mises.org / Jp Cortez / November 1, 2016
Gold clause contracts provide an avenue for states to promote the use and acceptance of gold and silver, and undermine the Fed’s monopoly on money.
Assuming you had the money, would you loan $10,000 to be paid back over 30 years plus 3 percent interest?
What if price inflation skyrocketed? That would benefit the borrower and deeply harm you as the lender. Even if you were repaid, the declining value of those repayments wouldn’t come close to making up for your loss in purchasing power.
Given that today’s rates of price inflation are generally higher than interest rates, agreeing to be paid at a fixed rate over a longer period of time is a risky proposition. The purchasing power of the Federal Reserve note has already fallen drastically since its last link to gold was severed in 1971. And in the coming decades, America’s currency will surely continue to depreciate — possibly at an even faster rate.
One way to reduce the uncertainty facing both parties who enter into a long-term financial arrangement is to employ what is called a “gold-clause contract.” This tool gives creditors and borrowers alike a significant degree of insulation from currency risk, including both price inflation and deflation.