Another Perspective
Was There Ever a Default on U.S. Treasury Debt?
If it’s happened before, why should we think it can’t happen again, in the face of rapidly increasing U.S. government 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.”
Letter to the Editor View all comments (91) | Leave a comment
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Robert Rosencrans| 1.21.09 @ 10:18AM
Wonderful article.
Bernard Higonnet| 2.8.10 @ 9:58AM
And the end of the world soon ensued...
Interested Conservative| 1.21.09 @ 12:25PM
Mr. Hume would be thinking, ". . . there you go again, democrats . . .". Not without plenty of GOP help this go around.
Jim| 1.21.09 @ 1:54PM
At the risk of having this comment traced back to its originator and having my domestic door kicked in, I must nevertheless state, absent all fear - for I am too old to care anymore - that were my imagination alone capable of blowing the capitol building in D.C. to smithereens, it would thus be done.
Many times over I would blow it up. I would take the collective, collected pieces together and blow them up. Rake that resulting debris into a large pile and blow it up until the finality of dust would blow away with an easterly moving wind depositing it's load far into and onto a broad, ever expanding ocean.
It's former inhabitants sent scurrying like ants without a home into sewers, transported as so much waste, never to be seen or heard from again.
I know, I know, I am too kind; far too generous.
Osamas Pajamas | 1.22.09 @ 2:02AM
My grandmother was a victim of Roosevelt's gold theft scheme, and according to her, so am I, she said, for a legacy gone south in the pockets of thieving Democrats. I am thinking that Grammie would be arrested and jailed today, for what she said about the FDR and government in general, when I was young. But paraphrasing her, we are ruled by predatory humanitarians --- by thugs with guns and their scummy media allies --- who deserve to be treated as such. And Grammie, well she was sort of an intellectual antecedent to Ayn Rand. Yee haa.
jo ann | 7.12.11 @ 12:01PM
Your Grandmother is a wise woman. We could all learn ALOT from people like her. Tell her many of us Thank her for educating us. We need more of that.
beatstreet| 1.22.09 @ 7:56AM
And yet look at the performance of gov't bonds after this default. Their prices rose (yields fell) and continued to do so for the next decade.
Mark A. Sadowski| 1.22.09 @ 12:22PM
It's a myth that the U.S. never has never defaulted on its debts. It's as American as apple pie. (Or was it cherry pie?) The first time we did it was in 1790 under President Washington. We were burdened with the debt accrued during the Revolutionary War. Nominal interest on our debt was pegged at 6 percent but a portion of the interest was deferred for 10 years, effectively putting us into default. Been there, done that, probably do it again!
Robert Burch| 1.23.09 @ 8:01PM
How about the dollar 'default'? It's gone to zero twice - first the continental, then the greenback.
Considering that it's lost 96% of its value since the Fed was created in 1913, it's pretty close to zero again. For the long-term bondholders, who will be paid in worthless paper, that's a default too.
Amero| 1.29.09 @ 11:25PM
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adagioforstrings | 5.31.09 @ 4:32PM
The US was a creditor nation after WWI. The countries that owed us money, Britain & France, both left the gold standard.
re: Sadowski: The US repaid its Revolutionary War loans, plus interest in gold bullion. That's how the US earned a higher credit rating than Revolutionary France.
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Ego Nemo| 2.15.10 @ 5:48PM
Well, the article proves that the 'lasting humiliation' never came and that that justice was just dead wrong.
Also, the article has a secret thesis, that it only hints at, and hides like a secret against a liar's bosom:
"Public debt repayments are suicide contracts."
The U.S. Supreme Court ruling was correct, but even those voting for it failed to muster the proper logic. Luckily, those hale and hardy fellows would drop from the scene less than three years later.
The issue is this: The Public Interest, Especially in Times of Crisis, is Paramount.
To believe the perspective of the article above, one would have to believe that governments can make contracts with private parties that, if enforced, would mean the end of the governments that made the deals.
Said again: Public contracts are not suicide pacts.
Any difference from that, to the extent of the difference, is irrational.
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Tim| 12.8.10 @ 2:47PM
The United States have to do something with this debt. They are strong enough to do a lot of things, but a debt is a debt.
Regards,
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Werner| 3.27.12 @ 12:20PM
Of course, this assumes 100% default. But inflating (both external and internal) debt away is also a form of default in my book, and there's been plenty of that, especially since '71. And I strongly suspect, more to come, not only in USA.