U.S. Has Repeatedly Defaulted:
Myth that the U.S. Has Never Defaulted On Its Debt
By Washington's Blog
Clearing House -
Some people argue that countries can’t default. But
widely stated that the U.S. government has never defaulted.
However, that is also a myth.
reports in the New York Times:
United States has actually defaulted on its debt obligations
first time was in 1790, the only episode Professor Reinhart
unearthed in which the United States defaulted on its
external debt obligations. It also defaulted on its domestic
debt obligations then, too.
in 1933, in the midst of the Great Depression, the United
another domestic debt default related to the repayment
of gold-based obligations.
points out at Forbes:
United States defaulted on some Treasury bills in 1979 (ht: Jason
Zweig). And it paid a steep price for stiffing
Zivney and Richard Marcus describe the default in The
Investors in T-bills maturing April 26, 1979 were told
that the U.S. Treasury could not make its payments on
maturing securities to individual investors. The
Treasury was also late in redeeming T-bills which become
due on May 3 and May 10, 1979. The Treasury blamed this
delay on an unprecedented volume of participation by
small investors, on failure of Congress to act in a
timely fashion on the debt ceiling legislation in April,
and on an unanticipated failure of word processing
equipment used to prepare check schedules.
United States thus defaulted because Treasury’s back office
was on the fritz in the wake of a debt limit showdown.
default was temporary. Treasury did pay these T-bills after
a short delay. But it balked at paying additional interest
to cover the period of delay. According to Zivney and
Marcus, it required both legal arm twisting and new
legislation before Treasury made all investors whole for
that additional interest.
consider Nixon’s decision to
refusal to redeem dollars for gold to constitute a partial
default. For example, University of Massachusetts at Amherst
economics professor Gerald Epstein
Forty years ago this month, on August 15, 1971,
President Nixon “closed the gold window”, refusing to
let foreign central banks redeem their dollars for gold,
facilitating the devaluation of the U.S dollar which
had been fixed relative to gold for almost thirty years.
While not strictly a default on a US debt obligation, by
closing the gold window the US government abrogated a
financial commitment it had made to the rest of the
world at the Bretton Woods Conference in 1944 that set
up the post-war monetary system. At Bretton Woods, the
United States had promised to redeem any and all U.S.
dollars held by foreigners – later limited to just
foreign central banks — for $35 dollars an ounce. This
promise explains why the Bretton Woods monetary system
was called a “gold exchange standard” and why many
believed the US dollar to be “as good as gold”. When
Nixon refused to let foreign central banks turn in their
dollars for gold, and encouraged the devaluation of the
dollar which reduced the value of foreign central bank
holdings of dollars, the Nixon administration
effectively “defaulted” on the United States’
long-standing obligations ending once and for all the
Bretton Woods System.
says in the Washington Post:
U.S. government defaulted after the Revolutionary War, and
it defaulted at intervals thereafter. Moreover, on the
authority of the chairman of the Federal Reserve Board, the
government means to keep right on shirking, dodging or
trimming, if not legally defaulting.
Default means to not pay as promised, and politics may
interrupt the timely service of the government’s debts.
were very different when America owed the kind of dollars
that couldn’t just be whistled into existence. By 1790, the
new republic was in arrears on $11,710,000 in foreign debt.
These were obligations payable in gold and silver. Alexander
Hamilton, the first secretary of the Treasury, duly paid
them. In doing so, he cured a default.
the whirlwind of the “first hundred days” of the New Deal,
the dollar came in for redefinition. The country needed a
cheaper and more abundant currency, FDR said. By and by, the
dollar’s value was reduced to 1/35 of an ounce of gold.
fair definition, this was another default. Creditors both
domestic and foreign had lent dollars weighing just what the
Founders had said they should weigh. They expected to be
repaid in identical money.
Language to this effect — a “gold clause” — was standard in
debt contracts of the time, including instruments binding
the Treasury. But Congress resolved to abrogate those
contracts, and in 1935 the Supreme Court upheld Congress.
“American default,” as this piece of domestic stimulus was
known in foreign parts , provoked condemnation in the City
of London. “One of the most egregious defaults in history,”
judged the London Financial News. “For repudiation of the
gold clause is nothing less than that. The plea that recent
developments have created abnormal circumstances is wholly
irrelevant. It was precisely against such circumstances that
the gold clause was designed to safeguard bondholders.”
lighter Roosevelt dollar did service until 1971, when
President Richard M. Nixon lightened it again. In fact,
Nixon allowed it to float. No longer was the value of the
greenback defined in law as a particular weight of gold or
silver. It became what it looked like: a piece of paper.
argues at the Mises Institute that the U.S. defaulted on
States Have Defaulted Also
have also defaulted. The Wall Street Journal
values soared. States splurged on new programs. Then it all
went bust, bringing down banks and state governments with
them. This wasn’t America [today], it was America in 1841,
when a now-forgotten depression pushed eight states and a
desolate territory called Florida into the unthinkable: They
defaulted on debts.
Catherine Rampbell explains:
were two episodes when a spate of American states defaulted
on their debts, in 1841-42 (nine states) and 1873-84 (10
states). The havoc wreaked by these state-level defaults is
part of the reason that so many states now have
constitutional balanced-budget requirements.
China Alleges that the U.S. Has
Already Defaulted By Weakening the Dollar
today’s political impasse leads to another default, it will
be a kind of technicality. Sooner or later, the Obama
Treasury will resume writing checks. The question is what
those checks will buy.
is the unsustainable conceit of the world’s
superpower-cum-super debtor. By deed, if not audible word,
we Americans say: “The greenback is the world’s great
monetary brand. You have no choice but to use it. Like it or
lump it.” But the historical record of paper currencies is
clear: Governments always over-issue it. The people finally
do lump it.”
the average life expectancy for a fiat currency is
less than 40 years.)
creditor – China – has said that America has already defaulted
by printing too many dollars.
A Chinese ratings house has accused the
United States of defaulting on its massive debt,
state media said Friday, a day after Beijing urged
Washington to put its fiscal house in order.
our opinion, the United States has already been
defaulting,” Guan Jianzhong, president of Dagong
Global Credit Rating Co. Ltd., the only Chinese agency that
gives sovereign ratings, was quoted by the Global Times
Washington had already defaulted on its loans
by allowing the dollar to weaken against other currencies
– eroding the wealth of creditors including China, Guan
be Chinese propaganda. But the point remains that the U.S. might
not be able to print money forever without facing consequences
from its creditors.
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