After Bernanke’s Testimony AIG Case Could Emerge As Reprise of the Gold Cases

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If testimony yesterday by the former chairman of the Federal Reserve, Ben Bernanke, is any indication, Maurice Greenberg’s $40 billion lawsuit against America may be shaping up as a reprise of the notorious “gold clause” cases of 1935.

Mr. Greenberg complains that the insurance company he founded, AIG, was seized by the government in 2008 without the just compensation required by the Constitution. The Depression-era gold clause cases centered upon a similarly brazen encroachment — the government’s repudiation of its promise to pay back its debts in gold.

In that case the Supreme Court found that America had overstepped its bounds, but it declined to award any damages because, reasoning that since Americans were no longer allowed to own gold, breach of the gold clause cost them nothing of value. So the victory of the bondholders was hollow. In the AIG case, Mr. Bernanke’s sworn statements in the United States Court of Federal Claims present a similar rationale for the government’s seizure of a controlling stake in the insurance combine without a shareholder vote in 2008.

AIG’s board was asked to accept the government’s onerous terms for assistance, or go bankrupt. “It was evident from the fact that the board took the Fed’s offer that they didn’t have a better offer,” Mr. Bernanke swore. The ex-chairman of the Fed argued — in effect — that since AIG didn’t have a better offer than the government’s, nothing of value was taken. It seems to be his view that the “just compensation” would be zero.

The Supreme Court offered similar logic, if that is the word, in 1935 when it ruled against the demands of creditors that the federal government pay them the full gold value of their bonds. The quarrel stemmed from F.D.R.’s abandonment of the gold standard in 1933, followed by the ban on “gold clauses” in contracts. These clauses required debtors to pay back their debts at their full gold value. They protected creditors from changes in the value of the currency.

With gold clauses banned, debtors were now free to pay their loans in paper money. Under Roosevelt, that paper money was worth 60 percent less, thanks to his 1934 devaluation of the currency. The dollar fell from about 1/20th of an ounce of gold, roughly the same value it had in the days of Washington and Hamilton, to 1/35th of an ounce.

This left American bondholders, among them John Perry of New York, with a substantial loss. Perry owned a $10,000 U.S. Liberty Bond, issued in 1918 to pay for World War I. He was owed its full gold value when it matured in 1934. But the government offered Perry only $10,000 of the devalued paper currency.

Perry sued, demanding $16,931.25, the new gold value of the bond, plus interest. When the suit made its way to the Supreme Court, the Attorney General himself, Homer Cummings, appeared before the court to warn of the “stupendous catastrophe” that would follow honoring the gold clauses.

At first the court seemed to be leaning against the New Dealers. Chief Justice Hughes dropped what the New York Times called a “bombshell” question on FDR’s lawyers. Of the contract to pay in gold, Hughes asked, “Where do you find any power under the Constitution to alter that bond, or the power of Congress to change that promise?”

“The question was a hard one,” the Times wrote. The line of questioning rattled the Roosevelt administration, which laid plans to ignore the Court and precipitate a constitutional crisis if the Nine ruled against them. In the end Hughes defaulted. He condemned breaking the gold clauses, explaining that such an action “imports that the Congress can disregard the obligations of the government at its discretion,” making the government’s financial promises “an illusory pledge.” Claimed he: “We do not so read the Constitution.”

Then, in what the New York Times as recently as last fall called “a pirouette that left legal scholars gaping,” Hughes noted that Perry, and all other bondholders, had not actually suffered any loss on his bond. The case was a “breach of contract,” Hughes wrote. Perry could seek to “recover no more than the loss he has suffered. … He is not entitled to be enriched.”

With private ownership of gold banned in America, Perry could not demand payment in coin. Perry must be content with his inflated paper dollars, the court decreed, as Hughes presented a ringing endorsement of Congressional power to alter the currency as it saw fit, a ruling which helped pave the way for the fiat currency regime that prevails today.

“The Supreme Court said what Congress did was a cheat and a repudiation,” declared Senator Carter Glass, father of the Federal Reserve Act. “It further said that those who had been cheated and upon whom repudiation had been practiced, if they undertook to recover what the government agreed to give them, they can go to hell!”

It might have been more polite of Senator Glass to simply observe that the holders of United States bonds had “no better offer.”


Correction: The dollar was worth 60 percent less after FDR’s devaluation of the currency in relation to gold. An earlier version misstated the extent of the loss.

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