It is an honor and great pleasure to deliver a few remarks on Prof. Timberlake’s profound book, Constitutional Money (Cambridge University Press, 2013). At 90 years of age, Dick is still at the top of his game. Why? I think the secret lies in what Winston Churchill said when he returned from the Boer War: “there is nothing more exhilarating than to be shot at without result.”
Dick knows all about Churchill’s feelings of exhilaration — literally. As recounted in his autobiography — They Never Saw Me, Then — Dick was a member of the 388th Bomb Group during the Second World War. The 388th was based in England. For his part, Dick flew his B‑17 over the channel into Germany on bombing runs 26 times in 1944. Well, the Germans wounded Dick three times, but they never took him out — fortunately.
Since then, Dick has produced a steady stream of scholarly books and papers, in which he has gotten down into the plumbing of money and banking. He has been a target of many academic hacks — without result. This must have been exhilarating, too.
Now, let’s turn to Constitutional Money. First, allow me to say that I second the endorsement of my friend, the great economist Professor Leland Yeager. As Prof. Yeager, who is only a couple years Dick’s junior, noted on the book’s dust jacket: “Timberlake writes smoothly, with flashes of brilliant phrasing and an attractive mix of short and moderately long sentences.”
For me, I would describe Dick’s writing style as crunchy — you know, like Rice Krispies. Yes, his sentences snap, crackle, and pop. As for Dick’s analytical style, it’s granular and thorough — features that are scarce as hens’ teeth these days.
What is my big take away from Dick’s very granular book? It is that the law — more specifically, the Rule of Law in the United States, is very elastic, particularly during times of so‐called national emergencies or crises. Indeed, during these times, Washington, D.C.‘s politicos attempt to overturn the Founders’ constitution by embracing the theory of a “living constitution.”
Let’s briefly consider, for example, the Gold Clause Cases. These are covered in Chapter 22 of Constitutional Money. The Great Depression — a so‐called national emergency — gave Congress license. And, Congress used it, abrogating the Gold Clause via a joint resolution, in June of 1933. Before that, a gold clause was included in most private and public bond covenants to insure that bond holders would receive interest and principle payments in dollars that contained as much gold as the dollar had contained when the bonds were issued.
Well, after April 1933, the U.S. government manipulated the price of gold upward until, under the Gold Reserve Act of January 1934, President Roosevelt redefined the dollar in gold terms. Overnight, the dollar became 41% lighter. This left gold‐clause bond holders out to dry.
Because of the Congress’ abrogation of the gold clause, bondholders could only receive the nominal dollar amounts of interest and principle, as stated on their bonds. They could not receive enough additional dollars to make their payments equal in value to the amount of gold originally stipulated. In short, they were stuck with new “light” dollars, not the original “heavy” ones that had been specified in the original bond covenants.
Bondholders, of course, sued over this theft. But, the Supreme Court, in 1935, held that the abrogation of the gold clause for private bonds was constitutional. The Court’s decision rested on the fallacious argument that contracts which contained the gold clauses interfered with Congress’ authority to coin money and regulate its value (Article 1, Section 8 of the U.S. Constitution). Never mind.
For bonds issued by the U.S. government, the situation was different, as Congress does not have the authority to repudiate obligations of the U.S. government. But, because the legal briefs were defective in proving actual damages, the plaintiffs who had held U.S. government bonds “protected” by gold clauses could not collect damages from the U.S. government.
In anticipation of additional gold‐clause cases, Congress simply passed a law amending the jurisdiction of federal courts, so that they were bared from hearing any further gold‐clause cases. Every time I reflect on this Congressional maneuver, Paul McCartney’s classic “Back In The USSR” rings in my ears.
The point is clear: the Rule of Law, particularly during a so‐called national emergency or crisis is very, very elastic — even in the good old U.S.A.
But, importantly, this legal elasticity is not limited to the U.S.A. For example, David Marsh — an expert on the German Bundesbank — recently brought a fascinating case from Germany to my attention.
The German elasticity episode centers on the so‐called “Emminger Letter.” Otmar Emminger was President of the Bundesbank from 1977 to 1979. Under the European Monetary System’s (EMS) exchange rate mechanism (ERM) — which was established in December 1978 — the Bundesbank was required by law to intervene with unlimited amounts of Deutschmark sales and foreign currency purchases, whenever another member country’s currency reached the ERM’s floor.
Well, the mighty Bundesbank couldn’t countenance the thought of such an external interference with its conduct of monetary policy. So, on 16 November, 1978, prior to the final EMS agreement, Herr Emminger sent a missive to the West German Chancellor Helmut Schmidt. The missive stated that the Bundesbank wanted to be freed from its obligation to intervene during a currency crisis.
The Chancellor wanted an EMS agreement — which was ultimately agreed to by resolution of the European Council at a meeting in Breman on 5 December, 1978. But, what to do about the Bundesbank? On 30 November, 1978, the Chancellor complied with the Bundesbank’s wishes by initialing the Emminger letter, before he signed the EMS agreement. But, he also told the Bundesbank Council that the Emminger letter must remain secret and not be part of the EMS agreement — yes, a secret agreement.
The Chancellor further stated that all this was allowable under the classical legal exemption clause: “Clausula rebus sic stantibus” (For those of you who aren’t Latin lovers: Treaties may become inapplicable because of changes in circumstances).
Well, the Emminger letter was trotted out by the Bundesbank 14 years later. On Friday 11 September, 1992, the Bundesbank indicated that, on Monday, it would stop supporting the hapless Italian lira. This forced a devaluation of the lira over the weekend and helped spark the run on the British pound on “Black Wednesday”, September 16th — the day both Italy and the U.K. were forced to leave the ERM.
So, when it comes to the Rule of Law and money, elasticity dominates. There is one Big Lesson to learn: beware of national emergencies — like the so‐called War on Terrorism, or our recent once‐in‐a‐lifetime financial crisis, or even a currency crisis.