The Truth About the History of U.S. Sovereign Default

During the ongoing US government shutdown, there have been worries that a sovereign default is looming if no deal is reached. While many people in the establishment media have been claiming that a sovereign default is unprecedented, this is false. Let us examine the depth of the historical inaccuracy being perpetuated in the establishment media.

The first event in American history that could be called a sovereign default occurred in 1779. In June 1775, the Continental Congress issued bills of credit amounting to 2 million Spanish milled dollars to be paid starting in 1779 in four annual installments. $4 million more were issued later in 1775, and $13 million were issued in 1776. Such bills continued to be issued until $241,552,780 of them were outstanding, and the British were successful in forging even more of them. The Continental Congress made each state responsible for redeeming the bills in proportion to their respective population sizes, as it had no power to levy taxes. As the Revolutionary War went on, the public realized that neither the Congress nor the states were able to redeem the bills, leading to the phrase “not worth a Continental.” Congress admitted default on the bills in November 1779 by announcing a devaluation of 38.5 to 1.

Revolutionary War debts also led to the second US default. The Continental Congress borrowed money in addition to its money printing. The domestic portion of this debt was 11,710,000 Spanish dollars. The Continental Congress began to default on these obligations on March 1, 1782. With the Funding Act of 1790, the US Congress assumed these state-held debts while offering to pay only part of the owed money. This act of federal acquisition of state debts was the first “bailout” in American history.

Another default occurred during the War of 1812, when America was on the brink of defeat. The White House and the Capitol were burned in 1814, and American soldiers were fighting without pay. In November 1814, the Treasury defaulted on some of its bonds.

The fourth default episode occurred during the Civil War. In August 1861, Congress created a new paper currency, which became known as the “greenback” due to its ink color. There were $60 million of these printed in denominations of $5, $10, and $20. They were redeemable in specie at a rate of 0.048375 troy ounces of gold per dollar, but this promise was broken on Jan. 1, 1862. More greenbacks were issued in 1862, and while these were not defaulted on, their holders did not get their promised specie until 1879.

The theme of war leading to default would continue in delayed fashion after World War I. On Apr 24, 1917, Congress began issuing “Liberty Bonds” to pay for the war effort. The fourth round of these bonds was issued on Oct. 24, 1918, and was an issue of $7 billion at 4.25 percent interest for 20 years, callable after 15 years, and payable in gold at a rate of $20.67 per troy ounce. By 1933, the interest payments on these bonds were draining the coffers of gold, with only $4.2 billion in gold remaining. There was no way to pay the principal when it matured in 1938. The total national debt at the time was $22 billion, meaning that paying the interest on the national debt would soon empty the gold reserves. Franklin Roosevelt’s solution was to refuse redemption in gold to Americans and increase the exchange rate to $35 per troy ounce of gold for foreigners.

The gold window was closed to Americans in 1933, but it was closed to everyone by Richard Nixon in 1971 in the event known as the Nixon Shock. At the end of World War II, America owned 574 million troy ounces of gold, the majority of the world’s gold reserves. As Germany and Japan recovered in the 1950s, the US share of global GDP decreased from 35 percent to 27 percent. Inflation by the Federal Reserve, a negative balance of payments, Great Society programs, and Vietnam War debts further strained the Bretton Woods system. Between 1960 and 1971, the US gold reserve was cut in half. During the year of 1970, the monetary supply inflated from $590 billion to $633 billion. Nixon responded by ending all convertibility of the dollar to gold, thereby defaulting on promises to creditors.

The most recent default occurred in 1979. Due to a debt ceiling debate in April 1979, a failure of word processing equipment used to prepare check schedules, and record high volume of participation by small investors, $122 million in bills coming due on April 26, May 3, and May 10 were not paid in full and on time. A class-action lawsuit, Claire G. Barton v. United States, was filed in the Federal court of the Central District of California over whether the Treasury should pay additional interest for the delay. The government decided to pay up to attempt to move past the incident, and no one lost any money that they were owed on the bills. Still, the end result was a permanent increase in the interest rates of Treasury bills by 60 basis points.

Whether or not a default ultimately results from the current gridlock in Congress, the truth is that such an event would be not the first of its kind in American history, but the eighth.

We are not a country of anarchists: a philosophical rebuttal

On Oct. 4, Sen. Elizabeth Warren (D-MA) made a blog post which presents a statist viewpoint of the necessity of government services as well as an incorrect association of Republicans with anarchism. Let us examine her sophistry and rebut it line-by-line. In the interest of reason, something which tends to make statists uncomfortable, we will skip around occasionally.

“If you watch the anarchist tirades coming from extremist Republicans in the House, you’d think they believe that the government that governs best is a government that doesn’t exist at all.”

Right out of the gate, there are multiple fallacies and falsehoods. Anarchism is an anti-political philosophy which holds the state to be an unnecessary, immoral, and harmful institution. Anarchists advocate for stateless societies with an absence of force, fraud, and coercion. This is not the position of any House Republican.

“Extreme” is a philosophically invalid term that is used frequently by statists, particularly those of a progressive bent, to dismiss a position without having to argue against it. As such, it is an example of argumentum ad lapidem.

