Norman v. Baltimore & Ohio Railroad Co. (Gold Clause Cases)

Summary

For decades American bonds and mortgages had commonly promised payment in gold coin of the present standard of weight and fineness, a clause designed to protect lenders if the paper dollar lost value. In the banking crisis of 1933 the Roosevelt administration took the country off the gold standard: it required the surrender of gold coin, forbade its export, and, by a joint resolution of Congress on 5 June 1933, declared gold clauses against public policy and made every such obligation dischargeable dollar for dollar in any legal tender. In January 1934 the Gold Reserve Act and a presidential proclamation reduced the gold content of the dollar to about 59 percent of its former weight. Norman C. Norman held a coupon from a Baltimore & Ohio Railroad bond issued in 1930 and payable in gold. When the $22.50 coupon fell due in February 1934 he demanded $38.10, its value in devalued currency at the old gold standard. The New York courts gave him only the face amount, and the Court of Appeals of New York held the joint resolution valid. A companion case arose from bonds of a Missouri railroad in bankruptcy reorganization. Norman's side argued that a gold clause fixed a measure of value that Congress could not erase, that the resolution took private property without due process, and that Congress was regulating contracts rather than currency. The railroads and the government answered that the clauses were promises to pay money, and that Congress's power to coin money and regulate its value includes power to prevent private agreements from defeating a uniform currency. By a vote of five to four the Court upheld the joint resolution as applied to private contracts. Chief Justice Hughes held that the clauses were contracts for the payment of money, not for gold as a commodity, and that Congress has broad authority to establish a monetary system, as recognized in the Legal Tender Cases. Contracts, he wrote, cannot remove a subject from congressional power, and Congress could reasonably conclude that enforcing gold clauses would require debtors to pay $1.69 for each dollar of income, dislocating the economy. In the companion case of Perry v. United States, decided the same day, the Court held that Congress could not cancel the gold clause in its own bonds, but that the bondholder had shown no actual damages. Justice McReynolds, for himself and Justices Van Devanter, Sutherland and Butler, dissented, calling the measures confiscation of property and repudiation of obligations and denying that the framers gave Congress power to annul its own promises. The library text contains Hughes's opinion and the first part of McReynolds's dissent, which breaks off in a history of the 1933 gold legislation; notes are not reproduced. A remark McReynolds made from the bench that the Constitution was gone does not appear in the written dissent. Congress restored the enforceability of gold clauses in new contracts in 1977.

Top Lessons

• Money as a contract term and as a public institution

  A gold clause looks like a private bargain, but money itself is created and regulated by government. Hughes treated the clauses as promises to pay money and therefore subject to the rules Congress sets for money; McReynolds treated them as fixing a definite measure of value that belonged to the parties.

• Private agreements and public power

  Hughes held that parties cannot contract their way out of the reach of a constitutional power. McReynolds answered that the federal government has only delegated powers and that no grant authorizes annulling lawful promises. The case tests how far the government may change the terms of existing bargains for the sake of national policy.

• Consequences in constitutional reasoning

  Hughes said that consequences cannot excuse a violation of constitutional right, yet he weighed the economic disruption that enforcing the clauses would cause in deciding whether Congress acted reasonably. Students can examine how a court may consider practical effects without letting them decide the question of power.

• Honoring a nation's promises

  In the companion Perry case the Court told the government that it could not repudiate its own gold bonds, while denying the bondholder any recovery. The dissent quoted the framers' hope of establishing justice and argued that a government able to annul its obligations endangers the rights it was created to protect.

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Medical Lens

The Gold Clause Cases concern monetary policy and private bonds; nothing in the opinions bears on health or medicine.