historians that do, but almost no one knew about it. And I said, well, someone has to research this case, tell the story and analyze how similar it was to the Argentine default of 2002. After all those years, here is the book. Yeah, there's a lot of research that went into it. And you start by talking about the Great Depression, because of course, I think it is important to contextualize how bad it was in 1932, 1933, when FDR took office. Have any of us, at least in America, seen anything like the Great Depression and what was happening at that time? Certainly we have not. Some people during what has been called now the Great Recession, big crisis that started in 2008 with the subprime debt, they have said that it was sensed similar. But if you look at the data, it was very, very, very different. During the Great Depression, there were industries where output went down by 80 percent. The automobile industry, which was taking off and was very important in the Midwest, agricultural sector was wiped out, and prices collapsed. The price of commodities went down by around 80 percent. And deflation can be very destructive. We haven't seen anything like that. And what really happened during the Great Depression is that it was worldwide. As I say in the book, there was nowhere to go. You could not emigrate and go to Argentina or Australia or anywhere. It was every country in the world was affected by the same problem. Now during the campaign with Hoover, with FDR in 1932, did FDR campaign on this issue of gold? Because in American history class, you learn about like William Jennings Bryant and the cross of gold speech and something that was a big campaign point. Was this something that FDR talked a lot about? Did he make some sort of cross of gold speech himself when he was campaigning? No, he did not do that. I make a point in the book of arguing and showing by going into the archives, not only FDR's archives, but also the archives and the papers of his main advisors. They did not know what to do or did not consider the gold issue as something important. And in fact, as a campaign took off in August and President Hoover realized that he was running behind, he accused FDR of wanting to take the US off gold. And FDR's response was, no, I commit myself to sound monetary policy. He did say something vaguely about silver. He said, I will do something about silver. He didn't say what something was, nor did he give in any details. So the point I make in the book is that this was not a preconceived idea of taking the US off gold. The notion was floating because the British had done that in September of 31. But pretty much the idea was that FDR and the Democratic Party were going to pursue sound monetary policy and by and large maintain the gold standard. And then he takes over and things sort of evolve in a way where he's sort of forced to get off the standard. Forced by circumstances. So I mean, I'm neither a lawyer nor was I born in this country. So for me to study this period and which I didn't study in high school, I didn't take American history because I grew up in South America. But to study this period and then go into the archives was fascinating. The first thing that happened is that, for instance, in mid February, there was an attempt on FDR's life. When he came back from vacation and he was traveling through the streets of Miami and opened a car, someone fired at him and killed the person who was sitting by him, the mayor of Chicago. And the day after that on February 14, there was a big banking crisis. And the day FDR took over at that time, it was the first Saturday in March, when he was inaugurated. His first act was to close every bank in the U.S. because there was such a deep crisis. So one event led to another, the crisis closing the bank, the run on the banks, the fact that people were taking gold out of the banks and taking it home led to a situation where at the end he was forced to take the U.S. off the gold standard. There's another wrinkle to this, which has to do with the populist block in Congress and in the Senate. And there are a couple of senators who play a very important role in this whole drama. So I find it interesting the force because, I mean, the gold standard is a big contentious thing. And here at Cato and monetary economists and a lot of libertarians think it's a great thing. And as you mentioned, England had gone off of it in 1931. And we had these runs on the banks and things. But even if you're forced to go off the gold standard, which I'm not a monetary economist, so I'll grant that. Does that require confiscating people's gold? No, it does not. In fact, the British went off the gold standard and did not confiscate people's gold, which we did in April. So the sequence of events is very interesting. So FDR is inaugurated on March 4th. The night of the fifth, he declares a national bank holiday. And the big debate there is under what legal authority he can do that. And he decides to do it under the trading with the enemy Act of 1917. That's the kind of law that always seems like a really dangerous law, the trading with the enemy Act. Yeah. And especially when we were not at war with anyone and there was no enemy