Last week I appeared on the third episode of the new podcast "Clauses and Controversies," hosted by Mitu Gulati and Mark Weidemaier. The episode focused on Perry v. United States, a 1935 Supreme Court case which concluded that there was no remedy for Congress's abrogation of the gold clause provisions in United States Treasury bonds. At one point, Professor Gulati and Professor Weidemaier asked me a fine question for which I did not have a fine answer: Why isn't Perry one of the most important cases in the constitutional canon given that the decision was extremely important and a huge success? I wrote a law review article about Perry several years ago, but even I haven't taught the case in a class.
Let me summarize Perry for those of who have not heard of the case. Prior to 1933, United States Treasury bonds contained standard "gold clauses" stating that the bondholder would be repaid in gold dollars. After 1933, though, these gold clauses were abrogated by Congress and by the President. The bondholders sued for damages. A plurality opinion by Chief Justice Hughes concluded that Congress lacked the power to abrogate public gold clauses (citing Section Four of the Fourteenth Amendment). He then concluded, in reasoning that is variously described as "puzzling," "stupefying," or "nonsense," that the bondholders were not entitled to a remedy. In essence, then, the abrogation was upheld without being upheld. Market reaction to the decision was very positive, and many observers felt that a contrary ruling would have precipitated another economic disaster.
Why, then, is Perry totally ignored by modern constitutional lawyers? One answer is Chief Justice Hughes made his opinion as confusing as possible. He apparently wanted to preserve the legal fiction that United States debt was inviolable (by denying that Congress could devalue) while still allowing the devaluation to go forward. This lack of clarity probably makes Perry less accessible. Another idea is that nothing similar has occurred in the United States since the 1930s, though elsewhere in the world Perry gets more attention because there are recurring debt defaults or devaluations across the globe.
There's a bigger issue though. Constitutional law is very good at analyzing decisions that (broadly speaking) fit into some doctrinal category or a decision that purports to create a new such category. What should the legal standard be? How does the legal standard draw from precedent? What are the standard's implications? Should there be exceptions? And so on. What constitutional is law is not good at is looking at cases that can be described as "one-way tickets," "hard cases," or "sui generis." Here the relevant question is whether the Supreme Court is answering a specific and very important legal problem sensibly without all that much concern for the past or future. Perry is one of these cases. So was Bush v. Gore.
Bush v Gore? Seriously?
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteThe better analogy is to the Roberts Obamacare decisions - irrational, self-contradictory nonsense meant to save a facially unconstitutional act of our progressive government. (Do law schools teach those decisions?)
ReplyDeletePerry was predicated on a bald faced lie - Plaintiff was seeking damages which he did not quantify when the bond holder was actually seeking specific performance in the promised gold. Reprehensibly outlaw decision.
For those here who have no problem with reprehensibly outlaw decisions so long as they reached a favored end, the end in this case was equally bad. Disengaging the currency from the gold standard without reaffixing it to some other reasonable standard like GDP has allowed the Fed, at best, to destroy trillions of dollars in wealth through gradual inflation and, at worst, according to Milton Friedman’s award winning work, The Monetary History of the United States, helped cause every subsequent US recession.
ReplyDeleteImportant issue. But the court, has conclusively, determined or declared that, I quote:
" To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise; a pledge having no other sanction than the pleasure and convenience of the pledgor. "
Or further:
" The fact that the United States may not be sued without its consent is a matter of procedure which does not affect the legal and binding character of its contracts. While the Congress is under no duty to provide remedies through the courts, the contractual obligation still exists, and, despite infirmities of procedure, remains binding upon the conscience of the sovereign."
End of quotation:
So, that is a hell of assertion with all due respect. Maybe, that is what is ignored in that case. Finally, not to forget, the creditor in that case, hasn't been damaged according to the court ( in monetary terms I mean).
