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A number of newspapers claim that the US federal government has never defaulted on its loans (though I noted that it did restructure them in 1930).

In particular, the Economist states in the article “The Debt Ceiling and Default”, Jan 13th 2011, that the US has never defaulted:

I have yet to find a similar ranking for the federal government. This should not be surprising; the United States has never defaulted. There is the fourteenth amendment to the constitution which says: “The validity of the public debt of the United States… shall not be questioned.” The purpose of this section was to forbid the United States from honouring Confederate debts. The Supreme Court has apparently ruled that it also bars Congress from voiding a government bond, although not from abrogating the gold clause as it did in 1934.

In contrast, Kenneth Rogoff states that the USA has defaulted before:

“We went off the gold standard,” he observes, and the price of gold, which used to be $20 an ounce, suddenly jumped to $35 an ounce.

“That was a default on domestic debt,” Rogoff observes. “You would be amazed at how many countries have amnesia with respect to their default(s).”

Both are references from eminent professionals, so I'm left wondering which is correct.

Why's there a disagreement between what Kenneth Rogoff states and what the Economist states – is it just a matter of semantics?

Are there indisputable examples of where the US federal government has defaulted?

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Brian M. Hunt
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  • If you set the laws that determine what default is. Then change the laws after you agree to a loan by the old laws so that the old loan now has to use the new laws which allow you more time to make payments, would that count as a default? What if elected officials of certain states take out a loan for you and then you declare those loans void, is that default? – Chad Aug 11 '11 at 15:54
  • @Chad: Good question. Default is a failure to pay according to the terms of the *contract*. Even where the debt is governed by the law of the debtor, legislating changes to the debt shall constitute a default, in the eyes of creditors', insofar as that legislation alters or effectively makes changes to material terms of the contract (i.e. terms relating to the amount and timing of payments). – Brian M. Hunt Aug 11 '11 at 16:03
  • The laws change the wording of the contract. That is how the laws are written to avoid breaking contracts. IE "Any current contract using terms previously set are hereby amended in accordance with this law. These changes shall not constitute a default and no penalty may be assessed as a result of this change." -- Those type of clauses are all over. Though I think they are typically 18 paragraphs long and essentially unreadable to the common man. – Chad Aug 11 '11 at 16:08
  • @Chad: It's unusual that sovereign bonds be governed by the debtor's law; most bonds are governed by New York or British law. Language of the sort you suggest in a sovereign bond is exceedingly unusual (what's the point since you can't change NY/London law?). Regardless, US Treasury bonds do not seem to contain a clause of the type mentioned (of the circulars I'm looking at; you can find them on perfectinfo.com, albeit pay-walled). Such a clause may avoid technical default, but I expect creditors would still consider it a default to receive less than face value. A rose by any other name… – Brian M. Hunt Aug 11 '11 at 16:41
  • Bonds are only one way that government takes on debt. So are you asking specifically about defaulting on its treasury bonds? – Chad Aug 11 '11 at 16:46
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    The gold standard is an irrelevancy here. A default is when somebody fails give back what they borrowed (with the agreed interest). The fact that the thing is not worth the same according to some exchange rate is irrelevant, If I lent you a thousand US dollars five years ago, can I claim you defaulted because the thousand US dollars you gave back aren't worth the same number of Canadian dollars? If I lend you my Picasso painting, and Picasso goes out of favour while you have it, did you default when you give it back because it isn't worth the same number of dollars? Of course not. – DJClayworth Aug 11 '11 at 19:47
  • What has happened in the cases where [the government has been in shut-down](http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/30/every-government-shutdown-ever-in-one-chart/) when the debt becomes due? Or do the shutdowns not include the departments that pay debts? – Oddthinking Oct 01 '13 at 01:38
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    @DJClayworth On the gold standard, I am not sure it was irrelevant. It is arguable that breaking from the gold peg constituted a default to some holders for a couple reasons: 1.) the US explicitly guaranteed until then full convertibility of currency at a pegged rate with gold, and unilaterally broke its guarantee; 2.) US dollars were bought with the expectation of a peg to gold, and holders relied on that expectation to their detriment; 3.) gold was the international norm for reserves and unpegging was a violation of that norm; and 4.) converting to fiat devalued the dollar. – Brian M. Hunt Nov 22 '13 at 14:51
  • @Oddthinking: Since the US federal government governs the laws about paying employees, there is no breach of a debt. I think a proper default would really have to be a failure to meet the terms of a bond agreement or a related contract (e.g. credit-default-swap, etc.), or a default in the eyes of a rating agency. – Brian M. Hunt Nov 22 '13 at 14:54
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    @Brian: I didn't mean the government not paying the wages of zookeepers, say. I meant the government sending home all the accountants who make sure bonds get paid on time. – Oddthinking Nov 22 '13 at 15:06
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    @Oddthinking: Oh I see. The bonds are paid automatically - and have been for quite a long time, so I imagine it could be unmanned or have a skeleton crew of essential workers. – Brian M. Hunt Nov 22 '13 at 15:10