that we had declared. So the trading with the enemy Act of 1917 was passed in order to make sure that the federal government could put in place a golden barcode so that the enemy would not get the gold. Who's the enemy here? The enemy in 1917 was the Germans. Who's the enemy in the New Deal? Right. But in the New Deal, there is no enemy. So he uses that authority, which is very doubtful. And there was a big legal controversy. And finally, his newly appointed Attorney General Homer Cummings writes an opinion saying that it's okay to base the holiday on that Act. So anyway, so he's inaugurated. There is this banking holiday which lasts for one week. At the end of that week, FDR gives his first fireside chat and tells people we're going to reopen most banks and the ones that we reopen are going to be sound. So bring back your money and your gold. And people do bring back their money, but don't bring back all the gold. So there's still gold in people's hands. And then on April 5th, he decides to confiscate the gold and to force people through an executive order to surrender all their gold to the Federal Reserve. And they will be paid the ongoing price, which is $20.67 per ounce. Which had been set like 30 years previously, correct? A hundred years previously in 1834. So it's a hundred years and people surrender that. And I have in the book a photograph of the posters that they placed in post offices and in different places and people surrender their gold. And a few months later, then when people had already surrendered their gold, the price of gold went up to $35 an ounce. That was just set by FDR though. That was set by FDR on January 31st, 1934. And that act is what triggers the cases that go to the Supreme Court. There are people that say we have contracts that say that we have to be paid in gold coin equivalent. And since an ounce of gold now is $35, we have to be paid in paper dollars 69% more than the original contract because the contract is in gold coin equivalent. I want to step. Those are the cases that go to the Supreme Court. And at the time, we're very famous, but what I say in the book is that we seem to have entered a period of collective amnesia where we don't want to remember the fact that there was a time not too long ago. My dad was alive. He had been born a few years earlier when the US acted like a banana Republic. We annulled contracts, debt contracts retroactively unilaterally imposing severe losses on investors. And when Argentina or Greece or any of those countries do this, we point fingers at them and we tell them contracts are sacred. You don't do this. This is a banana Republic type of thing. And we didn't look that long ago. I want to step back a little bit to the theories about this because so taking America off of gold, the question here, the words that get thrown around when you read histories at the time, and I'm kind of a student of the New Deal. So your book was particularly interesting to me, but you get these sort of inflationist and deflationist kind of people. And a lot of political rhetoric around this, you know, senators saying I'm an inflationist or I'm a deflationist. And FDR's position seemed to be that he had to raise prices, that this was the absolute goal of so much that he did. The Agricultural Adjustment Act was trying to raise commodity prices to 1926 levels. And the National Recovery Administration, National Industrial Recovery Act was also trying to fix prices in different industries. And was the gold part of that idea of raising prices? Yes, that was, it was part of the idea. So all the points you make are great points and you're right. So FDR campaigned on the basis of of course, ending the depression, but part of that was raising agricultural prices. And at that time, people were beginning to understand that deflation was really bad for the economy. And it was bad for two reasons. The first one is that if prices are going down and you expect that they will continue to go down, you postpone purchases, in particular big item purchases. So if prices of cars are going down, and they're going to be 50% lower by year end, then you wait until the end of the year to buy your car. And if you continue to postpone, then demand collapses and that's bad. And the second point is that if prices go down, people that have debts relative to what they produce, their debt goes up. And I'm showing the book that, for instance, in terms of bushels of corn, the debt that farmers had sort of tripled. So when they took the debt, the mortgage in 1926, it was so many bushels of corn. And by 1932, it was three times more bushels of corn. So FDR wanted to bring this to an end. And there were theories there that said that if you increase the price, the dollar price of gold, the dollar price of every commodity will follow almost immediately and will increase by the same amount. Even if you're not on the gold standard? Even if you are not in the gold standard, that was the theory at the time. Now, once you take into account that, as I said earlier, we didn't have a lot of information or historical evidence on which to base our analysis. The price of gold had been $20.67 per ounce since 1834. And before that, it had