Anytime the alarming national debt is called into question, federal officials and politicians claim the country has never defaulted on its debt. This talking point is strategically used to deflect any criticisms of the government’s ceaseless borrowing, assuage well-founded concerns about the consequences, and legitimize the irresponsible raising of the debt limit. This rhetoric has been parroted so often that many investors are starting to question: Is it becoming more and more likely that the US could default on its debt?
Defining US Debt Default
A U.S. debt default refers to a failure of the federal government to meet its obligations to repay the debt it has incurred. This can come in various forms including delayed or missed interest or principal payments or a unilateral change in repayment terms without the consent of creditors.
7 Times the US Defaulted On Its Debt
1. Restructuring of Revolutionary War Debts (1790)
Throughout the American Revolution, the US accumulated over $75 million of debt – over $2.5 trillion in today’s dollars. At such an early point in the country’s development, this debt proved too heavy a burden to handle. Under the guidance of Secretary of the Treasury Alexander Hamilton, the federal government restructured its debts by assuming responsibility for state debts to refinance payments in a more manageable way. In the end, creditors received less money than initially promised by the federal government, qualifying it as the country’s first debt default.
2. Failed Interest Payments on War of 1812 Debt (1814)
Only a few decades later, the US government found itself overextended on war debts once again. Following the War of 1812 against the British, the federal government fell short of its required payments to bondholders. At the time, the law dictated that interest be paid in physical gold and silver. Due to logistical challenges caused by the war, the US didn’t have the physical precious metals required to pay their creditors, resulting in another federal default. However, the government was able to meet its obligations a few months later.
3. The Issuance of Greenbacks (1862)
During the Civil War, the US government took the drastic step of issuing a fiat currency, dubbed “greenbacks” to fund the war effort. This unpopular and undemocratic shift in monetary policy was largely viewed as a federal debt default by creditors. The government’s decision to repay debts in greenbacks instead of gold or silver coins went against the initial terms of the agreement. Furthermore, many people saw the issuance of greenbacks as a loss of value since this fiat currency could fluctuate in value, unlike physical metals which had been the standard form of payment up until that point.
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4. Abandonment of the Gold Standard (1933)
In 1933, President Franklin D. Roosevelt took the unprecedented step of taking the US economy off the gold standard in an attempt to spend the government’s way out of the Great Depression. This drastic move, which was never put up to a vote, had significant implications for bondholders who purchased US debt with the understanding their repayments would be in gold coins. In direct opposition to this agreement, the government paid its creditors in depreciated fiat currency.
👉Further Reading: The Return to the Gold Standard
5. Default on Silver Certificates (1968)
Since 1878, the US had been pumping trillions worth of silver certificates into circulation. This short-lived piece of legal tender was a paper currency that could be exchanged for physical silver. Nearly 90 years after its initial release, the currency was effectively nullified. In 1968, the US government decided not to honor its original commitment to repay holders of these certificates with physical silver. This unilateral decision, against the initial terms of the agreement, clearly categorizes this debacle as another example of a US debt default.
6. Collapse of the Bretton Woods System (1971)
The dollar became the world reserve currency following the signing of the Bretton Woods Agreement. The newly established system pegged foreign currencies to the US dollar, the strongest and most stable currency, and allowed for the convertibility of the dollar into gold. In 1971, President Richard Nixon effectively ended this agreement by ending the transferability of cash into physical gold. This seismic shift ushered in the era of fiat currencies and stands as yet another example of the federal government failing to meet debt repayment terms.
7. Administrative Default on Treasury Bills (1979)
In 1979, the US Treasury failed to repay $122 million in Treasury bills. Officials blamed the major gaffe on a glitch with the word-processing equipment. The issue was resolved relatively quickly with creditors being repaid in full. However, this “technical default” highlights just how fickle a fully digitized fiat monetary system can be.
Armchair historians and quarterback economists might split hairs over whether these scenarios qualify as debt defaults, but the takeaway is clear: There’s a pattern and practice of the federal government taking on more debt than it can handle, making promises to debtors (most of which are private US investors) it can’t keep, and looking for a clean exit strategy.
The Supreme Court admitted as much when ruling on the 1933 default. Justice Harlan Stone, a begrudging majority member, declared that the US government is effectively “immune from liability” when it comes to defaulting on its debt. Unfortunately, that immunity doesn’t negate the practical consequences of reckless borrowing which are inevitably passed along to the American people.
False Claims of a Clean Debt Record
US leaders have consistently claimed that the US has a clean record when it comes to debt repayments, despite clear evidence to the contrary.
The Secretary of the Treasury, Janet Yellen, recently claimed, “America has always been a nation that pays its bills on time. Amid the most recent debt ceiling fiasco, the White House falsely stated that “The credit of the United States is built on centuries of stability and responsibility” when pleading for an increase in its budget.
A US Debt Default is an Ever-Increasing Likelihood
The consequences of a US default are no longer confined to theoretical conversations. The monumental size of US debt and the rapid pace of accumulation are increasing the possibility of a US debt default. The staggering increase in America’s borrowing has many investors worrying about the potential of a catastrophic debt default. The country’s immense economic power and global influence prevented this from being a concern for decades, but that financial dominance is starting to wane. The impact of US debt is a subtle conversation with potential advantages and drawbacks, but our financial elites aren’t approaching this critical responsibility with much nuance.
👉Related: U.S. Debt Visualized: $34 Trillion
Protecting Your Financial Well-being
Our financial leaders are spending the country into potentially the worst debt crisis in world history all the while claiming that everything is a-okay. As investors seek protection against rising debt, increasing inflation, and overall economic catastrophe, making sure your asset classes are diversified among stocks, bonds and physical precious metals can be an important part of your financial strategy.
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