Here to the ruling ( first link, authentic in pdf, second one, in "findlaw" in html format):
https://tile.loc.gov/storage-services/service/ll/usrep/usrep294/usrep294330/usrep294330.pdf
https://caselaw.findlaw.com/us-supreme-court/294/330.html
Thanks
A terrific post. I think the quick answer to Gerard's really important question is that the legal academy, as he suggests, is uncomfortable with decisions that cannot be made to fit comfortably within an ideological "rule of law" doctrinal structure. One doesn't know if the justices were aware that FDR was prepared to defy a decision going the other way, but they might have figured out, at the very least, that all hell would break loose if they upheld the clear contractual term on the currency itself. Perhaps it should be taught immediately after Marbury and Stuart v. Laird, which can be understood not in terms of any orthodox "rule of law," but instead as (necessary) judicial capulation to political realities. Bush v. Gore may not quite be the right analogy, because, to put it mildly, it did not exemplify anything close to the "passive virtues."
ReplyDeleteSome other good examples might be The Legal Tender Cases or Bolling v Sharpe.
ReplyDeleteDisengaging the currency from the gold standard without reaffixing it to some other reasonable standard like GDP has allowed the Fed, at best, to destroy trillions of dollars in wealth through gradual inflation and, at worst, according to Milton Friedman’s award winning work, The Monetary History of the United States, helped cause every subsequent US recession.
ReplyDeleteGetting off of the gold standard was probably the single biggest factor in the beginning of the US recovery from the Great Depression. A gold standard is not feasible in a modern, open economy with democratic institutions. The basic difficulty is sometimes known as the Eichengreen trilemma. It has various forumlations, but basically it says that a country cannot have all three of the following:
1) A fixed exchange rate system (a gold standard is an example).
2) Open financial markets/free mobility of capital.
3) Democratic political institutions/independent monetary policy.
The gold standard was feasible in the 19th century because even relatively democratic societies had a fairly narrow franchise. So, when the gold standard's built-in deflationary bias produced severe recessions, the political system did not produce severe consequences for those responsible. As societies like the US, England, etc. broadened the franchise over the 19th and 20th centuries, recessions and depressions produced demands for government actions, which forced those countries to engage in expansionary monetary policy. To do so, they have to abandon a fixed exchange rate system like the gold standard. The only other option would be very stringent controls on the movement of capital (which would be as severe a violation of free market dogma as leaving the gold standard, if not more so).
Bart continues to demonstrate his utter ignorance of economics, not to mention of Friedman's thinking.
ReplyDeleteJestak:
ReplyDeleteUnder the gold standard, the US experienced the highest sustained growth in our history, while recessions were rare and short. The two worst recessions preceding the 1930-1932 recession were caused by attempts to leave the gold standard - the 1890s Silver Panic under an inept bimetallic standard and the 1920 Depression caused when the Fed raised interest rates to stop the hyperinflation it created to finance WWI. Indeed, the 1930-1932 recession was caused in part by the Fed again raising interest rates to control inflation at the same time Hoover decided to wage a trade war resulting in loan defaults, causing a wave of bank failures from a lack of liquidity.
As for the Keynesian myth leaving the gold standard allowed the recovery from the Great Depression, the 1930-1932 recession was over before FDR left the gold standard and the depression (lack of recovery) lasted for years afterward.
That being said, inflation and deflation distorts the credit markets and should be eliminated by fixing the money supply to GDP..
Bart, I don't have time right now to respond to the complete catalog of errors you've managed to pack into a short post, but I will address one of them:
ReplyDeleteUnder the gold standard, the US experienced the highest sustained growth in our history, while recessions were rare and short.
Recessions were not "rare and short" under the gold standard. That is a matter of fact, not opinion. Economic historians who have done work on US business cycles tell us that over US history prior to the 1929 crash, we were in recessions about 2 years out of every 5. Post-World War 2, the figure has been 1 year of recession in every 5. Just to give one example, the Panic of 1873 set off a recession which lasted until well into 1879.
"irrational, self-contradictory nonsense meant to save a facially unconstitutional act of our progressive government. "
ReplyDeleteThis is typical partisan propaganda from our Bircher. If you're gonna lie, lie very big, that's the propagandists game. *Facially* the ACA is easily constitutional: health insurance is interstate commerce and the federal government is explicitly empowered to regulate it. The 'activity/inactivity' distinction is an atextual, political philosophy read into the Constitution. Roberts should have upheld the act on that grounds. I will admit that his spending power coercion decision was facially unconstitutional.
The gold standard stuff is, of course, very typical Bircherism.
