Was There Ever a Default on U.S. Treasury Debt?

As the bailouts in the current bust inexorably mount, financed in rapidly increasing U.S. government debt, one might wonder whether a default on Treasury debt is imaginable. In the course of history, did the U.S. ever default on its debt?

Well, yes: The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin Roosevelt’s presidency. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court. Granted, the circumstances were somewhat different in those days, since government finance still had a real tie to gold. In particular, U.S. bonds, including those issued to finance the American participation in the First World War, provided the holders of the bonds with an unambiguous promise that the U.S. government would give them the option to be repaid in gold coin. Nobody doubted the clarity of this “gold clause” provision or the intent of both the debtor, the U.S. Treasury, and the creditors, the bond buyers, that the bondholders be protected against the depreciation of paper currency by the government. Unfortunately for the bondholders, when President Roosevelt and the Congress decided that it was a good idea to depreciate the currency in the economic crisis of the time, they also decided not to honor their unambiguous obligation to pay in gold. On June 5, 1933, Congress passed a “Joint Resolution to Assure Uniform Value to the Coins and Currencies of the United States,” of which two key points were as follows: • “Provisions of obligations which purport to give the obligee a right to require payment in gold obstruct the power of the Congress.” • “Every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment is gold is declared to be against public policy.” “Purport”? “Against public policy”? Interesting rhetoric. In plain terms, the Congress was repudiating the government’s obligations. So the bondholders got only depreciated paper money. The resulting lawsuits ended up in the Supreme Court, which upheld the ability of the government to refuse to pay in gold by a vote of 5-4. The Supreme Court gold clause opinions of 1935 make instructive reading. The majority opinion, written by Chief Justice Hughes, includes these thoughts: • “The question before the Court is one of power, not policy.” • “Contracts, however express, cannot fetter the constitutional authority of the Congress.” Justice McReynolds, writing on behalf of the four dissenting justices, left no doubt about their view: • “The enactments here challenged will bring about the confiscation of property rights and repudiation of national obligations.” • “The holder of one of these certificates was owner of an express promise by the United States to deliver gold coin of the weight and fineness established.” • “Congress really has inaugurated a plan primarily designed to destroy private obligations, repudiate national debts, and drive into the Treasury all gold within the country in exchange for inconvertible promises to pay, of much less value.” • “Loss of reputation for honorable dealing will bring us unending humiliation.” The clearest summation of the judicial outcome was in the concurring opinion of Justice Stone, as a member of the majority: • “While the government’s refusal to make the stipulated payment is a measure taken in the exercise of that power, this does not disguise the fact that its action is to that extent a repudiation.” • “As much as I deplore this refusal to fulfill the solemn promise of bonds of the United States, I cannot escape the conclusion, announced for the Court, that the government, through exercise of its sovereign power, has rendered itself immune from liability.” So five of the nine justices explicitly stated that the obligations of the United States had been repudiated. There can be no doubt that the candid conclusion of this highly interesting chapter of our national financial history is that, under sufficient threat, crisis and pressure, a clear default on Treasury bonds did occur. About 250 years ago, in a celebrated essay, “Of Public Credit,” David Hume wrote: “Contracting debt will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills upon posterity.” Hume would have looked down from philosophical Valhalla in 1933-35 and seen his views confirmed. What, one wonders, would he be thinking now?

9 Responses to "Was There Ever a Default on U.S. Treasury Debt?"

  1. Michael   January 23, 2009 at 5:53 pm

    U.S. debt default is rendered an oxymoron by a)The removal of the dollar from the gold (or any other fixed) standard (1993/1973) and b)The complete dependence of world capitalism (that’s everybody now) for a reserve currency issued by the nation with the biggest military and the biggest consumer economy. Bernanke has proudly declared that “China has no choice but to continue to purchase new Treasuries because it already holds so many that any decline in their value through auction failure would represent unnacceptable losses.” As long as we can print unlimited dollars (given that at some point national debt interest payments will be greater than can be paid for at 100% taxation), and as long as the rest of the world believes that buying our debt is key their own salvation, default is out of the question. Then again, Mr. Madoff reasoned much like Mr. Bernanke until circumstances led to the sudden arrival on his desk of those inconceivable redemptions.

