Gold Clauses in Contracts

Who Should Use them - and Why

A recent US Court of Appeals decision puts Congress' 1977 re-authorization of gold clauses back on the map - just in time to help business owners protect themselves from progressive, terminal dollar-decay

Only a few days before publication of this article, the US Court of Appeals for the Sixth Circuit handed down its opinion in 216Jamica Ave. LLC v. S&R Playhouse Realty Co., holding that a 1982 amendment and assignment of a 1912 lease constituted a "novation" that effectively revived a gold clause that was part of the original lease agreement.

Gold clauses are agreements by which one party to a contract binds itself to pay the other in gold bullion rather than fiat dollars/federal reserve notes. Congress initially outlawed them in 1933 as part of FDR's prohibition of gold ownership. The latter was part of FDR's decision to rescue the thieving banking sector of his day from the consequences of its own over-issuance of paper receipts for American gold coins. As always since passage of the Federal Reserve Act, Congress went along.

What is interesting about this decision is not so much its effective ruling (who cares what a ‘novation’ is and whether the lease amendment in question constituted one or not?), but the fact that there is now a court decision from the federal appellate level that proves contracts containing gold clauses are indeed valid and enforceable in our day – at least if they were entered into after 1977.

The enforceability of gold clauses is one of the preconditions for instituting a de facto gold (and silver) bullion-weight standard as a parallel currency system that can run side by side with a debt-based fiat currency, such as the US dollar.

In 1977, Congress amended its 1933 Joint Resolution in which it declared gold clauses to be unenforceable as ”against public policy after then-president Roosevelt effectively confiscated Americans’ gold and outlawed its ownership. That 1977 amendment is currently codified under Volume 31 of the United States Code, Section 5118(d)(2), and it plainly states that the provisions of the 1933 joint resolution banning gold clauses does not apply “obligations issued” (i.e., contracts entered into) after its date of enactment in October 1977.

What this means is that, under current US law, individuals and businesses can legally enforce any contract requiring payment in gold, as long as that contract was entered into after 1977. Most people don’t know that little fact, but it is likely to become extremely important as the current debt-based fiat dollar system unravels in front of our eyes.

If and when this little-known fact becomes more widely known in the business community, businesses could begin to negotiate gold clauses in their future contracts. These would require at least partial payment of whatever is owed them by their contract partners in American gold eagle coins, or in digitally transferred gold ownership, such as those used by GoldMoney.

Let’s say a professional provides consulting services of some kind to big companies and contracts to supply these services over several years. The length of the contract period exposes the consultant to the potentially damaging results of purchase power deterioration of his fees as a result of price-inflation.

To hedge against that risk, he could insert a clause in his standard contract that requires his client to pay at least a percentage of his fee in gold. Now, granted, most companies don’t have too much in the way of gold lying around with which to pay their consultants or vendors, but it may be possible to negotiate at least a small portion of any fee or other future payment in real money.

Doing this goes a long way toward getting the company execs thinking about how they themselves might protect their bottom line from chronic dollar-decay. Your request may have the salutary effect of encouraging them to do likewise. It’s just that nobody thinks about these things in this day and age. Having someone start the process would be a good idea, indeed.

Earning gold alongside fiat has tremendous advantages. Under current tax laws, doing this may add some accounting wrinkles to a company’s balance sheet and tax return preparation, but is serves as a nice hedge against inflation when the gold price rises during an accounting period, and as a nice tax write-off whenever gold falls.

Since the price of fiat in terms of gold constantly fluctuates, the payor party to any contract will probably feel uncertain about how agreeing to make future payments in gold instead of dollars will affect his bottom line. Dollar cost averaging may be the answer here.

Dollar cost averaging has been criticized in its use as a purely an investment tool as not providing any better results than random investing, but for purposes of this essay we are not concerned with investment returns on a dollar-basis, as such. The focus is rather to point out a pain-free way to not only purchase, but to actually earn gold as a medium of exchange that has better store of value properties than fiat money.

Naturally, there is no way to earn gold if nobody wants to pay with gold.

The point is therefore to provide a framework that allows the reintroduction of gold and silver into the normal stream of commerce as money in spite of currently restrictive and inhibitory legal tender and tax laws, and in spite of the common (mis)perception that Gresham’s law will always take gold out of circulation in favor of fiat currency.

A buyer of goods or services over long periods of time who agrees to pay a seller in gold can hedge against fluctuations in the gold/fiat ratio by budgeting whatever payments will be required in the future through starting a consistent gold accumulation program.

Whenever the average price of gold decreases over a period of time, doing this allows the payor to acquire gold at progressively cheaper prices, which decreases his dollar-cost in paying the recipient. At the same time, whenever the gold price rises, the buyer benefits from the rising dollar-value of units he has acquired earlier in the period and the resulting hedge against inflation, i.e., loss of dollar purchasing power, which benefits his bottom line.

The buyer himself can also turn around and negotiate partial payments in gold from those who owe him money. A buyer of services (i.e., and employer) is usually simultaneously a seller of something else, maybe a product he manufactures or markets. He can now himself earn gold from his customers, possibly by negotiating a discount to the normal dollar-price of his product that would make it attractive for his customers to choose to pay with gold.

The customers themselves can take advantage of these discounts by setting up a similar gold acquisition program so he has gold available for any future payments he chooses to make.

This entire process is far more likely to become widely used when gold clauses in contracts are enforceable. The recent federal appeals court decision affirming this enforceability, together with the news value this decision generates, therefore forms a big step toward bringing a parallel bullion-weight currency system into being.

Once such a system comes into wider use, it will have a tendency to overtake whatever price discovery function for gold and silver current commodities exchanges perform.

The NYMEX Commodities Exchange, as many already know, is basically a paper/electron trading system where promises to exchange metal at a future date and time are traded for dollars as if they were the actual metal. In other words, the price at which physical gold is bought and sold is determined by demand for paper-based promises of only potential future delivery, where all parties concerned know that the actual taking of delivery by anyone is a rather rare event.

Accordingly, it is at least theoretically possible to have many more promises floating around than there is actual metal to back them up. The result is a virtual clone of fractional reserve banking. The COMEX should be called a ‘fractional reserve trading facility’ rather than a commodities exchange.

Once an actual parallel gold payment system becomes widespread, it will very quickly reveal how much real people value real metal in times like these, where paper and electron-based promises of future payment can disappear to the tune of billions of dollars (i.e., fiat accounting units) in a heartbeat – or faster.

Only then will we know where the supply and demand curves for gold really intersect when measured up against fiat money. In other words, only then will we know what the real convenience value of fiat is versus the safety value of gold and silver.

The Sixth Circuit’s S&R decision has brought that day nearer than it has ever been since the world of finance was rolled over into a pure fiat system. Nothing like it has existed even during the days of the classical gold standard. The gold standard was really only another form of fiat system since it legislatively shackled the price of gold to a certain dollar amount.

Only this new system will reveal the true market value of gold and silver as both commodities and as current money – and only then will the slow-burn ravages of inflation become a thing of the past.

Got gold?

Alex Wallenwein
Editor, Publisher
The EURO vs. DOLLAR & GOLD MONITOR
In this multi-decade gold bull market, the old investment maxim of "know when to buy and when to sell" has been replaced by "know when NOT to sell!" Monitor subscribers know when not to sell.

August 31, 2008