been $19.60 since Alexander Hamilton founded the Mint. So we had had only two prices of gold since independence, 19.6, and then a very small adjustment to bring the price of gold in line with the price of silver in the rest of the world in 1834. So it was not crisis-related. Then we had a brief interruption of the gold standard or aspects of it during the Civil War and then again during the First World War. So pretty much we had three observations to go by. So economists had no idea what was going to happen. But at the same time, there was no evidence for them to actually study the history. When we talk about these prices going down and that being FDR and a lot of his brain trust obsession, that seems a little counterintuitive because generally, when things become cheaper, this is not a bad thing. If a Model T becomes cheaper, if corn becomes cheaper, people will adjust. We'll have fewer people producing corn, but they can produce more corn and we can adjust around this. Doesn't it go against the free market ideology of you're a Chicago grad that playing with these prices is a little bit crazy? Yeah, it does. And when my mother asked me what was my new book about and I told her, she was sort of surprised. I said, I love it when prices go down. So the problem is that if it is generalized and it's very acute, then you have two problems that I just mentioned. What we think, what we like is that relative prices change and some prices go up, reflecting greater scarcity or greater quality in some goods and some prices go down. So relative prices moving around. That we like as economists. We think that that is a reflection of the market and it provides the right incentives for people to allocate their resources and their effort to the right sector. But when prices go in general down, you have the two problems that I mentioned. People postpone consumption because they're waiting for lower prices. And what is more serious is that the real value of debt goes up very significantly. And I mean, monetarist economists, in particular Milton Friedman and Anna Schwartz in their famous monetary history of the United States, recognize this and very in a great detail analyze all of this. Now, when they confiscate or they didn't confiscate the gold, they did pay people the $20 and 67, correct? They did pay people 20 and 67. And then I think that if one looks at this from today's perspective, the most impressive thing has to do with gold certificates. So this is the story. These were called yellow bags. So if you had gold, you had bars or coins, you could take them to the Treasury and give them to the Treasury for safekeeping because you didn't want to have those coins in your house. And the Treasury would give you a certificate. And then when they pass this executive order, that you could not get your gold back, they would give you money. And say you just kept your certificate and so this means the Treasury is still holding your gold, then when the price went up to 35 and your certificate said one ounce of gold instead of giving you back the new price $35 an ounce, they still gave you 20 and 67. And this is what people found particularly surprising and irritating. You had given physical gold for safekeeping and then they didn't want to give it back to you, which was okay. So give me the money equivalent, but they didn't give you the new price, they gave you the old price lower, much lower. Yeah, it's kind of mind blowing that a lot of people may not know that it was illegal to own gold, illegal to own gold privately in America from basically 1933 until 1975. But how about, I don't know, jewelers or artists or dentists or people who make electronics with gold? I mean, were they all drug dealers buying on the black market? Yeah, three exceptions to the executive order. Industrial use, which meant jewelry making and dentists, I suppose. I mean, I know the dentists, but I don't know if they're all under industrial use. And coins of numismatic value. So coin collectors could keep their collection. Big problem was that the secretary of the treasury, Will Wooden, had one of the most important coin collections in the world. So it was exempted, but the greatest or one of the greatest beneficiaries of that exemption was the secretary of the treasury, who was a very nice guy, very loyal. He was a Republican, but served under FDR anyway. So there were those exemptions. And then newly minted gold was a question. What did you do with newly minted or newly mined gold? What price did you pay for it? And until August of 1933, they were paid the old price. And then in August of 1933, FDR tried for a two months an experiment, which is known as a gold purchasing program, which did not work out, and it was the grandchild of a pretty obscure economist who taught at Cornell at the time. George F. Warren? George F. Warren. He seems like the most important economist. I haven't done the exhaustive research on this, or I've tried, but I'm going to hedge my bets here. And I think that there are three economists who were or have been on the cover of Time Magazine without ever holding public office. One is Milton Friedman. The other one is John Maynard Keynes. So we know those two guys. Those