palani
1st January 2013, 03:11 PM
http://joecobb.com/2011/06/19/gold-clause-legal-financial-application/
Gold Clause, legal and financial application
Review of The Gold Clause by Henry Mark Holzer
[Amazon link]
Investors have long understood that money issued by governments is not a stable measure of value. Throughout history governments have debased money, clipped coins, repudiated debts, and used inflation for public policy. The 20th century saw the triumph of paper (credit) money after World War I and even the fiction of some link to gold was eliminated in the 1970s. Today, under the Articles of Agreement to the International Monetary Fund, governments can link their currencies to commodities except gold, although none do so.
The avowed mission of most central banks, like the U.S. Federal Reserve, includes a promise to control inflation and keep the value of money stable, but the success rate is nothing to be proud of. The current debt crisis in the Euro zone is always linked to whether the European currency will survive the stress if Greece defaults. The volatility in foreign exchange markets is testimony to the unreliability of the value of government-issued money.
Yet most people never think money could be different – money comes from government, and it is a government monopoly. This book suggests an alternative, entirely private, and hopefully safe from government policy. The classical gold standard evolved as a way to give stability to the value of money. During and after the Civil War, bonds and notes were almost always written with a gold clause to spell out a particular value in terms of gold coin because the Union and Confederate governments had both resorted to printing press inflation during the war.
Henry Mark Holzer has compiled a reference book with all of the important court cases in the history of gold clauses in U.S. law, including the 1935 Supreme Court decisions that nullified gold clause contracts. The book further analyzes the current situation with gold contracts and gold clauses once again having been legalized by Congress, and he offers some important conclusions for anyone seeking to use a gold clause in notes and bonds, leases, or other contracts for future payment.
In simple terms, Holzer recommends never to write a gold contract with any reference to legal tender or government money in any form. Although Congress made the ownership and use of gold legal in the 1970s, and some recent court cases have upheld gold clauses, the power to nullify them is still in the Constitution. But Holzer points out the Supreme Court has never ruled out the right of private parties to make contracts for delivery of particular weights or volumes of commodities. His concluding chapter, “How to Use the Gold Clause Profitably,” sets out the rules as he understands them: (1) never denominate the debt in currency dollars; (2) make the debtor owe repayment in kind, either by weight or by specific form of coin, such as Krugerrand or Maple Leaf. If the debt instrument is likely to be under the jurisdiction of a U.S. court, it might be wise to avoid gold coin from the U.S. Mint. He cautions against using the price of gold to be an index of value because that indirectly brings government money into the contract.
Holzer offers this suggested language on pp.170-171:
“Debtor hereby borrows from creditor 100 ounces of gold bullion, of .999 fineness, and agrees to repay same to creditor on or before December 31, 1987 [for example]. If, for any reason, it shall become illegal or otherwise legally impossible for debtor to repay the aforesaid gold, the event causing such illegality or impossibility shall automatically convert debtor’s obligation to one requiring the repayment of an amount of silver bullion which shall be equal to what the value of gold would have been at the time of repayment, all values to be established by the Zurich fixing.”
There are additional considerations in writing a debt contract, such as rates of interest, which have been regulated under usury or consumer protection laws. Holzer discusses these in historical perspective, but generally such regulations have only affected contracts written for repayment of amounts of government money.
Holzer suggests that standardized futures contracts might serve as a form of insurance for bullion-denominated debts but does not elaborate whether those also bring government money indirectly into the debt contract. If debtors or creditors felt the need to hedge a fluctuating gold price, it should be done independently of the debt instrument itself. Certainly this is how existing bonds and notes denominated in foreign currencies are hedged, although swap contracts, which are widespread in international currency transactions, are currently in doubt due to regulations required but not yet written under the Dodd-Frank statute.
One thing is clear, both in this book and others Holzer has written in his career as a law professor and expert on monetary history, government policy is always the source of financial uncertainty and legal tender laws make things worse. Movements in gold prices that may only be due to depreciation of paper money are taxed under capital gains rules and some governments impose sales or value added taxes on gold transactions. When it suits policy makers to prohibit or regulate private markets, property rights are threatened.
The uncertainty of property rights and future regulations are the principal cause of slow economic growth because people who need to plan for the future cannot predict what is coming. Using gold as a unit of value, measured only by its weight and fineness, has traditionally been one way to stipulate a definite future reference. After all, what will “one dollar” be worth next year? One troy ounce or one gram of gold will be exactly unchanged.
