Whenever the debate over raising the debt ceiling becomes heated, officials and pundits tell us the federal government has never defaulted on its debt. Unfortunately, this statement is demonstrably false.
Evidence of these payment failures can be found in reputable academic and government publications. Two U.S. defaults are mentioned by Carmen Reinhart and Kenneth Rogoff in their seminal 2009 book, This Time is Different: Eight Centuries of Financial Folly. Other episodes are covered in a 2016 Congressional Research Service report entitled Has the U.S. Government Ever "Defaulted"? Author Andrew Austin concludes "The U.S. Treasury in some historical instances was unable to pay all its obligations on time or made payments on terms that disappointed creditors."
Here are five times the U.S. Treasury defaulted.
Even before the peace treaty ending the Revolutionary War was signed, the U.S. was failing to fully pay interest on its debts. Congress's wartime domestic borrowing fell mainly into three categories: loan certificates sold through Treasury loan offices in every state; certificates issued by the Quartermaster and Commissary corps in exchange for goods and services to supply the Continental army; and certificates issued to the army's troops and officers after Congress ceased paying wages in 1780.
Only the first of these represented entirely voluntary loans. The loan certificates, initially paying interest in specie (i.e., silver or gold coins), were bought with depreciating Continental paper money, temporarily making them lucrative investments. The first loan certificates of October 1776 promised 4 percent interest, but the following year Congress raised that to 6 percent. Congress eventually eliminated any maturity date for both previous as well as new loan certificates, effectively converting all these securities into consols.
But in March 1778, Congress stopped paying the interest in specie and instead did so in Continentals, reducing any real return. By March 1782, all borrowing through loan certificates ceased entirely, and the interest was now being paid in what were called indents, essentially IOUs. Although the indents were receivable for state taxes, they promised no accruing interest for those continuing to hold them. Each of these steps involved incremental defaults.
The U.S. had also relied heavily on foreign loans. Partly because the French government refused to roll over its loans with new ones after 1781, Congress suspended interest on its French debts in 1785 and defaulted on installments of the principal due in 1787. On the other hand, there was no default on loans from private Dutch investors, who confidently continued to help finance the U.S. government up until and after adoption of the Constitution in 1788.
When Treasury Secretary Alexander Hamilton finally funded the Revolutionary War debt in 1790 during George Washington's administration, the loan certificates were rolled into a package with estimates of the amount of the other types of domestic loans. The creditors of these various loans received two-thirds of their face value in consols (though these were called "stock" at the time, unlike today's usage of the term) paying 6 percent interest beginning in 1791, but the other third came in the form of consols paying the same rate beginning only in 1801. In addition the indents were treated separately, being redeemed with consols paying only 3 percent interest from 1791. So the funding itself involved an additional haircut on the loan certificates that could also be interpreted as a default. Of course, all these obligations had by then depreciated in market value. As for the foreign U.S. debt, it was paid off in full according to the original terms negotiated, with all accrued interest, as far as could be ascertained. To do this, Hamilton raised money with new loans.
War of 1812
As the Congressional Research Service reports, the U.S. temporarily defaulted during the War of 1812. This resulted from two factors. The first was the terms of loans, over which the Treasury Secretary had been given far more discretion than before the war. Consequently, for several congressional loan authorizations, investors gained a stipulation that if any future bond sales under the same authorization were at more favorable terms, they would retroactively receive the same terms. Thus as the Treasury's 6-percent bonds were sold at successive discounts of 15 and then 20 percent below face value, the Treasury, while initially trying to avoid paying the difference, after some delay had to compensate the earlier subscribers with additional securities, significantly enlarging the war debt over what it otherwise would have been.
The second factor leading to sporadic defaults was the general suspension of specie payments by banks outside of New England in August 1814. Up until then, the Treasury had consistently paid interest on its debt in specie or bank notes and deposits redeemable in specie. But as the bank notes depreciated, the Treasury still accepted them for taxes and used them to make expenditures. At the beginning of the war, the Treasury had also for the first time resorted to short-term securities. Called Treasury notes, they had a maturity of one year, paid 5.4 percent, and were receivable to pay taxes with accrued interest. They therefore could be used to make expenditures. But with the scarcity of specie and reluctance of creditors to now receive banknotes or Treasury notes, Treasury Secretary Alexander Dallas had to admit in a response to a congressional inquiry that "the dividend on the funded debt has not been punctually paid."
One dispute between the Treasury and its creditors was not settled until long after the war was over. In November 1814, the Treasury negotiated bank loans of 6 and 7 percent at a 35 percent discount from face value. Although the Treasury got a new congressional authorization for these loans, the creditors who had previously purchased 6-percent bonds at a 20 percent discount challenged this as a ruse and demanded compensation for the additional 15 percent discount. Not until 1855 did Congress relent and authorize this payment.
In August 1861, the federal government issued demand notes in denominations of $5, $10, and $20 to help cover the costs of the Civil War. The certificates were called demand notes because they could be redeemed for gold at the Treasury. In the midst of a December 1861 financial crisis, New York-based banks suspended specie payments. This was quickly followed by banks in other cities and then by the Treasury itself. Consequently, holders of demand notes were no longer able to exchange them for gold on demand. Then in April 1862 the government began to issue non-redeemable greenbacks, whose value declined significantly relative to gold over the course of the war.
Depression-Era Repudiation of the Gold Clause
For several decades prior to 1933, holders of Treasury securities were contractually entitled to receive interest and principal payments in either dollars or gold. At the time, many private contracts contained a "gold clause," which enabled payees to receive proceeds in the form of gold. During the 1933 banking holiday declared by President Franklin Roosevelt immediately after his March 4 inauguration, the federal government refused requests for interest payments in gold, remitting only currency instead. (Congress ratified this.) In 1934, Roosevelt officially devalued the dollar by increasing the price of gold from $20.67 to $35. Although contemporary press accounts characterized the government's actions as an abrogation (see the Wall Street Journal on May 4, 1933), Treasury securities issued in June and August 1933 were oversubscribed and a February 1935 Supreme Court decision upheld the government's actions. While these actions are generally portrayed today as an attempt to halt gold hoarding or end price deflation, they also appear to have had a fiscal motivation. In fiscal year 1933, the ratio of interest expense to federal revenues reached 33.15 percent, the only time this ratio has exceeded 30 percent since the post-Civil War era. The Roosevelt administration needed more funds to implement New Deal programs and wanted the flexibility to issue new Treasury securities unimpeded by gold convertibility.
'Mini-Default' of 1979
Most recently, the U.S. defaulted on Treasury bill payments in 1979 shortly after Congress raised the debt ceiling. According to the Congressional Research Service analysis: "In late April and early May 1979, about 4,000 Treasury checks for interest payments and for the redemption of maturing securities held by individual investors worth an estimated $122 million were not sent on time. Foregone interest due to the delays was estimated at $125,000." The default was due to technical problems and was cured within a short period of time.
The claim that the United States has never defaulted, despite its frequent repetition, is not strictly true. Officials could make more modest and qualified claims such as "aside from a relatively minor operational snafu, the United States has not defaulted in the post-World War II era." Such a claim lacks the power of a more sweeping generalization, but at least it's accurate. If President Joe Biden and Treasury Secretary Janet Yellen want to seem credible, they should avoid making historic statements that are easily refuted by a small amount of Googling. If they cannot be believed about the basic reality of the federal government's credit history, how can we believe what they say about current policy choices?