Officials and pundits often tell us that the federal government has not defaulted on its debts, no matter how heated the debate about raising the debt limit. This statement is a disgraceful lie.
Reputable academic and government publications can provide evidence of such payment failures. Kenneth Rogoff, Carmen Reinhart, and Kenneth Rogoff mention two U.S.-related defaults in the seminal 2009 book. This is a Different Time: Eight Centuries Financial Folly. Additional episodes can be found in a 2016 Congressional Research Service ReportThis entry Have the U.S. Government ever “Defaulted” on a loan?Andrew Austin states that the U.S. Treasury has been unable to meet its obligations in certain historic instances or paid on terms that displease creditors.
These are the five most recent defaults by U.S. Treasury.
Post-Revolutionary War
Before the signing of the Peace Treaty to End the Revolutionary War, the U.S. had not paid all its interest. Congress’s wartime domestic borrowing was split into three types: loan certificates were sold through Treasury loans offices in all states; certificates by Quartermaster and Commissary corps to exchange goods and services for the Continental Army; and certificates to army officers and troops after Congress stopped paying salaries in 1780.
The first two were entirely voluntary loans. These loan certificates paid interest in specie, i.e. silver and gold coins. They were temporarily made into lucrative investments using depreciating Continental money. In October 1776, the first loan certificate promised 4 percent interest. However, Congress increased that rate to 6 percent in 1877. Congress ended all maturity dates on both old and new loans certificates. All these securities were converted into consols.
Congress paid the interest in Continentals instead of in specie in March 1778. This reduced any return. Indents were essentially IOUs and all loans through loan certificates had been repaid in March 1782. The indents could be used to pay state taxes but they did not promise any accruing interest. All of these actions involved incremental defaults.
American had relied on loans from abroad heavily. Because the French government wouldn’t roll over their loans with new ones following 1781, Congress stopped interest payments on French debts in 201785 and defaulted in installments due 1787. Private Dutch investors continued to finance the U.S. government until 1788, and there wasn’t any default.
The loan certificates of Alexander Hamilton, Treasury Secretary during George Washington’s Administration in 1790 were combined with estimated amounts of other domestic loans to fund the Revolutionary War debt. Two-thirds in consols were paid to the creditors. Consols, which at that time was called stock, began paying 6 percent interest in 1791. The other third of consols started paying the same rate in 1801. The indents could be redeemed separately with consols that paid 3 percent interest beginning in 1791. The funding also included an extra haircut on loan certificates, which could be considered a default. All of these obligations were then worth less. The U.S. foreign debt was paid in full, according to its original terms, and with any accrued interest. Hamilton obtained new loans to pay this off.
War of 1812
According to the Congressional Research Service, the U.S. defaulted temporarily during the War of 1812. There were two reasons for this. First, the terms of the loans. Before the war the Treasury Secretary was given more control over these matters. For several congressional loan authorizations investors were granted a condition that any future bond sales at better terms would be retroactively received if they occurred. The Treasury’s 6-percent Treasury bonds were then sold at discounts of 15, 20 and 30 percent, respectively, which allowed it to pay the difference. However, this was not the original intention. After some delay, the Treasury had to make up the difference by compensating the subscribers who subscribed earlier with additional securities. This significantly increased the amount of war debt than would otherwise have been.
Second, the suspension in August 1814 of all specie payments from banks other than New England was a factor that led to periodic defaults. The Treasury has paid interest in specie, bank notes or deposits that are redeemable in specie on its debt since the beginning. As bank notes declined in value, however, Treasury accepted the bank bills for tax purposes and continued to use them to pay expenses. Short-term securities were also first used by the Treasury at the outbreak of war. These were known as Treasury notes. Their maturity was one year and they paid 5.4 percent. In addition, the Treasury could receive accrued interest to help pay taxes. You could use them to pay for expenses. Due to the lack of specie, and the unwillingness of creditors to accept banknotes or Treasury bills now, Treasury secretary Alexander Dallas was required to answer a congressional inquiry. He stated that “the dividend from the funded debt had not been punctually paid”.
A dispute between Treasury creditors and Treasury was settled only after the war had ended. The Treasury was able to negotiate bank loans for 6 and 7 percentage at a 35% discount on the face value in November 1814. The Treasury received a new authorization from Congress for these loans. However, creditors who previously bought 6-percent bonds at 20% discount challenged the Treasury’s ruse. They demanded compensation for the 15% additional discount. Congress did not authorize the payment until 1855.
Civil War
The federal government was established in August 1861. Notes of DemandIn denominations of $5 to $20, $10 to $15, and $20 respectively, they were used for funding the Civil War’s costs. Because they could be used to redeem for gold at Treasury, the certificates were called “demand notes”. New York banks were affected by the December 1861 financial crises. specie payments. Soon after, banks from other cities followed and the Treasury also took this step. Holders of demand notes could no longer exchange them for gold at will. After the war, April 1862 saw the government issue greenbacks that could not be redeemed. The value of these greenbacks fell significantly in comparison to gold.
Depression-Era Repudiation Of The Gold Clause
For many decades, Treasury security holders were entitled to principal and interest payments in dollars or gold. Private contracts often contained a gold clause, which allowed the payees of Treasury securities to receive their proceeds in the form or gold. After President Franklin Roosevelt’s March 4, 1933 inauguration, the Federal Government refused to pay interest in gold and instead remitted currency. This was approved by Congress. Roosevelt devalued dollars by raising the value of gold to $35 from $20.67 in 1934. Modern media reports characterized Roosevelt’s action as an abrogation, but they were not the only ones. Wall Street JournalOn May 4, 1933, Treasury securities that were issued in June or August 1933 were sold out. A February 1935 Supreme Court ruling declared them oversubscribed Reaffirmed These were the actions of government. Although these actions have been portrayed as an effort to stop gold hoarding and end price inflation, there is no doubt that they were motivated by fiscal concerns. The ratio of federal revenue to interest expense reached 33.15 percent in fiscal 1933. This ratio is the highest since the post-1965 Civil War period. Roosevelt’s administration required more money to execute New Deal programs. They also wanted to be able to issue Treasury securities without restriction.
1979: “Mini-Default”
Recently, after Congress increased the debt ceiling in 1979, the U.S. went into default on its Treasury bills payments. The Congressional Research Service report states that approximately 4,000 Treasury bills for interest payments or redemptions of mature securities were delayed by the U.S. in late April and May 1979. These checks had a value of $122 million. The $125,000 loss of interest as a result of the delay was calculated. It was caused by technical issues and was resolved in a very short time.
However, the claim that the United States never defaulted is false despite repeated repetitions. There are other claims, more subtle and less sweeping than the one made by the officials. For example: “Aside from an operational snafu that was relatively minor,” the United States has never defaulted since the end of the Second World War II. Although it is not as powerful as a generalization more broad, such a claim can be relied upon to prove that the claims are accurate. If President Joe Biden, Treasury Secretary Janet Yellen are to be credible they must avoid historical statements that could easily be refuted through a bit of Googling. They cannot be believed in the truth of credit history and current policies.