are giants. And the third one is George Warren. And I can go around the Department of Economics to the Department of Economics in the U.S. and 99% of the faculty would not know who George Warren was. And he was the most powerful economist in the U.S. during the second half of 1933. I'd like to read this quote here on page 103 of your book. During the second half of 1933, George F. Warren was the most influential economist in the world. Almost every morning during November and December, he met with FDR while the president was still in bed and helped him decide the price at which the government would buy gold during the next 24 hours. Henry Morgenthau Jr., who often attended these meetings, confined to his diary that the process had a cabalistic dimension to it. In selecting the daily price FDR would jokingly consider the meaning of numbers or flip coins. On one occasion, he decided that the price would go up by 21 cents with respect to the previous day. He then asked the group assembled around his bed if they knew why he had chosen that figure. When they said that they didn't, the president smiled broadly and remarked that it was a lucky number. It's three times seven. That seems insane. Is that a good... It was insane. It was totally insane. So much so that it prompted John Maynard Keynes to write an open letter to the president, which was published in the New York Times on December 31, 1933, where he told the president that the gold buying program made the dollar look like a drunk. It's the dollar looks like it's on the booze, he said. And it is not the kind of dignified policy that a country like the US would follow. And shortly after that, then FDR ended the gold buying program. And George Warren Starr was eclipsed, and he sort of disappeared from the scene, and a couple of years later, he died. Now this had some severe international ramifications, because we were kind of beginning to build this international monetary system to some degree, at least the birthing pains of it. And there was a London monetary economic conference that featured, I mean, especially France and Britain and America kind of fighting over how these currencies would be denoted. What was that conference like? And there was some drama there. There was a lot of drama there. And so FDR and his advisors wanted to solve the US domestic problems first. They didn't want to deal with international issues. But they inherited a lot of international problems from Hoover or international unsolved issues, including the fact that the debt moratorium that had been declared in 31 by Hoover had come to an end. And then France and the UK had to start paying their debts to the US again. So there were a number of, and there was a smooth holy act, and the greats had put in place the imperial preferences act of protectionism was coming, inching or moving up very quickly. So the conference in principle had, which was agreed upon during the Hoover administration, would deal with the debt with currencies and protectionism at the end of the of the of the depression and reluctantly FDR sent a team, which was headed by the secretary of state Cordell Hall. And one of the issues was how to stabilize currency values. And when they were about to come to an agreement, FDR sent a very famous cable, which is known as FDR's bombshell, accusing France and the UK of trying to sabotage the US and he said, I'm not interested in stabilizing the exchange rate. And this was very humiliating for Cordell Hall, who almost resigned over it. But but but but FDR was a charmer. So he invited him over to spend some time with him in Hyde Park and Hall State and became the very well known, very highly respected secretary of the Treasury of State in in in American history. Now, the we're going to get back to the gold clause cases here because I am a lawyer. And as I said, I had a new interest in the new deal. And I read the gold clause cases in law school, I think most people do or at least an excerpt from it. And a lot of times in law school, you read these cases and you're reading so many pages that you don't pay attention to the backdrop. And I remember reading this case and it said, FDR made private ownership of gold illegal. And I was like, what? And then the case stands for these contract clause and other issues. But I'm going to talk a little bit about how the case went up to the Supreme Court. They had taken these gold clause contracts, which explain and get exactly what that was. And was it in basically every contract? And also it was in private contracts, but it was in public contracts too. So, so the gold clauses said, as I pointed out earlier, said that the debt was written in gold equivalent, gold coin of the current degree level of purity. So that meant that you got alone and you committed yourself to paying back the gold equivalent of what you took in. And those clauses were put into contracts during the Civil War. When there were two currencies circulating side by side, the greenbacks, which did not have gold backing and the backed dollar. So they were put in the in 1863. They became a common part of loans and people maintained them. So by 1933, almost every single bond and mortgage in the US, so