No, the United States Has Not Always Paid Its Debts
There are five instances of the Treasury defaulting on the debt.
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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.
Post-Revolutionary War
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.
Civil War
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?
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The consequences of a default would be devastating to the economy, and fiscal conservative like me would be mortified by the outcome. Rumor has it that if the Democrats failed to raise the debt ceiling without any Republican support, the Fed has a plan to step in and start buying treasuries just before they expire. The moral hazard that would create for progressives would be the beginning of the end.
I’m sympathetic to the suggestion that the debt limit isn’t really an effective means to control spending, but making Congress go through the exercise is better than nothing. There are only a few truly effective brakes on spending. One of them is the American people’s tolerance for inflation, the second is the exchange rate and the rest of the world’s willingness to buy our debt, and the third is the American voters’ willingness to spend money before it becomes inflationary pressure.
The debt ceiling may not be an effective means to stop spending, but at least it makes Congress go on the record every time they raise the debt limit. And that means, theoretically, the voters could start holding their representative in Congress responsible for whether they vote for or against raising the debt ceiling. It is wrong to blame the debt ceiling or our representatives in Congress for raising the debt ceiling–when the real cause of the problem is the American voters’ failure to hold their representatives in Congress accountable for how they vote.
The question is: Why should the federal government “stop spending”?
1, The federal government is Monetarily Sovereign. The private sector is not.
2. The private sector can run short of dollars. The federal government cannot.
3. By formula, a growing economy requires a growing supply of money.
4. Virtually every recession and depression in U.S. history was caused by a reduction in deficit growth and was cured by an increase in deficit growth.
5. Contrary to popular myth, inflations never are caused by “excessive” federal spending. Inflations always are caused by shortages of key goods and services. Today’s inflation is caused by shortages of oil, food, computer chips, labor, and shipping.
6. Inflations are cured by increases in federal spending to acquire and distribute the scarce goods and services.
Now tell me again why the federal government should “stop spending.”
4.
Now tell me again why the federal government should “stop spending.” —- UR Duh; because they didn’t *EARN* it???!!!!
OMG; UR sooooooooo wildly stupid….
Venezuela’s currency so worthless it’s mostly being used for making crafts.
No-one can “print” fiat resources… Printing the common-trade median of resources is STEALING… Only so much can be stolen before entire economical collapse.
“…Now tell me again why the federal government should “stop spending…”
Because no one should take fucking ignoramuses who mistake “dollars” for actual currency seriously.
Fuck off and die, asshole.
3,4,6 are wrong. 5 is right, but you neglect categorical differences.
3. Economies can theoretically grow just fine into a fixed supply of sufficiently divisible money, and have historically grown at record rates with gold standard mined supplies increasing at less than 2%.
4. Your kinda-correlations miss causation. Recession are caused by systemic defaults. Systemic defaults require large scale coordinated mislending ongoing for years prior. Coordinated mislending requires a monetary influence capable of that magnitude of price distortion. Practically speaking, when on a national scale, only governments–usually during war–can have that specific and magnitude of effect. The recession is the delayed correction, not cause. Governments typically deficit spend during that result both because revenues decrease and welfare increase–but that is not the reason for recovery–the correction, with resumption of normal price incentives, is.
5. “Shortages” in goods and services can be a negative supply shock or a positive demand shock. The former is correct price signalling, not inflation. The latter can be due *simply* to increased supply of money without relevant change in any other economic factors. That is inflation. Under a fiat regime, that is an explicit fiat decision.
6. Inflation is “cured” (i.e. stopped, not reversed) by the fiat monetary authority choosing to stop inflating. In modern times, and in all times where massive inflation of a money occurs, both inflation and deflation are explicit political choices.
False:
“I’m sympathetic to the suggestion that the debt limit isn’t really an effective means to control spending”
It IS. But not when its ignored.
Dont blame the limit…blame Democrats that keep ignoring it.
Hmm. I wonder if a Republican has ever voted to raise the debt ceiling.
There’s no stopping the downward spiral when Brandon changes fed Chair – Brainard-. A socialist fed chair and currency comptroller. What could go wrong.