3 Answers3

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The answer is yes. The US has defaulted on their debt once. In 1979 it postponed sending some of the checks on time for technical reasons.

From the article Delayed payments in 1979 offer glimpse of default consequences dated July 10, 2011 in the Washington Post, citing Terry Zivney and Richard Marcus, "The Day the United States Defaulted on Treasury Bills," The Financial Review 24 (3). (1989): 475–489.:

In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did . . . It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode entitled “The Day the United States Defaulted on Treasury Bills.”

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Daniel Iankov
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    If just missing a payment counts then it happens all the time. The government has a accounting class for paying interest penalties for not meeting their payment dates. Its right in the budget. In 1996 I got $128 extra because my tax refund was not processed until August. – Chad Aug 12 '11 at 14:57
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There is this example from 1933:

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.

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.

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.

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.

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  • That's the same default as Rogoff refers to (from the question). Not a dollar default, but taking the US off the gold standard. – MSalters Aug 12 '11 at 12:40
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    Would it be fair to say that the US defaulted on an obligation to remain pegged to the gold standard? – Brian M. Hunt Aug 12 '11 at 13:17
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    Well, the majority opinion was no. All legal contracts are limited by law, and contract terms have to be interpreted no further than the law allows them to. In this case, the constitution specifically reserved a right to Congress, so the terms of the bond can not be read to bypass Congressional powers. In other words, the Executive cannot make promises on behalf of Congress, not even in the terms of a bond. (Shame on the minority opinion for suggesting such an easy loophole. "Congress shall make no law..."? Just make a promise in bond terms and suddenly you can?!) – MSalters Aug 12 '11 at 13:45
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    Well if I remember correctly owning gold was illegal at time. http://en.wikipedia.org/wiki/Executive_Order_6102 . So you cannot repay in gold because it will be crime. So if US gives today's bondholders cocaine bond, there will still be no legal way for them to take the payment. – Daniel Iankov Aug 12 '11 at 14:32
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    @Daniel Iankov If the bond holder wasn't a US citizen, then they couldn't have been affected by that order. – dtanders Aug 12 '11 at 18:48
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The US is in a unique situation as the US dollar has been accepted as the exchange standard and as the Reserve Currency. So when it needs to borrow money, it can borrow US dollars and repay with US dollars. In addition, the US Government is the only one allowed by law to print US dollars. Because it is held as a reserve and used for exchange, the US can get away with financing its own debt with the costs being absorbed by everyone who holds the dollar (which is a far greater number than all other countries).

The Federal Reserve is a govenment entity that is part of the Department of the Treasury that handles both the printing of money and issuing of Treasury Bonds. Because of this the US can choose never to default.

That said when you get a treasury bond for $1,000,000 you buy it for $999,500 with a 6 month maturity date you expect that in 6 months you will have a bond worth $1m. But if the government decides during that 6 month period to create a signifigant quantity of dollars, such that the value of the dollar is diluted so $1,000,000 is only worth $999,450, it is not default but it is also not what you expected when you purchaces your T-Bill 6 months earlier.

If the US had to buy, say, gold to back its T-bills, let's look at the two values: a 6 month T-bill bought Feb 1 for $1m versus a T-bill that promised an amount of gold worth $1m on Feb 1 with a July 1 Maturity.

