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A Brief History of US Debt Defaults
“This country has never intentionally defaulted on its obligations because of the debt limit.” – White House.
While technically true, there is a lot obscured in this short sentence. Here is a list of US debt defaults.
In 1790, the federal government assumed the Revolutionary War debt of the States. Regardless of the timing of payments and interest rates promised by the several states to their lenders, by law Congress said that interest would be paid on two-thirds of the principal at 6% beginning in 1791, but the other one-third would only draw interest starting in 1801. Overdue interest would only draw interest at 3%. While this may have been a boon to holders of state debt who bought it at a huge discount and might never have been paid in full by the state governments, it was still a default because the terms of the original bonds were not honored. But under the White House legalese, it would probably be counted as a state default, not a federal one.
In July 1861, Congress authorized demand notes to fund the Civil War that could be redeemed for gold. This didn’t last long — in December 1861, the federal government suspended redemption in gold and authorized them as legal tender only for payment of non-customs debts. In March 1862, Congress attempted to legalize this suspension, but in 1869 the Supreme Court ruled this an unconstitutional ex post facto law. In 1870, the Supreme Court reversed itself and said that the shenanigans were in fact constitutional. This default didn’t happen because of the debt limit but because the government was running out of gold.
In 1917-1918, the US government issued Liberty Bonds, again redeemable in gold, to pay for World War I. By 1934, there was a surge in redemptions due to the Great Depression, and the government did not have enough gold to redeem them. The US Treasury redeemed them for depreciated paper money instead of gold. After a series of convoluted rulings, the US Supreme Court gave its blessing. Chief Justice Hughes called it immoral but legal. This was a major default by the US government but again not because of the debt ceiling.
In 1968 the Johnson administration halted the redemption of silver certificates for silver. You could still use them as legal tender, but they suddenly became worth much less than their silver value. Again, not as a result of the debt ceiling.
Until 1971, the US government promised foreign governments that it would redeem US dollars for gold under the Bretton Woods Agreement. Nixon decided to suspend and then cancel this. Foreign governments were very angry, but the US Treasury told them to get lost. This was a major cause of the global inflation of the 1970s. Not as a result of the debt ceiling.
In 1979, the US defaulted on $122 million in bonds because of administrative confusion during a debt ceiling fight. When it was discovered, the US paid the principal and interest up to the due date. But bondholders sued for interest to be paid from the time bond was due until it was actually paid. The government settled out of court and paid the extra interest. This was a technical default due to the debt ceiling, but it was minor and unintentional.
These are all the defaults that I could find from a variety of sources. But it shows you how cynically the US government has played with its debt and currency in the past. And cynically Biden is calling for more reckless spending that will increase the risk of default while blaming the House Republicans for risking default by trying to rein in spending.
Published in Finance
It’s amazing how the importance of paying off our debts is the premise for the conclusion that we should have no limits on spending.
Thank you Steve for your post
Unfortunately, most Americans as well as many here ar Ricochet are completely oblivious to the grave issues of this looming debt limit fight which could end in default.
While many in the financial world are completely aghast at the prospect of default or even the threat of default , the issues of continued money printing, it’s consequences and wanton spending with no way to pay it back portend to me a much more serious crisis than a default.
What is also not being said is that most countries of world face a similar plight due to reckless government spending.
The Constitution requires debt to be honored (14A.4). The only way for there to be a default would be for all Americans to quit paying taxes (unlikely) or for Biden to choose not to honor debt with the incoming tax payments. I don’t think Biden has the stones.
Very informative. Thanks Steve.
Debt default is a paper boogieman.
The way Biden, et. al., are using it, I certainly agree. But if we don’t get control of our spending, it will be devastating. Especially if it comes in the midst of a war with China.
Debt default is…a hostage situation – “Give me what I want or the economy dies!”
Also, as inflation eats at creditor’s assets receivables, inflation is a backdoor default, like telling the people who hold your note that you will pay them a dime for each dollar you owe, and these dimes shall be called “dollars”.
We are already at war. It just isn’t the shooting kind.
Well, no. No money can leave the treasury without a congressional appropriation. The issue with what 14A.4 requires in practice has never been clear to me. Also, I’ve never understood why validity is taken to mean the same thing as paid. If I don’t pay a credit card bill, it’s still valid; I just haven’t paid it.
It is all one big default
But if you’re not able to pay it, now or in the future, the bill isn’t worth very much.
And there’s also the other story, if you owe the bank $1000 and can’t pay it, you have a problem; if you owe the bank $1 Million (or Billion) and you can’t pay it, the bank has a problem.
Fortunately Congress has appropriated money to service the debt.