May 16, 2023 - Economy

The not-so-secret history of U.S. default

Illustration: Natalie Peeples/Axios

You hear it everywhere. "The U.S. has never defaulted on its debt."

Yes, but: It’s not true. By the most basic definition of default — not making agreed-upon payments to those you owe — the U.S. has indeed defaulted, arguably on multiple occasions.

Why it matters: The talking point on the pristine U.S. credit record is a key bit of rhetoric for those arguing that not raising the debt ceiling — which would ultimately mean missing payments the government owes — represents an unprecedented economic risk.

  • But in reality, the U.S. has failed to meet obligations in the past.

What they're saying: "Since 1789, the United States has paid all of our bills on time. It should stay that way," Treasury Secretary Janet Yellen said in April.

  • "In our history, we have never defaulted on our debt or failed to pay our bills," White House press secretary Karine Jean-Pierre said in April.
  • "Since the United States has never defaulted on its debt, no one knows exactly how bad the financial carnage would be if it did," the Washington Post recently wrote.

Fact check: There have been at least three, admittedly distant, times when the U.S. failed to keep its financial word.

  • 1814: Amid war with the British, the Treasury couldn't come up with the scratch to service its debts, with Treasury Secretary Alexander J. Dallas admitting, "the dividend on the funded debt has not been punctually paid; a large amount of treasury notes has already been dishonored."
  • 1933-34: President Franklin D. Roosevelt's refusal to repay Treasury bondholders with gold, as agreed to when the securities were sold, represents an abrogation of the contract that certainly qualifies as a default.
  • 1979: The Treasury briefly missed payments on roughly $122 million in Treasury bills, according to the Wall Street Journal, citing issues with computer technology. Investors were repaid, with interest.

💭 Our thought bubble: What might be truthier for government figures to say is not that the U.S. has never defaulted on its debts — but rather, it has never repudiated its debts.

  • Such a dramatic turning of the nation's back on previously incurred debts has never, to our knowledge, happened with Treasury debt.
  • On the other hand: There have been episodes when the U.S. said it would not pay debts that it was arguably responsible for — for instance, the money Cuba owed Spain after the U.S. took control of the island in 1898.

For the record, most experts do think failing to raise the debt ceiling could be anywhere from a serious to a massive problem for the economy and financial markets — especially the longer it persists past the x-date.

The other side: Congressional Republicans argue the U.S. public debt is so large — at roughly 100% of GDP, the biggest since World War II — that threatening extreme measures, such as not raising the debt ceiling and defaulting in order to extract spending cuts from the White House is a legitimate tactic.

The bottom line: This may all be beside the point — at the rate we're going, claims about America's ironclad commitment to servicing its debts appear pretty hollow.

  • If Republicans in Congress continue to openly threaten to default, then the comforting — though false — image of the U.S. as the world's best borrower will be relegated to the history books anyway.
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