GOVERNMENT UPHELD.

Star (Christchurch), Volume LXVI, Issue 20543, 19 February 1935, Page 1

GOVERNMENT UPHELD.

Has Power to Cancel Gold Clauses in Private Bonds. RIGHTS OF CONGRESS. New York Securities Market Surges Upward Following Decision. (United Press Association.—By Electric Telegraph.—Copyright.)

(Received February 19, 11.5 a.m.) WASHINGTON, February 18.

THE United States Supreme Court upheld the Government’s right to cancel the gold clauses in private bonds, hut ruled that the Government gold obligations could not be paid off on a dollar-for-dollar basis. The Chief Justice (Mr Charles Evan Hughes), in summarising the decisions of t(ie Court, disclosed the Court’s ruling that Government “ gold clause ” bonds must be paid off in gold or in an equivalent amount of devalued currency, meaning that for every 1000-dollar gold bond the Government must pay 1690 dollars.

The attitude of the Administration has not been announced. A later interpretation showed that while the Court held to be invalid the resolution of Congress saying that Government obligations need not be paid in gold the decision also apparently closed the door to recovery of damages by saying that bondholders could not sue for redress. The Court completely sustained the Government with respect to private bonds, saying that they need not be paid in gold. It also ruled that the holders of gold certificates did not have legal cause for complaint, since the Devaluation Act merely carried out the power of Congress to regulate currency. The Administration decided that the legislation was not called for. A Chicago message says that trading stopped in the wheat market with the announcement of the decision on the gold clause. In New* York the securities markets surged upwards upon the news of the abrogation of the clause in private obligations. REACTION IN LONDON. Trans-Atlantic Stocks Advance Sharply. British Official Wireless. (Received February 19, 1.10 p.m.) RUGBY, February 18. Satisfaction was shown in the stock market to-night at the gold clause decision, the United States Supreme Court having declared the action of the Administration to be not unconstitutional. All trans-Atlantic stocks sharply advanced, while mines also showed gains. MAJORITY OPINION. Abrogation of Gold Clause Valid. (Received February 19, 2.5 p.m.) WASHINGTON, February 18. By five votes to four the Supreme Court to-day upheld the monetary features of Mr Roosevelt’s New Deal, which it had been considering for over a month. The majority opinion, which was read by the Chief Justice, Mr Hughes, declared that the Government had the right to abrogate the so-called money and fix the value of it. municipal bonds, and that the calling in of all gold and gold certificates by Congress was perfectly legal under the constitutional right of Congress to coin mone yand fix the value of it. On the important issue of invalidating the gold clause in Government bonds, the Court held that Congress

had no right to invalidate this “ contract,” but denied the right of holders of them to sue the Government through the so-called Court of Claims. In effect, therefore, the Government is under no mandate to pay Government bondholders a premium unless Congress passes specific legislation allowing them to sue in the ordinary Courts, which the present Congress at least will certainly not do. IMPORTANT DECISION. Modest Bondholder Started Litigation. The case with which the Supreme Court has been concerned is one in which a modest holder of one Baltimore (Ohio) railway bond, involving an interest payment of 22 dollars, is testing the validity of the Roosevelt monetary policy*. In January’, 1934, the price of gold was raised in terms of American currency from 20.67 to 35 dollars an ounce. That is. more dollars were required to purchase an ounce of gold than had been the case before, the purpose of the devaluation being to raise prices in America to an equivalent of pre-depression levels. At the same time the law provided that gold clauses in contracts be cancelled. Thus, if a contract provided for the payment of five gold dollars, it would be satisfied by the payment of five paper dollars, now worth only 2.9530 -gold dollars. For the investor, therefore, who had bought shares at the old currency* rates, the devaluation of the dollar represented a considerable “ book ” loss, in that if he wished to sell his shares he would receive less than he had paid, and interest received on holdings would be worth less to him than before devaluation. So the Baltimore bondholder took action against the Administration with the object of recovering the “ book ” loss which occurred when he received in interest, not 22 gold dollars, but 22 paper dollars. The case was to test the legality of the Administration’s action in sanctioning this alteration of means of payment. As the Supreme Court verdict favoured the Government as concerned private bonds, private contracts will still be paid in “ paper ” dollars at the devalued rate. It appears, however, that the United States Government’s obligations in ! gold clause bonds must be paid in gold or its equivalent, which would mean payment by a greatly* increased number of paper dollars. At the same time, however, as the court gives holders of gold certificates and bonds the benefit of the decision, such benefit is apparently taken from them by the reservation that holders cannot sue for redress, nor have they legal cause for J complaint.