As societies like the US, England, etc. broadened"
ReplyDeleteBirchers like Bart hate modern, developed nations. They all adopt what they consider as 'totalitarianism.' They hate modernity, it's not simple.
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ReplyDeleteThis comment has been removed by the author.
ReplyDeleteJestak: Recessions were not "rare and short" under the gold standard. That is a matter of fact, not opinion. Economic historians who have done work on US business cycles tell us that over US history prior to the 1929 crash, we were in recessions about 2 years out of every 5.
ReplyDeleteI have read this work and it does not comport with national GDP growth estimates. Most of what progressive economists called "recessions" during the 19th century were regional or industry specific issues which only only slowed world leading national growth. In fact, national GDP growth was higher when these economists claimed we were suffering from more frequent recessions.
Mr. W:
ReplyDeleteThe imposition of totalitarianism slowed development (aka economic productivity growth) to the point where the "developed world" is facing sovereign insolvency over the next generation,
I think it's proper to pay less attention to one offs.
ReplyDeleteLaw school is a trade school. One offs are basically useless. Let law professors write obscure articles about them. The lawyers you are training need to learn other things.
Dilan: Law school is a trade school.
ReplyDelete:::heh:::
Don't tell the profs that. When I made this point to one of my profs in reaction to the law school's overemphasis on theory, I recall he responded with something along the lines of: "BarBri will teach you how to pass the bar exam and your firm will teach you how to practice law."
Yeah. And that's outrageous. The state gives them an effective monopoly on entrance to the profession, they charge hundreds of thousands of dollars, and they refuse to do the job the state is asking them to do. (And BarBri is a racket too- the professors make extra money teaching what they should have taught in school!)
ReplyDeleteI actually once said a similar thing at lunch in the faculty lounge of a law school after giving a talk there, and the professors gave me a similar reaction.
Responding to some more errors from Bart:
ReplyDeleteThe two worst recessions preceding the 1930-1932 recession were caused by attempts to leave the gold standard - the 1890s Silver Panic under an inept bimetallic standard and the 1920 Depression caused when the Fed raised interest rates to stop the hyperinflation it created to finance WWI.
The recession of the 1890s--often referred to as the Panic of 1893--was severe. However, it did not occur "under an inept bimetallic standard." The US was on the gold standard, and had been since the passage of the Coinage Act of 1873. This was the era of the "Free Silver" movement, but that movement 1) was not successful, and 2) was to a considerable degree a response to the downturn, not a "cause."
The 1920 recession saw a fairly steep drop in GDP, but it was relatively short, over in about 18 months. It was far less severe than the Long Depression of the 1870s, which I alluded to last night. That downturn, by the way, was caused in part by the Coinage Act of 1873--sometimes referred to as the Crime of '73 at the time. You can read about the link between the two events in an article in the Journal of Political Economy from December 1990, titled "The Crime of 1873." The author was that notorious lefty economist, Milton Friedman, who labeled the Coinage Act "a mistake that had highly adverse consequences."
The 1920 recession was also far less severe than the double-dip recession that began with the Panic of 1837, which was triggered in part by Andrew Jackson's ham-fisted monetary policies, such as the Specie Circular of 1836.
Indeed, the 1930-1932 recession was caused in part by the Fed again raising interest rates to control inflation
What you refer to as the "1930-32 recession" is, of course, what we actually know as the Great Depression, which actually began in 1929. There was no "inflation" to be "controlled" in 1930-32; annual rates of inflation during those years were negative. Milton Friedman's hypothesis that the Fed's alleged monetary tightening caused the Depression has been refuted multiple times, for example by Peter Temin in his book Did Monetary Forces Cause the Great Depression? I actually did a paper on this topic in grad school; it has been over 30 years, and I don't have a copy any more, but I recall pretty clearly that I concluded that there was little evidence of any real monetary tightening before mid-1931. The Fed might have made the Depression worse but did not trigger it.
Bart again:
ReplyDeleteI have read this work and it does not comport with national GDP growth estimates. Most of what progressive economists called "recessions" during the 19th century were regional or industry specific issues which only only slowed world leading national growth. In fact, national GDP growth was higher when these economists claimed we were suffering from more frequent recessions.
Which papers from the extremely voluminous work on this subject have you read? The dating of business cycles for most of this period is done by the very mainstream National Bureau of Economic Research, not by some nebulous "progressives."
