Protecting Against Inflation By Resuscitating The Gold Clause (Part I)

Introduction
By now, it’s becoming apparent that the Three Horsemen of the Apocalypse—Obama, Reid and Pelosi—are hell bent to drive America into penury with their massive infusion of taxpayer dollars into pork, unconscionable entitlements, handouts to crooks, charity to incompetent businessmen, and gifts to favored leftwing causes.

It’s also apparent that, ultimately, the principal way trillions of this newly created debt will be repaid is by the federal government running its printing presses until they overheat—by the “creation” of money, by the deliberate inflation of the dollar.

“Inflation” is “an increase in the supply of currency . . . relative to the availability of goods and services, resulting in higher prices and a decrease in the purchasing power of money” (Encarta Dictionary; my emphasis.) According to Webster’s Dictionary of the American Language, inflation is “an increase in the amount of money in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices.” (My emphasis.)

Of all the consequences that flow from government’s manipulation of paper money, rampant inflation (a “silent tax”) is the most devastating. In self defense, some of the government’s victims have traditionally fled from currency to find refuge in collectibles, various commodities, the precious metals and, especially now, thousand-dollar-per ounce gold.

But because of the nature of the assets they hold, one class of victims, hostages to currency, have nowhere to go: creditors.

Of everyone harmed by inflation, creditors (“a person or organization owed money by another,” Encarta Dictionary) suffer greatly because the money they lend is later repaid in dollars that are worth less because there are more of them in circulation.

One becomes a creditor in two ways: by selling or leasing goods or services to be paid for later, or, like a bondholder, by lending money, to be repaid later.

In many conventional sales transactions, payment is not due or received for at least thirty days. Short term personal loans are rarely less than six months in duration. Residential real estate leases usually run from one to two years, equipment leases to five. Commercial and industrial leases often run for ten years or more. Corporate and municipal bonds have even a longer life. Mortgages are not fully payable for decades. In the eighteenth and early nineteenth centuries ninety-nine year leases were not uncommon.

In each of these cases, the creditor is parting with funds of a specific value at the time the transaction is made, for repayment somewhere down the line. To repeat: Anyone who parts with money today against repayment tomorrow is a creditor, from used car dealers who sell “on time” (i.e., who lend money to borrower/debtor John Doe) to sovereign investment funds which purchase billions in T-Bills (i.e., who lend money to borrower/debtor United States government).

And if a creditor lends $1,000 today, ten percent inflation in a decade will shrink the purchasing power of that money to $386.00. In twenty years, the thousand is worth $149.00, in thirty $57.30, and in forty the $1,000 is virtually non-existent at $22.10. So much for investing and long-range planning.

Inflation devastates capital, more so over the long term.

An unused anti-inflation antidote
But creditors can insure themselves against the government-created inflation that ravages the value of the debts owed them. No creditor need be at the mercy of the government’s manipulation of paper money, thanks to the availability of a simple contractual provision which can be inserted into any debt instrument. It is called the gold clause.

Simply stated, for the moment, a contractual gold clause requires repayment of a debt based on its value when the credit was extended, not based on when the debt was repaid. Thus, the gold clause protects creditors not against default, but against payment—payment by the debtor of today’s loan with tomorrow’s inflated/depreciated money. I’ll explain later how gold clauses work in practice.

If the federal Government’s Money Monopoly (the title of one of my books, see http://www.henrymarkholzer.citymax.com/books.html) is virtually unrestrained, and if the exercise of that monopoly has created, is now creating, and will in the future create, serious inflation, and if creditors can protect themselves through use of the contractual gold clause, the question is why for long periods it has not been used.

One reason (I’ll discuss another in Part II) is because too little is known about the gold clause.

To be continued.