  2. Michael   January 23, 2009 at 6:00 pm

    Typo. It should read (1933/1973).

  3. George Harter   January 24, 2009 at 12:53 am

    One point, re Big B’s statement. No TWO: NEVER say NEVER, NEVER!The second, if China allows the yuan to appreciate, well, then what Bernanke? The Yuan climbs, what?? 40%, the Treasuries drop 6%, who is really the loser??(well, Benanke may have his ego bruised but the country….???)In fact I have contended for the last 2 years that the Chinese would actually profit by having a “Pseudo-Reserve” currency. They certainly would have much more financial muscle than now. It would also focus efforts to reflate the economy of the general populace.Per the above writer, China is certainly willing to accept reasonable losses. The Chinese are a LOT tougher than many in our inept government believe. Another item, Chinese have “FACE”, for those who don’t understand check Wiki on the concept.Bernanke is just a foolish American Academic(a Peter Principle man), he should squawk at a faculty Senate, not in front of the world.George HarterNYC Resident who will be happy to see many of the financial crooks leave even tho it will hurt the city’s economy. At least we will have a much cleaner TOWN!!

  4. john   January 24, 2009 at 9:07 am

    If the Yuan or RMB appreciates, that would make China’s contraction even more severe and quicker. Exports would be more expensive when priced in dollars and the uncertainty of future business prospects would drive lots of Chinese factories out of business. I think that may be a bad idea as it would spread a lot of misery around the far east. Last statistic I heard was ~180 million migrant workers to Dong Guan area, if even a quarter lose their jobs that’s greater than the US unemployment and could have terrible effects worldwide. I don’t really care if you have a wall street cdo, arm, toggle bond seller lose their job, but these are real people producing real products (medicine, artificial limbs, computers, etc.).Furthermore, I’d like to point out the entire time Paulson and Bernake said they were for a stonger dollar, the dollar rose from 72-89. They gave the people exactly what the people asked for (albeit indirectly a forced repatriation); so why bad mouth Ben? If you didn’t position yourself properly that’s your fault. He’s been very open and transparent and methodical in his methods and followed through to a ‘T’. Don’t badmouth the man, badmouth the policy if you don’t like it.

  5. Anonymous   January 30, 2009 at 6:45 am

    IF DARWIN WERE ONLY ALIVE NOW! Evolution has deep roots in social psychology too. As we strip all the textures off this deventure and see it for what it is we will see pure and wicked survival at its core. No rule, law or remorse will be available and a survival of the fittest rule of nature will emerge. Regional economies of new types will emerge as well as entirely new philosophical highways of thought. Our protectable assets are our diversity and ability to structure and complete research, our practical independence as individuals and our ability to lead. We are all 70 year time machines with new models in the making, social networking and marketing will re-define past our wildest dreams. Egos die with their hosts. Mother nature always bats last, let’s not forget the rules.SR Florida

  6. Swiss Genome   January 30, 2009 at 6:55 am

    It’s only a question of Time before the Chinese assume the their role as an economic power and major player something the Americans have been responsible for and thought they would be able to control. How Foolish our leaders are. As the Chinese always say . . . . . we have all the time in the World ! The key to their acension will be the revaluation of the yuan. Like America’s foreign policy . . . . we have no idea what we are doing with our economic/financial policy. This is because Americas only think short term ! The rest of the World is not going to get caught out again with another Financial crisis caused by the U.S. The time is coming for the return to a GOLD standard without one there can be no standard measurement of Value and that is the reasong we are in the mess we are today. Such a standard would not allow Governements to promote inflationary growth policies and debase their currencies over time.

  7. Don the libertarian Democrat   February 8, 2009 at 1:22 pm

    Thank you for this post. It saves me a lot of time. See here:http://www.bloomberg.com/apps/news?pid=20601080&sid=aFgHlh.Dn4Lc&refer=newsBy Stanley White and Shigeki NozawaDec. 24 (Bloomberg) — Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”So, I’m saying that a CDS on treasuries is viable, if not likely. Do you agree?

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