It is true that long-term GDP growth was higher in the 19th Century. Long-term GDP growth is largely a function of two variables: 1) population growth and 2) productivity growth. US population growth during the 19th century, driven by high levels of immigration, was very rapid--our population grew by a factor of about 15 from 1800-1900.
High long-term GDP growth is not inconsistent with that growth also being much more volatile. Which the facts show that it was.
Jestak:
ReplyDelete(1) The Long Depression of 1873–1879
Jestak: the Long Depression of the 1870s, which I alluded to last night. That downturn, by the way, was caused in part by the Coinage Act of 1873--sometimes referred to as the Crime of '73 at the time. You can read about the link between the two events in an article in the Journal of Political Economy from December 1990, titled "The Crime of 1873." The author was that notorious lefty economist, Milton Friedman, who labeled the Coinage Act "a mistake that had highly adverse consequences."
I figured you were alluding to the Long Depression of 1873–1879, which is why I responded as I did: Most of what progressive economists called "recessions" during the 19th century were regional or industry specific issues which only only slowed world leading national growth.
Under the Coinage Act, the US went off a bimetallic gold and silver standard back to a gold standard. Silver and other business interests took a hit, BUT the economy in the midst of the Second Industrial revolution kept growing. During this "depression," real annual GDP growth soared at an average 4.21% and per capita GDP rose at 1.96% as millions of immigrants (primarily from Germany, including some of my ancestors) flooded in to take work in a growing economy. Per capita GDP did contract slightly at the beginning of this period, but that was the sum total of what was at most a mild recession. Samuel H. Williamson, "Annualized Growth Rate of Various Historical Economic Series" MeasuringWorth, 2020.
(2) Silver Panic of 1893
Jestak: The recession of the 1890s--often referred to as the Panic of 1893--was severe. However, it did not occur "under an inept bimetallic standard." The US was on the gold standard, and had been since the passage of the Coinage Act of 1873. This was the era of the "Free Silver" movement, but that movement 1) was not successful, and 2) was to a considerable degree a response to the downturn, not a "cause."
You obviously have no clue about this period. I recommend you read: Lawrence W. Reed, A Lesson from the Past: The Silver Panic of 1893 (Irving on Hudson: The Foundation for Economic Education, Inc. 1993).
In response to debtor farmers and silver interests, Congress created a bimetallic currency backed by silver and gold where silver could be exchanged for gold at a 16:1 ratio. High silver production reduced the market value of silver, so speculators started exchanging silver notes for gold. Gold reserves and the value of silver notes collapsed. Creditors started demanding gold and foreign investors sold off US stocks to avoid being paid off in silver notes. The resulting credit crunch caused a severe recession, which ended when Congress went back on the gold standard.
Jestak:
ReplyDelete(3) The 1920 Depression
Jestak: The 1920 recession saw a fairly steep drop in GDP, but it was relatively short, over in about 18 months.
True. The government slashed spending and WWI regulation, but otherwise did nothing. The !920 Depression came and went quickly to be replaced by the Roaring 20s. Unfortunately, the progressive Hoover did not learn the proper lessons from this period.
(4) The 1930-32 Recession
Jestak: What you refer to as the "1930-32 recession" is, of course, what we actually know as the Great Depression, which actually began in 1929.
False.
The Great Depression was a pair of L-shaped recessions (1930-1932 and 1938) followed by years of low growth and high unemployment. The private economy actually did not recover until after WWII when government slashed taxes, tariffs, borrowing, spending and most New Deal and WWII regulations. (I do not count borrowing and then destroying a year's GDP during WWII as an economic recovery).
The first of these recessions started in 1930. The 1929 stock market correction mostly recovered by the beginning of 1930.
Jestack: There was no "inflation" to be "controlled" in 1930-32; annual rates of inflation during those years were negative.
The inflation was during the late 1920s and helped fuel the stock market.
Jestak: The Fed might have made the Depression worse but did not trigger it..
Mostly agree. The 1930-1932 recession was caused by a perfect storm of progressive misdirections of the economy - a fair trade tariff, the Fed tightening the money supply, jawboning business into maintaining wages during a deflationary recession creating mass unemployment, then a millionaire's tax to double government spending on make work projects.