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The New Gold Clause

The use of inflation resistant digital assets in contracts

By David Parsons co-founder of TrustMe Property Exchange tpx-london.io

veryday we are seeing the effects of monetary inflation on common items, building supplies, food, gasoline, and other daily commodities.  This is directly the result of a vast expansion of the money supply by governments. This article focuses on how to use digital assets to mitigate the inflationary effects expanding the money supply, first by examining the strategies of our forefathers, secondly by using modern digital assets in the same manner.

Allegory on monetary Inflation in Japan 1860s, debasing gold coins creates more gold coins

Source Wikipedia

Good as Gold

A gold clause is a provision within a contract that requires consideration to be paid in gold or another particular type of currency upon request. The creditor can insist on payment either in gold or another type of currency equivalent to gold. With the advent of digital assets, consideration in a contract can now be defined not in gold, currency or money but in terms of digital assets that are depreciation resistant. This enables the evolution away from money, currency or precious metals in contracts towards non-monetary consideration and only real assets.

Why Gold

Creditors involved in long-term contracts benefit from gold clauses when there are concerns about inflation, changes in government, war, or other events that may change the value of commonly exchanged currency. These clauses were popular in the early 1900s until President Roosevelt issued executive orders confiscating all personally held gold.

In 1913 the Federal Reserve act mandated that all Federal Reserve Notes, also known as “paper money” needed to be backed by the gold that was in the possession of the federal government. Roosevelt believed that issuing more money would help the economy, so he confiscated all gold and gave its holders paper money. It became a criminal act to possess more than 5 ounces of gold punishable by 10 years in prison or a fine of $10,000- which is the equivalent of almost $270,000 in today's money!

As a result of this regulation, Congress passed a resolution that made it no longer possible to enforce any gold clauses written into contracts. In 1974, President Ford made it legal again to own gold, and therefore made it possible to enforce gold clauses in contracts.

Gold Clauses and Usury Laws

Gold clauses are rarely included in contracts today because many states have ruled that they violate usury laws. The U.S. government is prohibited from paying out gold coin; people who have U.S. coins and paper money may exchange them only for coins and paper money of equal value. Because it is illegal to demand unreasonable amounts of interest on an obligation, and requiring payment in gold might constitute a violation of that law, the government does not give consent for any of its agencies or employees to enforce gold clauses.

Currency's value no longer rests on the metallic content of the coin. Claims for payment by the U.S. government may not involve any payments of amounts greater than the face value of coins or currency. Even obligations from loan contracts with gold clauses are only subject to payment in the U.S. currency that is considered legal tender at the time payment is rendered.

Why Gold Clause Contracts Are Beneficial

In the 1930s, both federal and state governments were in chaos due to the struggle to maintain economic stability and liberty. A Supreme Court ruling in 1934 in Homebuilding and Loan Association v. Blaisdell determined that it was legal for states to change contract terms when needed, due to difficult economic conditions.

When President Roosevelt signed the order to confiscate privately owned gold, four cases referred to as the Gold Clause Cases were ruled on by the Supreme Court:

The point of these cases was to make gold clauses invalid and unenforceable. The result of the Supreme Court's decision was the concept of “sanctity of contracts” was not a reality. Based on this decision, if the government did not approve of the terms of a contract, it might not be enforced in a court of law. Therefore, the contract itself would be invalid.

Although there have been court cases ruling that states did not have the power to make contracts invalid, the result of these four “gold clause” contracts was that Congress had the power to regulate money, and gold clause contracts fell into this category. The ruling stated that gold clauses affected Congress' ability to control the monetary system.

The USA, however, did take steps to protect gold clause contracts and their enforcement. In two cases, Bronson v. Rodes(1868) and Butler v. Horowitz(1868), the court's decision stated that contract clauses were allowed to name specific types of payment and to not accept any substitutes. Payment requirements can be specific, such as mandating gold or silver coin, even as much as a specific type of coin or a specific country's currency. This type of guarantee is the most important, central factor in gold  clause contracts' usefulness and reliability.

How to use digital assets in contracts

Getting back to how gold clauses relate to digital assets, by substituting gold for specific tradeable digital assets such as property(real estate), this enables an almost direct substitution of gold clauses for digital assets in contracts. The value of the contract is denominated in the number and type of digital assets. Just as with gold, as monetary inflation occurs, the digital asset maintains its constant value relative to all other units of account. The other key point is the absence of fiat units of accounts in the contract e.g., USD, GBP, EUR. These units of accounts bring the contract enforceability on payment back to the legacy monetary system and all of its capriciousness. Additionally, since specific amounts of money are not being denoted in contracts usury laws are may or may not be applicable.


David Parsons co-founder of TrustMe Property Exchange tpx-london.io

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