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?

By 1.21.09

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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?

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About the Author

Alex J. Pollock is a resident fellow at the American Enterprise Institute.