No, the United States has not always paid its debts


Whenever the debate over raising the debt ceiling heats up, officials and experts tell us that the federal government has never defaulted on its debt. Unfortunately, this claim is patently false.

Evidence of these defaults can be found in reputable academic and government publications. Two American flaws are mentioned by Carmen Reinhart and Kenneth Rogoff in their 2009 flagship book, This time it’s different: eight centuries of financial madness. Other episodes are covered in a 2016 Congressional Research Service report entitled Has the US government ever “defaulted”? Author Andrew Austin concludes that “the US Treasury, in some historic cases, has not been able to pay all of its obligations on time or has made payments on terms that have disappointed creditors.”

Here are five times the US Treasury in default.

Post-revolutionary war

Even before the signing of the peace treaty ending the War of Independence, the United States did not pay the interest on its debts in full. The wartime Congressional domestic borrowings fell mainly into three categories: loan certificates sold through treasury loan offices in each state; certificates issued by the corps of quartermaster and commissioner in exchange for goods and services to supply the Continental Army; and certificates issued to troops and army officers after Congress stopped paying salaries in 1780.

Only the first of these represented fully voluntary loans. Loan certificates, initially paying interest in cash (i.e. silver or gold coins), were purchased with depreciated continental paper money, making them temporarily lucrative investments. The first loan certificates of October 1776 promised 4% interest, but the following year Congress raised that rate to 6%. Congress ultimately eliminated any due dates for old and new loan certificates, effectively converting all of those titles into consoles.

But in March 1778, Congress stopped paying interest in cash and made it to Continentals instead, reducing any real return. In March 1782, all borrowing by means of loan certificates ceased altogether and interest was now paid in the form of what were called withdrawals, essentially IOUs. Although the dashes were admissible for state taxes, they promised no accrued interest for those who continued to hold them. Each of these steps involved incremental defaults.

The United States had also relied heavily on foreign loans. Partly because the French government refused to renew its loans with new ones after 1781, Congress suspended interest on its French debts in 1785 and defaulted on principal payments due in 1787. On the other hand, it There were no defaults on private loans Dutch investors, who confidently continued to help fund the U.S. government until and after the adoption of the Constitution in 1788.

When Secretary of the Treasury Alexander Hamilton finally funded the War of Independence debt in 1790 under George Washington’s administration, the loan certificates were grouped into a set with estimates of the amount of other types of domestic loans. The creditors of these various loans received two-thirds of their face value in consols (although these were called “stocks” at the time, contrary to the current usage of the term) by paying 6% interest. from 1791, but the other third came in the form of consols paying the same rate from 1801 only. In addition, the dashes were treated separately, being repaid with consols paying only 3% interest from 1791. The financing itself therefore involved an additional discount on the loan certificates which could also be interpreted as a default. . Of course, all these bonds had then depreciated in market value. As for the American foreign debt, it was fully repaid according to the initial conditions negotiated, with all accrued interest, as far as we could see. To do this, Hamilton raised funds with new loans.

War of 1812

As the Congressional Research Service reports, the United States temporarily defaulted during the War of 1812. This was the result of two factors. The first was the terms of the loans, over which the Secretary of the Treasury had had much more leeway than before the war. As a result, for several Congressional loan authorizations, investors got a stipulation that if future bond sales under the same authorization were on more favorable terms, they would retroactively receive the same terms. Thus, since the 6 percent Treasury bonds were sold at successive haircuts of 15 and then 20 percent below their face value, the Treasury, while initially trying to avoid paying the difference, has had, after a certain delay, to indemnify the first subscribers with additional securities, considerably enlarging the war debt over what it would have been otherwise.

The second factor leading to sporadic defaults was the general suspension of cash payments by banks outside New England in August 1814. Until then, the Treasury had systematically paid interest on its debt in cash or notes. bank and deposits redeemable in cash. But as banknotes have depreciated, the Treasury has always accepted them for taxes and used them for spending. At the start of the war, the Treasury had also for the first time resorted to short-term securities. Called treasury bills, they had a one-year maturity, paid 5.4%, and had to pay taxes with accrued interest. They could therefore be used to make expenses. But with the scarcity of cash and the 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 funded debt n ‘was not paid on time “.

A dispute between the Treasury and its creditors was not settled until long after the end of the war. In November 1814, the Treasury negotiated bank loans of 6 and 7% at a discount of 35% from face value. Although the Treasury obtained further authorization from Congress for these loans, creditors who had previously purchased 6 percent bonds at a 20 percent haircut contested this as a ruse and demanded compensation for the additional haircut. 15 percent. It was not until 1855 that Congress ceded and authorized this payment.

Civil war

In August 1861, the federal government issued notes on demand in denominations of $ 5, $ 10 and $ 20 to help cover the costs of the Civil War. The certificates were called sight notes because they could be exchanged for gold in the Treasury. In the midst of a financial crisis of December 1861, New York-based banks suspended cash payments. This was quickly followed by the banks in other cities, and then by the Treasury itself. As a result, holders of sight notes could no longer exchange them for gold on demand. Then, in April 1862, the government began issuing non-redeemable greenbacks, which declined significantly in value compared to gold during the war.

Depression at the time of the repudiation of the golden clause

For several decades prior to 1933, holders of Treasury securities were contractually entitled to receive interest and principal payments in dollars or gold. At the time, many private contracts contained a “gold clause”, which allowed beneficiaries to receive the proceeds in the form of gold. During the public holiday of 1933 declared by President Franklin Roosevelt immediately after his inauguration on March 4, the federal government refused requests for interest payments in gold, issuing only change instead. (Congress ratified it.) In 1934, Roosevelt officially devalued the dollar by raising the price of gold from $ 20.67 to $ 35. Although contemporary press reports have characterized the government’s actions as repeal (see the Wall Street newspaper May 4, 1933), the Treasury securities issued in June and August 1933 were oversubscribed and a Supreme Court decision of February 1935 confirmed government actions. While these actions are generally described today as an attempt to stop gold hoarding or end price deflation, they also appear to have had fiscal motivation. In fiscal year 1933, the ratio of interest expense to federal revenue reached 33.15%, the only time this ratio has exceeded 30% since the post-Civil War era. The Roosevelt administration needed more funds to implement the New Deal programs and wanted the ability to issue new Treasury securities without being hampered by the convertibility of gold.

‘Mini-Default’ from 1979

More recently, the United States defaulted on treasury bill payments in 1979, shortly after Congress raised the debt ceiling. According to the analysis of the Congressional Research Service: “At the end of April and beginning of May 1979, approximately 4,000 checks from the Treasury for interest payments and for the repurchase of maturing securities held by individual investors with an estimated value of 122 millions of dollars were not sent on time. the delays were estimated at $ 125,000. The defect was due to technical problems and was corrected in a short time.

The claim that the United States has never failed, despite its frequent repetition, is not strictly true. Officials could make more modest and nuanced statements such as “Aside from a relatively minor operational problem, the United States has not been lacking in the post-WWII era.” Such a statement does not have the power of a more radical generalization, but at least it is correct. If President Joe Biden and Treasury Secretary Janet Yellen want to appear credible, they should avoid making historic statements that are easily refuted by a small amount of Googling. If they can’t 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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