these are private loans, had a gold clause. Since the price of gold had been cons and the scare through during the Civil War had been dissipated. So at the end we went back and everything was convertible and gold was available. People didn't pay much attention to them. So let me give you an example. The Dow bond index had 30 bonds at the time. 29 of them had a gold clause. So almost every private debt was written with a gold clause. And after 1917, public debt was required by law to have the gold clause. The government could not issue debt without the gold clause, government debt. Now in terms of debt equivalent, the total debt that had the gold clause was calculated to be 120 billion dollars. And GDP was estimated, we didn't have very good statistics then, but it was estimated to be at most 80 billion dollars. So more than about 140% of the GDP was written with a gold clause to make things put things in perspective. Today the public debt of the US government, the federal debt is less or it's about 100% of GDP. So everything was under the gold clause. And when FDR thought or was prompted by the inflationist senators, Elmer Thomas and Bertrand Wheeler in particular, he is prompted to devalue the dollar. He said, okay, we're going to do this, we're going to get off the gold standard and do what the Brits did. His advisor told him, hold on. If you do that, the value of every debt is going to go up by the amount of adjustment of the price of gold. Yeah. So I want to just be clear, as I said, as a non-economist lawyer, so you, so let's say I buy a house in 1914. And I get, I don't know, maybe the $3,000 loan, that's probably about maybe what a house was. And so the gold clause in there says that I can pay, is that I can pay it back in the equivalent gold value of the time? Because is this really a thing to protect the creditor against inflationary monetary policy? So they can ask for the gold if the money, if the money becomes relatively worthless? That is exactly what it's trying to do, right? And as I said, it's put on during the Civil War, because you could try to pay your debt back with greenbacks, which were unbacked by gold, but greenback was not worth the same as a dollar that was backed by gold. So to protect creditors, every loan had, or almost every loan had the gold clause in it. But because the price was so stable, it didn't really matter. You're right. That's the point I was going to make. But since the price had not changed, it didn't matter. Yeah. So the real problem here seems to be FDR's decision to raise the price from $20.67 cents an ounce to $35. So then the problem was that the creditors could call on their debt and ask for it now in the new price of gold. And that means that it seems like a windfall. Every railway, every utility, every electrical power company, every mortgage debtor would have gone bankrupt, or most of them, because they would have had to pay 69% for it. So I can see how they could say it was necessary to, Congress passes this out that says all these clauses and contracts that go back decades are now no longer valid. I can say that would be necessary if you raise the price of gold, but you don't have to raise the price of gold. He could have confiscated gold and kept gold at $20.67 cents. Yeah, but we can get to that later. There's a wrinkle to that. You could have done that, and I discussed that in the book to some extent. But going back to the gold clause, you're absolutely right. FDR says, well, we have a huge majority in both houses of Congress. Let's Congress pass legislation annulling these clauses, and that's what Congress does on June 5th of 1933. And it's a joint resolution. I'm not a lawyer, but joint resolutions are not that common of the House and the Senate, and the gold clauses are obligated. So now the Congress says, yes, all these debts were written in gold equivalent, but they can be discharged from now on independently of when they were written. They can be discharged in paper dollars at the old value of the dollar. So as a lawyer, that's where you come in with this. There's a few clauses in the Constitution, but one of them, for example, says that the federal government shall not impair obligations to contracts, and that seems like a really good example of impairing obligations to contracts. So a few cases get filed that get put together into what we call the gold clause cases. What are some of those cases that get filed? So as people get paid with paper dollars at the old lower price, they bring the cases to court, and there's a huge confusion. And so the government asks the Supreme Court to consolidate the cases, and the four cases go in front of the Supreme Court. Two of them are private debt, and two of them are public debt. The private debt cases, one is a railway bond, where the holder has a bond, I don't know, $10,000 bond, and he wants back $16,900, which would be maintaining the gold equivalent at the new price of gold. The government is not part of that case. It's a private debtor and a private creditor. The second private case is a mortgage, where the senior, it's a bankruptcy case, excuse it, it's a bankruptcy case, where senior creditors have gold clause debts, and they