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.”
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?