Saturday, August 30, 2008

1912 Gold Clause Sustained!

In the early part of the last century, it was common for people to make contracts based upon payment in gold or its equivalent. At the time, the dollar was standardized as a certain weight of gold: $20.67 equaled one ounce of the yellow metal.

The US went off the gold standard during the 20th century, even going so far as to outlaw the possession of the gold coins that used to circulate. Today, it is legal to hold gold and coins, but it is highly unusual to find a gold clause in any contract.

However, there are exceptions it seems. One such exception is a still-valid 1912 lease for a building in Cleveland.

BXP44791
[thanks to matcmadison.edu for the image.]

The rent was the equivalent of $35,000 in 1912. Believe it or not, the lessee was still paying only $35,000 today, pursuant to his interpretation of the lease. Inflation clauses were unknown in those days.

Now you and I know that $35,000 in 1912 is quite a different sum of buying power than $35,000 today. This interpretation of the lease was highly detrimental to the landlord.

But the landlord, dumb like a fox, found a clause in the lease that said that the rent was payable in gold or gold equivalent, which back then was--let's see, $35,000 would have been 1,693.28 ounces of gold (1 oz = $20.67).

According to this article at Yahoo Finance (thanks to GATA and Walker Todd for bringing it to my attention), the landlord is right. Any such gold clause is still enforceable. The lessee is now obligated to pay 1,693.28 ounces of gold (or its equivalent in dollars), instead of the $35,000 annual rent they had been paying. That's around $1,440,000 a year, "only" 41 times more than they were paying up to now. Ouch.

This sounds like a nightmare for the lessee, a windfall for the lessor (or justice, depending on your experience with landlords), and an amusing anecdote for the casual newspaper reader. But in fact, this court decision is very important.

If it is possible today to use gold as payment in contracts, I can see no reason, other than government fiat, why a court couldn't declare the government's monopoly on legal tender to be unconstitutional and allow gold to reclaim a more prominent role in our monetary affairs.

I won't go into the details about "legal tender" here, because (1) I haven't fully researched it myself, and (2) any discussion would likely contain a lot of legaleze and boring details.

Suffice it to say that this gives me hope for the future. If enough people of the world still retain gold as their personal monetary standard--and I'm convinced they do (remember my mantra), in spite of the fact that their government has forsaken it--they will need a way to assert their right to a stable currency. This might be an avenue for activists to pursue.

On the other hand, this decision is at the level of the 6th Circuit Court of Appeals. There are a few more steps the lessee can take to appeal this decision; and it may go all the way to the Supreme Court, if that court will take it on.

Now this one would be the hearing of the monetary century.

Oh, to remind you of my mantra: You can take gold out of the standard, but you can't take the standard out of gold.

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