want to be paid in gold equivalent. The junior unsecured non-goal clause creditors say no, because if you pay them at the new price, the amount of money left over for us is going to be diminished significantly by 69%. And the reconstruction financial corporation, which is a government agency, is one of the junior creditors. So the government, because of that, can be part of that, I'm not a lawyer, but because of that, it's part of that private case. So the government is part of that private case because it is a creditor in that bankruptcy. The two public sector cases come through the court of claims. The court of claims asks the Supreme Court what to do. They don't know whether they should accept these cases. And one is the Liberty Bond, which is issued in 1917. And the holder of that bond wants to be paid at the new rate. And the other one is a Gold Certificate, which as I explained, many people consider it to be a warehouse voucher, warehouse coupon. And they say, I gave you guys a bar of gold. I want my bar back. But I understand that it's illegal for me to hold it. So give me the money equivalent at the new price of gold. And the government says, no, we'll give you the money equivalent, but at the old price. So those four cases go in front of the Supreme Court. And they are heard on January 8th through 11th of 1935. And it didn't seem during the oral argument, there was some laughter and some mocking, some questions from the Supreme Court. It didn't seem to go too well for the government. Right. So what is interesting is that so the timeline, and I have in the book the timeline, which is interesting, the confiscation of gold is on April 33. The joint resolution on nulling the clauses is in June. The dollar value of gold is increased by 69% in January of 34. And the cases are heard in January of 35. So there's a whole year where the country is functioning at the new price of gold. And things are going well. The country is recovering. So when the cases are heard, people that are not claimants really don't want the gold clause to be the annulment to be ruled unconstitutional because they think, well, the country is recovering. And the government does not do very well in arguing these cases. It's argued first by the attorney general himself. I did a little research on how common it is for attorney generals to argue in front of the Supreme Court. Very rare. It's rare. It was not the only time nor the first time nor the last time, but very rare. And the protocol at least at the time seemed to be that when the attorney general argued the case, the justices because of difference did not ask questions or interrupt. So the first day goes smoothly. Homer Cummings gives a speech and nothing happens. And the second day, the solicitor general and some deputy solicitor general start arguing and they get interrupted and mocked and there is laughter and all sorts of problems. And you read the press of the time and there is generalized concern that the government or agreement that the government has done very poorly and people think the court is going to annul the joint resolution. The court had just a few days earlier had ruled on the Panama oil case also known as the hot oil case and it had ruled against the government. So there was a lot of concern by this point that the court maybe was becoming very skeptical about the new deal, which it did later. So here we are in mid January of 1935 and people think, oh my God, this is going to be bad for the government and people start preparing for this. And that's another thing that I found out, which is that FDR decides that if the court rules against the government, he's not going to abide by the court rule. Yeah, he writes a speech that I find great that you found in the archives. It says it's written in his hand, this is the speech I would have given if the Supreme Court would have struck down the annulment of the gold clauses. Yeah, and it's basically precipitating a constitutional crisis, which he would a couple of years later anyway. So it would just been earlier than the court packing plan. And there was a lot of hand wringing and everything from the government coming up. And FDR continually made this argument, which you point out multiple times that was just wrong when he kept, he would always say that there's not enough gold in the world to cover all the debts from the gold clauses. And that just seemed to be, either he didn't understand or he was just demagoguing. I'm not sure. Why is that a bad argument? Yeah, no, I think that he didn't understand that. And there is a beautiful article written in 1932 by Jacob Biner, who at the time was a professor at the University of Chicago and ended up his career at Princeton, a very distinguished international economist, and who actually was one of the first professional economists who advised the Roosevelt Treasury starting in 1934. And Biner says, we have a pyramid of credit in this country. And gold is the base of that pyramid. It's not the whole pyramid. So you don't need it to have all of credits backed by gold. All you need is to have a solid base in this pyramid. And FDR did, he was very smart. So I don't think that he didn't understand that he was