Format is Currency $1m Feb 1 2011 - Value of return on July 1 2011 in US$ vs had you kept your original currency

US Dollar - $940253.16
Gold - $887230.95
Euro - $952920.52
Canadian Dollar - $967767.47

Feb1 xch rates
Jul1 xch Rates

So actual default? No. But If I took a $1,000 loan from the bank and when it came due I only paid them $940, they are not going to just accept that as paid in full. But government effectively does just that. This is changes in valuation not inflation.

US Inflation rate - 3.5588% (Per year)

Devaluation rate - 11.94% (Feb1-Jul12011)

To be fair QE is not the only downward pressure on the value of the dollar. We are currently reaping the result of overspending and policies that encourage wealth exodus. This is not the result of any one president, but goes back about 20 years, through several changes in leadership of all levels of government.

(Updated gold to reflect the same metrics as other currencies)

UPDATE CONSUMER CONFIDENCE CRASHES

The whole point is of this is that while technically and legally, there is no default the expectation is that the government will honor its debt. If they allow their currency to devalue, allow hyper-inflation to set in, and print money to pay debt, then they are not doing that. If it was just gold that was going up then it would not hold water. But look at all of the currencies listed. It shows consistent losses by the dollar. Roughly around 6-8% almost across the board over 6 months. That is effective default even if it is not technically default.

