Count Those Square Feet in Gold

American leaders tell themselves that citizens aren't interested in the nuances of the dollar's value. The yuan exchange rate? That is something Treasury Secretary Paulson deals with at summits like the one this week with China's Vice Premier, Wang Qishan, at Annapolis, Md. The inflation rate? Federal Reserve Chairman Bernanke grapples with it. The rest just live with the results.

The politicians deceive themselves. Each American brain is constantly updating and editing its own personal dollar index. Americans also try out their theories about their greenbacks in all fields, including mundane thickets of contract law cases.

Just such a case involving a 400,000-square-foot building in Cleveland is now being decided in the U.S. Court of Appeals for the Sixth Circuit. The case illuminates the American government mischief with the dollar over the past century so well that it might even be worthy of the attention of Mr. Wang.

This story begins more than nine decades ago, when Americans were sanguine about the prospects for their country's growth. But they were also concerned about two sources of dollar anxiety.

The first was war in Europe. The second was a new agency in Washington — the Fed, established to manage monetary policy in 1913. The government itself was on the gold standard at $20.67 an ounce.

With a nose every bit as acute of that of Jean-Claude Trichet, Midwestern merchants picked up the scent of inflation. They therefore deployed a great hedge: the gold clause. Such a clause in a contract guarantees a lender the right to be paid in ounces of gold instead of dollars, if he chooses.

Among such merchants were the Halle Brothers, the department store owners who built that enormous building in Cleveland. In 1912, they leased part of the structure under a gold-clause contract for 99 years. The rent topped out at $35,000 for some 170,000 square feet, the 1912 equivalent of 1,693 ounces of gold.

Fast forward to the Great Depression. Confronting deflation, President Roosevelt abandoned the gold standard for a time. He led Congress in abrogating the gold clauses, even the private ones. Americans henceforward had to pay the dollar amount in contracts; you could forget about the ounces.

Roosevelt returned the nation to the gold standard within a year. But he didn't reinstate the gold clause. And no wonder. At the new gold standard rate of $35 an ounce, the Halle Brothers store contract would have been worth almost $60,000 a year. The owners lost. The renters won, for they still owed merely $35,000 a year. The same redistribution was happening on a national scale as the White House and Treasury reflated.

The Halle building was so grand it became a Cleveland landmark. In the 1960s, the actress Halle Berry's parents named her after it. But decade in, decade out, the rent contract with its useless clause weighed on the owners. Their mood must have only grown darker when the gold price zoomed skyward in the 1970s.

In the early 1980s, the tenants decided to sell their lucky-break lease. The buyer was S&R Playhouse — the "R" stood for the Ratner clan of Forest City Ratner, the New York developers. Forest City Ratner renovated the Halle Building, which makes sense. They were paying some 20 cents a square foot for space they subleased for many multiples of that.

S&R Playhouse may not have been taking into account something that had happened during the great rise in gold prices during the 1970s. Lawmakers in Washington had reauthorized gold clauses in private contracts. To be sure, the new gold clause rule did not cover pre-1970s contracts.

But in property law, when a new tenant agrees to be bound by an old lease, that tenant must abide by the existing terms, including an old gold clause. (The contract is, in effect, a new one).

Now Stuart Venner, the New York real estate investor who owns the building, says he is owed his pounds of gold. The past claim alone comes to something like $3 million, and going forward for the few years remaining, the owners claim $1.5 million a year or so. That math assumes, of course, that Mr. Paulson doesn't make too many more statements designed to boost the dollar and the Fed doesn't raise rates too much.

Small wonder then that the brief from S&R Playhouse Realty opens by bracketing the phrase gold clause in sneering quotation marks and dismisses such a clause as "arcane and archaic."

On June 12, when the Sixth Circuit heard the arguments, the gold price was bouncing around just over $871 an ounce, which does something to explain the case. But only something. The rest has to do with the dollar's increasingly unpredictable movement.

The interests of Venner and his New York company that owns the building, 216 Jamaica Ave. LLC, overlap those of foreigners who reckoned that their dollars would buy more than they do. They are also shared by the fixed-income crowd here at home who console themselves buying Treasury inflation protected securities, or TIPS, bonds.

216 Jamaica Ave. LLC v. S&R Playhouse Realty Co. makes a good debate topic for Senators McCain and Obama. And you can bet a gold dollar that Chinese central bankers and American pensioners both would be happy to watch.

Miss Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a columnist for Bloomberg News.