All Commentary
Friday, July 29, 2011

U.S. Default Would Not Be Unprecedented

Why do the media and politicians persist in saying the U.S. government has never defaulted on its “obligations” before? It most certainly has. Marc Joffee, a consultant in the credit assessment field, writes in “Correction: The US Has Defaulted Before and It Can Default Again”:

One troubling aspect of the political debate over the debt ceiling is the constant repetition of the statement that “the US has never defaulted on its debt”. On the grounds that those who fail to learn from history are due to repeat it, I would like to set the record straight…. During its 235 years as a sovereign entity the United States has defaulted on three separate occasions … and has also intentionally liquidated debt via inflation.

At least partial defaults occurred after the Revolution and in 1933 under Franklin Roosevelt:

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 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 later ratified this action by formally invalidating gold clauses….

Meanwhile, as reported in The Economist (2011, June 23), the US Treasury failed to redeem $122 million of Treasury bills on time after another debt ceiling debate in 1979. This episode was purely a technical default, arising from systems issues….

Conclusion: The US Treasury has defaulted in the past and it has a material risk of doing so again. Absent substantive budget reforms in the current debate, it is hard to see any justification for leaving the US at AAA.

Why the constant “we’ve never defaulted before” drumbeat? Who believes the answer is simple ignorance?

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.