No mean tweets!!!!!!!
NOT GUILTY ON ALL COUNTS!
Everyone grab a gun and be a vigilante. Go kill someone. Innocent in America.
…Sarcastically says those threatening to kill, steal and vandalize one’s town/property.
“Everyone grab a gun and be a vigilante. Go kill someone. Innocent in America.”
New steaming pile of lefty shit or a sock?
I demand Free Ammo.
Can “Whats My Name” Biden write that in the BBB?
You democrats stop rioting, raping, murdering, molesting, and looting. Then we won’t have to use our guns to stop you.
Give them guns, let them kill each other.
Perhaps pedantic, but an event of default does not necessarily equate to not paying one’s debts. In the War of 1812 case, there was default but the debts eventually got paid.
Still, the worst financial chicanery can be perpetrated without ever going near a formal default: devaluation.
The worst explicit screwing the U.S. handed out to creditors was Roosevelt’s devaluation of the dollar with respect to gold in 1934. Devaluation has been destroying governments for thousands of years, and the legislative machinery will never be able to self-govern against devaluation. For that we can only hope for an independent and competent Federal Reserve.
Independent Fed?!?! That’s an oxymoron. It’s a political institution, not an economic or financial one, and can never be independent.
Competent Fed?!?! Another oxymoron, a subset of “competent government” or “democratic socialist”.
Go back to school. Oh wait, that’s what they teach nowadays anyway. Well, fuck off.
I didn’t read it as “We have an independent and competent Fed.” I read it as “Our only hope is an independent and competent Fed, which means we’re fooked.”
Milton Friedman said the Chi Coms did that in 1936. Money Mischief book.
A Disaster ensued.
Joe Blomes doing it now
Over a century has shown that is too much to hope for. What is needed is a separation of money and state–denationalization of money, as Hayek called it. Of course there is no way in Hell politicians won’t fight that tooth & nail to retain the second pillar of their power and corruption. Hopefully something like a popular blackmarket cryptocurrency industry will one day force their hands.
They kind of forgot the aftermath of WWI.
Also many soldiers that never were properly paid for their service. At least after the Revolutionary War, many waited decades for back pay, and instead of cash were finally given “land warrant” titles to land on the frontier – usually when they were too old to move to undeveloped land and try to build a cabin and break the land to the plow, likely while fighting off Indians.
The bonus army protests.
^^^^^^^^^^^^
Bonus Army MURDERS.
Biden and/or Yellen “seeming credible” is not anything I can imagine in any world I might inhabit.
Yelllen gets bonus points for stating, last week, that the CO2 based Global Warming hoax had failed.
Now, for a new Hoax.
Well lets clear one thing up right away….
The United States didn’t PAY sh*t; The people PAY. And there is nothing more tempting to dishonest people than a 3rd Party limitless credit card in someone else’s name.
Kinda like believing a military big shot at a news conference. The sign says, THE PENTAGON — WASHINGTON
News flash: The Pentagon is in Arlington, Virginia.
A Suburb of DC
Fact checking is not your strong suite
A Suburb of DC
Exactly. Not across state lines, doesn’t count. 😉
The government never lies to its citizens – well, maybe on occasion – but only when it is talking or broadcasting or writing/publishing.
Hyperinflation can never happen in the United States because it has never happened before. That means that if you’re concerned about it, you’re a right wing nut job. And if hyperinflation ever does happen here, it’s not my fault, because I was just relying on the most modern economic thought from our experts.
Macroeconomics says inflation is increase in the MONEY supply.
They no longer do so in the large context.
Yes they do print a few pitiful billion in paper so Democrats can give it to Islamic Terrorists.
Theyre issuing DIGITAL CREDITS to Banks, not money.
It therefore cannot be inflationary….UNLESS..
The Chair of the Denver Federal Reserve in 2009 said that ” if they dont claw that back thered be a disaster.
That disaster is happening NOW.
It not only hasnt been clawed back but being more or less monetized via Democrat Welfare Spending.
Ambrose Pritchard (U.K.) said back about 2009 that the coming disaster would make the Great Depression look like a picnic.