Gold Clause, legal and financial application
Review of The Gold Clause by Henry Mark Holzer
[Amazon link]
Investors have long understood that money issued by governments is not a stable measure of value. Throughout history governments have debased money, clipped coins, repudiated debts, and used inflation for public policy. The 20th century saw the triumph of paper (credit) money after World War I and even the fiction of some link to gold was eliminated in the 1970s. Today, under the Articles of Agreement to the International Monetary Fund, governments can link their currencies to commodities except gold, although none do so.
The avowed mission of most central banks, like the U.S. Federal Reserve, includes a promise to control inflation and keep the value of money stable, but the success rate is nothing to be proud of. The current debt crisis in the Euro zone is always linked to whether the European currency will survive the stress if Greece defaults. The volatility in foreign exchange markets is testimony to the unreliability of the value of government-issued money.
Yet most people never think money could be different – money comes from government, and it is a government monopoly. This book suggests an alternative, entirely private, and hopefully safe from government policy. The classical gold standard evolved as a way to give stability to the value of money. During and after the Civil War, bonds and notes were almost always written with a gold clause to spell out a particular value in terms of gold coin because the Union and Confederate governments had both resorted to printing press inflation during the war.
Henry Mark Holzer has compiled a reference book with all of the important court cases in the history of gold clauses in U.S. law, including the 1935 Supreme Court decisions that nullified gold clause contracts. The book further analyzes the current situation with gold contracts and gold clauses once again having been legalized by Congress, and he offers some important conclusions for anyone seeking to use a gold clause in notes and bonds, leases, or other contracts for future payment.
In simple terms, Holzer recommends never to write a gold contract with any reference to legal tender or government money in any form. Although Congress made the ownership and use of gold legal in the 1970s, and some recent court cases have upheld gold clauses, the power to nullify them is still in the Constitution. But Holzer points out the Supreme Court has never ruled out the right of private parties to make contracts for delivery of particular weights or volumes of commodities. His concluding chapter, “How to Use the Gold Clause Profitably,” sets out the rules as he understands them: (1) never denominate the debt in currency dollars; (2) make the debtor owe repayment in kind, either by weight or by specific form of coin, such as Krugerrand or Maple Leaf. If the debt instrument is likely to be under the jurisdiction of a U.S. court, it might be wise to avoid gold coin from the U.S. Mint. He cautions against using the price of gold to be an index of value because that indirectly brings government money into the contract.
Holzer offers this suggested language on pp.170-171:
“Debtor hereby borrows from creditor 100 ounces of gold bullion, of .999 fineness, and agrees to repay same to creditor on or before December 31, 1987 [for example]. If, for any reason, it shall become illegal or otherwise legally impossible for debtor to repay the aforesaid gold, the event causing such illegality or impossibility shall automatically convert debtor’s obligation to one requiring the repayment of an amount of silver bullion which shall be equal to what the value of gold would have been at the time of repayment, all values to be established by the Zurich fixing.”
There are additional considerations in writing a debt contract, such as rates of interest, which have been regulated under usury or consumer protection laws. Holzer discusses these in historical perspective, but generally such regulations have only affected contracts written for repayment of amounts of government money.
Holzer suggests that standardized futures contracts might serve as a form of insurance for bullion-denominated debts but does not elaborate whether those also bring government money indirectly into the debt contract. If debtors or creditors felt the need to hedge a fluctuating gold price, it should be done independently of the debt instrument itself. Certainly this is how existing bonds and notes denominated in foreign currencies are hedged, although swap contracts, which are widespread in international currency transactions, are currently in doubt due to regulations required but not yet written under the Dodd-Frank statute.
One thing is clear, both in this book and others Holzer has written in his career as a law professor and expert on monetary history, government policy is always the source of financial uncertainty and legal tender laws make things worse. Movements in gold prices that may only be due to depreciation of paper money are taxed under capital gains rules and some governments impose sales or value added taxes on gold transactions. When it suits policy makers to prohibit or regulate private markets, property rights are threatened.
The uncertainty of property rights and future regulations are the principal cause of slow economic growth because people who need to plan for the future cannot predict what is coming. Using gold as a unit of value, measured only by its weight and fineness, has traditionally been one way to stipulate a definite future reference. After all, what will “one dollar” be worth next year? One troy ounce or one gram of gold will be exactly unchanged.