just using that argument because it resonated with people. Which he was good at. He was very good at that. And one of the things that I did while doing this research was to listen to many of his speeches. And he was very reassuring. Slightly nasal voice, tenor timber, patrician accent. He was a master. Yeah. So the decision comes down and Charles Evans, Chief Justice Charles Evans, he used, it's a little bit split because there's four cases here and there's two private, two public, but overall it's a victory for the government. But it's kind of an interesting victory in a way. It is very interesting. So the private cases, so let me slice it the following way. There is no disagreement that Congress can change contracts going forward. Okay. So the Congress can say from now on, we don't allow gold-based contracts. That's not an issue. That's of course, Congress can do it. On the private cases, the government position is that the Constitution very clearly gives Congress in Article 1, Section 8, power to coin money and determine the value of their own. Or mint money, I think it says. This says coin money and regulate the value thereof, yeah. Right. Okay. So that's one of the powers of Congress. And what the court decides by five to four, and it's not that controversial, is that if in order to run monetary policy as it were, Congress decides that you cannot have or should not have gold-written private contracts, it can do that. So that was the argument for the private cases. Congress has the power to determine the value they're offering. It can define what is legal money. And if they say paper dollars are legal money, they are legal money. And if they are legal money, you can pay private debts using that legal money. The problem came with the public debt cases. And there, the Chief Justice, who wrote the opinion, did something quite remarkable, which is he said, yes, Congress does have the power to regulate the value of money. But it also has the power to issue debt on the credit of the United States. And issuing debt means that you are at the same time committing yourself to paying it back. Thus, he said, you cannot use one power to contradict or eliminate another power. So it is unconstitutional for the government to annul the gold clause in public debt. And then he added, however, there are no damages. Because the price of things, prices, because of what we said earlier, the cost of deflation, prices have gone down. And the purchasing power that the holder of the debt would obtain by getting his or her money under the old price is enough to buy the same amount of goods, the same basket that he or she could have bought at the time he or she bought the block. So it's unconstitutional, but there are no damages. Thus, the government wins. Yeah, you compare it. It's a incredibly, I don't know, weasley opinion. That's how the word, it's very, very deft. And it gets around some of the issues. But you compare it to Marbury in the sense of being able to rule that something is unconstitutional and at the same time say, well, nothing happens because of that. Right, right. And get out from under it. So at the time, I mean, there are lots, I mean, and what is surprising is that if you go, if you go back to the law review articles of the time, they are repeat with articles about these cases. And at the same time, 80 years later, we have collective addition. But one of the points that the scholars scholars make at the time is that it is like Marbury. But this also generates a rift between the Chief Justice Charles Evans Hughes and Justice Stone, who would become Chief Justice a few years later. Because Stone thinks that it's enough to say that for the court to say that there are no damages. And there's no need to rule on the constitutionality of Asia. And so he writes a long letter to his son, which you can find in his archives making that point. And some scholars agreed with them. So from I'm not a lawyer, but after doing this research, sometimes I wonder whether I should have become a lawyer and work on constitutional law. But anyway, it's too late for that. It's a fun job. I suggest it. But you already got your PhD and everything. Let's talk about consequences, though, and just how this is perceived. We talked a lot about whether it was necessary raising the price of gold, all these things. And Milton Friedman and Anna Schwartz had sort of said in their history that it, quote, discouraged business investment that this was a bad policy for FDR to do. We talked about some of the weirdness of it, setting the price of gold from your bed. What can we say? I mean, it's hard to do the counterfactual. But what can we say about, you know, how this was done, whether it should have been done or whether there was some other way of doing it that would have been better? Let me take that from the following perspective. One of the things that we teach our students when we teach economics at any level, bad level or underground level, is that if a country repudates its sovereign debt or restructures it in a unilateral fashion, imposing great costs to creditors, that the market will punish that country. And it will have no access to capital markets for some time. And