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    If the bond pays in dollars and the correct number of dollars are paid, there's no default regardless of the value of the dollar with respect to commodities or other currencies. The last paragraph where you create a scenario that's an actual default and imply that's it's equivalent to not adjusting a bond to match inflation is just disingenuous. – dtanders Aug 11 '11 at 18:15
  • @Chad a note on the first paragraph, I'd suggest clarifying that the US is not unique in offering debt in its own currency; Germany, France, Japan, China, Canada and others have all offered bonds denominated in their own currency, and have had access to seigniorage/quantitative easing to pay debts. I agree that the US is unique in presently having exorbitant privilege, though even then only really since the US dollar became a fiat currency (i.e. since Bretton Woods in 1971). – Brian M. Hunt Aug 11 '11 at 18:37
  • @dtanders - It really is the same thing one is somehow allowed the other is not. And realistically the first few times you can probably get away with paying the bill 40 light because its not worth fighting over it. But eventually everyone starts wanting you to give them more to make up for the fact that you have screwed them before. – Chad Aug 11 '11 at 18:38
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    @Brain - Good point I think i have clarified that better now. I would argue that it started in the 30's when we left the gold standard but either way, we are now backed by alot of hot air and promises from Washington. Fortunatly they can all be trusted to do what is in our best interest. – Chad Aug 11 '11 at 18:46
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    It's not the same and even though I understand how it would feel that way form the lender's point of view, it's absurd to claim that just because a lender doesn't get back the value from an investment they expect that the legal concept of a default applies. If lenders want to guard against inflation, they need to, as you alluded to, demand higher interest rates, not use loaded language to make themselves look like victims of a scam. – dtanders Aug 11 '11 at 19:34
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    Gold standard is irrelevant here. If I lend a thousand things (dollars, yen, cowrie shells, ounces of gold) I expect to get back a thousand of those things. The fact that the exchange rate between them has changed is irrelevant - giving back the same number of things satisfies the debt. – DJClayworth Aug 11 '11 at 19:42
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    @dtanders: Agreed; creditors could also demand indexing to inflation (which is effectively a higher interest, contingent on inflation). They could also demand pegging to a basket of currencies, gold, oil, etc., to hedge their risk – though such would be unusual in bonds, more likely in derivatives. – Brian M. Hunt Aug 11 '11 at 20:03
  • @dtanders - they can also buy TIPS instead of straight up bonds (Treasure Inflation-Protection Securities). They are indexed to inflation, as the name implies. Other countries have them too. http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm – user5341 Aug 11 '11 at 20:39
  • OK I have changed the comparison to more of an apples to apples comparison. – Chad Aug 11 '11 at 20:40
  • @DVK - Inflation is 3.58% annually the change of the value of the dollar over the time period(i picked them just as last reported 6 month period) was nearly -6% over 6 months. The TIPS does not protect from that – Chad Aug 11 '11 at 20:41
  • If you claim that you should get more dollars because gold went up, then you should also accept that you get _less_ dollars if gold went _down_. Of course, you'd have all investors yelling if that happened. I.e. bogus claim. – MSalters Aug 12 '11 at 12:35
  • @Chad - heh... I didn't mean to imply that TIPS are necessarily a GOOD investment. Merely that there ARE securities that are indexed for inflation by design. – user5341 Aug 12 '11 at 13:02
  • @MSalters - No i am saying that the US Government has a duty to prevent extreme devaluation of its currency. That duty is not just to its citizens but to its creditors and the rest of the world who accept it as the standard for exchange and reserve. If it was just gold Then it would be bogus. But I just picked 2 currencies that are fairly common. THE US DOLLAR IS WORTH LESS THAN THE CANADIAN! Heck the mexican peso gained almost 8% in 6 months. I almost included them but the thought sickened me. – Chad Aug 12 '11 at 13:30
  • -1 then, with that it's just not an answer to the question. Skeptics.se isn't a political site, we're debating factual claims here. We're not arguing for or against the gold standard, we're wondering if the US government ever defaulted on a loan (i.e. didn't abide by the stated terms of a loan) – MSalters Aug 12 '11 at 13:36
  • Your answer still conflates devaluation and default. Also, protecting the value of treasury bills is not one of the missions of the Fed http://www.federalreserve.gov/aboutthefed/mission.htm – dtanders Aug 12 '11 at 13:39
  • @Dtanders I am not saying it is part of the fed, it should be, but that is a different question. I am saying that US not defaulting is not the same as honoring our debts. When you issue debt, it is implied that $1m today will be roughly the same as $1m at maturity with an allowance for normal inflation. I went back 6 months but I could easily have gone back 12 18 or 24 and saw fairly consistant results. Over time it would lessen the impact slightly as the rate of devaluation seems to be growing. So do not take the US avoiding default as meaning US Debt is good. – Chad Aug 12 '11 at 13:58
  • And I'm saying that what a lender thinks is the implied final value of the return on a loan doesn't factor in at all when determining whether the loan was repaid according to the terms of the loan unless the terms specify a final value relative to the value of the principal at the time of the loan. That is not the case here. Further, your answer is not an answer to the question at hand. It's an answer to the question "was buying treasury bills a **good investment** over the last year or so if my main goal was to keep abreast of valuation" which was not the question asked. – dtanders Aug 12 '11 at 14:09
  • @dtanders - It was an extrapolation of the Quote by Kenneth Rogoff included by the original poster to show that the same thing is going on today but as we have already jumped off of the gold and silver standard its what is left. As the post says **ACTUAL DEFAULT NO**. But that is not the same as honoring your debt. We are going in circles here I am willing to address concerns but Your claim is not that what i am saying is wrong or invalid just that you dont think its a fair comparison. – Chad Aug 12 '11 at 14:21
  • When you say that paying less than the expected final value of a loan is the same as not honoring debt, that is certainly wrong. Lenders take on risks when loaning money and one risk is that the loan won't keep pace with valuation. If they don't understand that risk, they're being stupid with their money. Nobody cheated them, though. Rogoff's quote was dubious until xiaohouzi79 posted his answer pointing out that the treasury decided not to allow bonds that were issued to be redeemable for gold to be redeemed for gold. – dtanders Aug 12 '11 at 15:18
  • @Dtanders - Think of this as renting the money. If I rent a car then trash it and turn it in I cant just walk away paying the little bit that i promised. That is what the US is doing they are renting the car and trashing it. – Chad Aug 12 '11 at 16:46
  • Buying a bond is a loan to the government. Trying to think about it in terms of renting physical property is inaccurate at best and will only cause you problems when trying to make sound financial plans. – dtanders Aug 12 '11 at 17:34
  • Please move this to chat... :) – Sklivvz Aug 13 '11 at 07:07
  • @Sklivvz - No interest in continuing this actually. On somethings people just will not agree this seems to be one. – Chad Aug 15 '11 at 13:04
  • http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ seems relevant to this answer – dtanders Aug 18 '11 at 18:59
  • @Dtanders - I do not claim that it causes inflation... inflation != devaluation. Inflation means things cost more. Devaluation means that your money is worth less. You keep trying to confuse the issue by claiming inflation when I am talking devalution. Then when i compare phyical value to a return on a bond you cry foul. Devaluation is much more like the rental analogy except that not only did i trash the rental i put a ding in everyone else's car too. – Chad Aug 18 '11 at 20:06