Here we are!
“the United States has not defaulted in the post-World War II era.”
Not war, but removing the Gold standard.
That peg limited how much currency could be issued.
Thats not the case now especially since they ARE NOT PRINTING MONEY.
See Forbes Magazine Nov 2011 on the Money Printing Myth.
That also exposes the Inflation Lie
Yeah, what was going off the Gold Standard if not a gigantic default?!
Originally the gold (and silver) was the money, and the paper notes were literally notes in the financial sense: IOUs.
The process of going off the Gold Standard, started in 1933 and finalized in 1971, resulted in all those notes never being paid off.
And it was because the gov’t didn’t have the money. That’s a default.
Joe Biden just announced his upcoming Memoirs book titled ” Who am I?”
FJB
LGB!
“The government never defaults! We’ve always been able to steal what we need! Now act responsible, Congress, and scale up the looting!”
It took TWO people to write this piece!
So, the general statement about default is not strictly true.
But even if the TWO authors of this piece concede that aside from a relatively minor operational snafu, that the US has not defaulted in the post-World War II era — then the sentiment of the statement is true enough. Today’s media environment doesn’t provide for the sort of finesse and context that this sort of explanation would provide.
It’s almost like the minor snafu event is the exception that proves the general rule. If the TWO authors of this piece provide an exhaustive list of defaults in the modern era (past half-century), and this single snafu is all that they can come up with, then the work of these TWO people is almost a little silly.
It was very interesting to read though, the sort of picayune stuff that historians and academics eat up and geek out over.
But other that a work of history, what import or implication this has in today’s economy is probably exceedingly little. Is the implication that default, even of the minor snafu sort, would be okay? Or is it that officials should be painstakingly accurate about making truth claims about general statements?
That claims about contingent events must have the same degree of necessary truth as logic or mathematics before any kind of short general statement can be made? For academic papers and testimony under oath, that seems right. But for public statements, to say that someone is a big fat liar if they make the claim that the US has never defaulted on its debt — again, that seems very silly.
The TWO authors finish this piece by asking us to ponder the following hypothetical;
“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?”
But the claim that the US has never defaulted on its debt is broadly made, even by politicians that have policy positions that the TWO authors of this piece would probably greatly prefer.
So, if making the general statement that the US has never defaulted on its debt should raise skepticism over the claimant’s policy choices, then nearly everyone, or at least every (or nearly every) current politician, should not be believed about their policy choices.
Again, all very, very, very silly.
Attacking the Messenger is so lame.
You pretend such wisdom but stoop so low
“It took TWO people to write this piece!
So, the general statement about default is not strictly true.”
I get the feeling you are not bright enough to understand the phrase non sequitur.
I further get the feeling you’re hoping your special pleading will be ignored.
Buzz off.
Here’s to the many people who perceive nothing to be thankful for on Thanksgiving Day — nor any other day of the year, for that matter — COVID-19 crisis or not. Even national debt alleviation with free turkey won’t lift their heavy spirits.
GRACE
Pass me the holiday turkey, peas
and the delicious stuffing flanked
by buttered potatoes with gravy
since I’ve said grace with plenty ease,
for the good food received I’ve thanked
my Maker who’s found me worthy.
It seems that unlike the many of those
in the unlucky Third World nation,
I’ve been found by God deserving
to not have to endure the awful woes
and the stomach wrenching starvation
suffered by them with no dinner serving.
Therefore hand over to me the corn
the cranberry sauce, fresh baked bread
since for my grub I’ve praised the Lord,
yet I need not hear about those born
whose meal I’ve been granted instead,
as they receive naught of the grand hoard.
I’m sympathetic to the suggestion that the debt limit isn’t really an effective means to control spending, but making Congress go through the exercise is better than nothing. There are only a few truly effective brakes on spending. One of them is the American people’s tolerance for inflation, the second is the exchange rate and the rest of the world’s willingness to buy our debt, and the third is the American voters’ willingness to spend money before it becomes inflationary pressure.
INIJOKER
I further get the feeling you’re hoping your special pleading will be ignored.
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