when it does, it will have to pay a very high premium risk premium because of the precedent that its reputation has created. We don't see any of this in this case in the US. The US had no problem, the government falling its debt. It didn't have to pay a higher price or higher yield. It was not punished by the markets in spite of what Milton and Anna say. By the way, they only have a very short paragraph on the gold clause, which was surprising to me. And likewise, Alan Meltzer also devotes very little space to it in his magnificent history of the Federal Reserve. I talked to both Milton and Alan extensively about the issue. So I was fortunate to be a colleague of Milton Friedman in Governor Arnold Schwarzenegger's Council of Economic Advisers here in California. And during coffee breaks, I would ask Milton about the episode. And so we talked quite a bit about it. But the surprising thing is, as I said, the US was not punished by the market. And then we have to sort of speculate why was that. I mean, you can see Argentina queues all of these countries severely punished the Dominican Republic. I mean, you go through the list, all of them are punished by the market in more modern debt restructure. And the point that I make in the book is that this was seen by the market as an excusable default. And in part, because of what you said earlier, which is that if you get out of the gold standard, that's a big if we can get to it, then you have to get rid of the gold clauses. And it was done by following due process. An independent judiciary looked at the case. Clemens had all the time in the world and all the resources to present their case. The Supreme Court deliberated very long and and seriously about it. And at the end, I think that the market understood that there was a need to do this in order to get out of a great depression. The fact that a year had gone by 1934, the whole of 1934 had gone by between raising the price of gold by 69% and the cases. And that that year was a year of great economic recovery, I think also played a very important role because the market said, well, it was needed. And the way things are working shows that it was a good thing to do. We are recovering the US is improving. Well, I was moving out from a very low point. And of course, it would crash again in 1937. Right. That is true. Yeah. So that could have been, I mean, it's hard to do the counterfactual. As a lawyer, the reasoning in the gold clause cases is quite suspect and using this necessity. But as you, as an economist, it's interesting that as you said this, we didn't see this consequence of public debt being difficult to market punishing the repudiation of the debt. But in that sense, since we've seen so many South American countries and Euro crisis countries do a similar thing, this shouldn't be something that we would advise anyone to do now. But I want to ask you the question that you asked at the end of your book, could this happen again? Yes. So we would not advise countries to do this. Now, what we have now is a situation where the government used the necessity argument and the Supreme Court agreed with the government. Could that happen again? It happens every day, right? Argentina used that argument except that the tribunals did not side with Argentina, that the Argentina lawyers know their constitutional law, know their president, and they use the case, the same argument. Now, why the tribunals did not side with them? That's a different story. But I mean, look at Italy now. So it has a new government, a very nationalistic, a Eurosceptic government. And they may decide that in order to solve the Italian problems, there is the necessity for Italy to get out of the Euro and reissue the lira, at which point the whole question of contracts will come up, because every contract in Italy now is in Euros. And what if they were to reintroduce the lira as the Greek series they consider it reintroducing the drachma a few years back, then what do you do with the contract? And then the necessity argument in this case would be invoked. So internationally could happen, it does happen. Could it happen in the US? That's a more difficult and more interesting question. And the point here is that we have a huge contingent liabilities debt, contingent debt or undocumented debt that stems from Social Security and from Medicare and Medicaid. And people, including people at Cato, who have calculated the present value of the unfunded liabilities, think that they are 400% of GDP, 500% of GDP, they are all sorts of numbers. And at some point, we could have the government say, well, we are going to change these contracts or implicit contracts and we are not going to pay according to promise. And it will go to court. And people that think that there is a Social Security crisis looming, and I know that at Cato you have a very vibrant group dealing with this issue, think that that could happen. And then the court could say, or the lawyers will say, well, look, there's a precedent in 35. And you guys once accepted the necessity argument, you should do it again. Thanks for listening. Free Thoughts is produced by Test Terrible. 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