No government exists; only its component parts (each person, each building, each gun, etc.) exist, because only those parts have independent forms in physical reality. To define existence in a way that does not require an independent form in physical reality allows for abstractions and universals to exist alongside concrete objects, which deprives the idea of existence of meaning, as anything can then be said to exist.

“But behind all the slogans of the Tea Party – and all the thinly veiled calls for anarchy in Washington – is a reality: The American people don’t want a future without government.”

“The American people” is a nonexistent universal, just like government. Each individual person exists; “the American people” does not. Therefore it cannot be a reality that the American people do not want a future without government. It is also not the case that each individual person wants a statist future. Some individuals within the geographical area of the United States are anarchists, this writer included.

“When was the last time the anarchy gang called for regulators to go easier on companies that put lead in children’s toys? Or for inspectors to stop checking whether the meat in our grocery stores is crawling with deadly bacteria? Or for the FDA to ignore whether morning sickness drugs will cause horrible deformities in our babies?

When? Never. In fact, whenever the anarchists make any headway in their quest and cause damage to our government, the opposite happens.

…The Food and Drug Administration makes sure that the white pills we take are antibiotics and not baking soda. The National Highway Traffic Safety Administration oversees crash tests to make sure our new cars have functioning brakes. The Consumer Product Safety Commission makes sure that babies’ car seats don’t collapse in a crash and that toasters don’t explode.”

Here, Sen. Warren is going after her straw man caricature of House Republicans, but let us take the attack upon anarchism at face value. First, we should consider the nature of regulations imposed by the state. Such regulations are written by legislators, who are routinely bribed by lobbyists hired by the most powerful people in the very industries to be regulated. Under such a system, regulations serve not the interests of the common man, but the interests of the wealthy business owners.

On the other hand, all of the above examples can be handled through private dispute resolution organizations in a free market. People who destroy life, liberty, and property with their goods would be made to either perform restitution or be economically ostracized. Economic ostracism would make it impossible for them to continue their harmful practices, as no one would buy their goods or sell them anything for fear of being ostracized themselves. All of this can be forcefully backed by individuals acting in self-defense or by private defense agencies.

“After the sequester kicked in, Republicans immediately turned around and called on us to protect funding for our national defense and to keep our air traffic controllers on the job.

And now that the House Republicans have shut down the government – holding the country hostage because of some imaginary government ‘health care boogeyman’ – Republicans almost immediately turned around and called on us to start reopening parts of our government.”

By pointing to Republican efforts to protect certain government employees and services, Sen. Warren has contradicted her previous assertion that Republicans are anarchists.

A hostage-taker is a person who threatens to harm peaceful people unless certain demands are met. Any legislator who passes a law of any kind is doing exactly that, because anyone who peacefully disobeys a law is in danger of being harmed by agents of the state. Therefore, every member of every legislature is a hostage-taker, not just House Republicans.

“Why do they do this? Because the boogeyman government in the alternate universe of their fiery political speeches isn’t real. It doesn’t exist.”

Sen. Warren says that government does not exist. Even a blind squirrel occasionally finds a nut.

“Government is real, and it has three basic functions:”

And sometimes, a blind squirrel promptly loses the nut again.

“1. Provide for the national defense.”

Like a government and the American people, a nation is yet another nonexistent collective. There is no such thing as national defense apart from the sum of individual defenses.

“2. Put rules in place, like traffic lights and bank regulations, that are fair and transparent.”

As shown above, regulations in a statist society are anything but fair, as the affluent can easily bribe those who write the regulations. A state is not necessary for there to be regulations, as the free market imposes its own regulations which arise through spontaneous order.

“3. Build the things together that none of us can build alone – roads, schools, power grids – the things that give everyone a chance to succeed.”

Here, Sen. Warren commits the great fallacy of statism, which goes like this:

1. The state provides service X. X can be anything; in this case, Sen. Warren mentions roads, schools, and power grids.
2. Without the state, service X would not be provided.
3. Therefore, those who do not want the state to provide service X do not want service X to be provided at all, and do not care about people who need service X.

The problem with such reasoning is that step 2 is a positive claim, which carries a burden of proof. This burden is never fulfilled by statists, nor can it be, as one must ultimately disprove every possible solution to a problem that does not involve the state. This is an inexhaustible proof by exhaustion. On the other hand, all that an advocate of liberty must do is to find a solitary example of such services being provided in the free market. Examples of roads and schools which are built and maintained privately are abundant. Power grids can be more tricky to open up to free market competition, but it can be done.

“These things did not appear by magic.”

This is a straw man, as no one claims that they did.

“In each instance, we made a choice as a people to come together. We made that choice because we wanted to be a country with a foundation that would allow anyone to have a chance to succeed.”

From here on out, Sen. Warren continually uses “we” to refer to “the American people,” a collective which has already been shown not to exist. It is impossible for “us” to make a choice because there is no such thing as a collective mind; there are only individual minds. For the sake of avoiding unnecessary repetition, this rebuttal should be understood to come after each bit of text by Sen. Warren from this point forward. In this excerpt, the collective pronouns render all points invalid.

“We are alive, we are healthier, we are stronger because of government. Alive, healthier, stronger because of what we did together.”

This is a post hoc ergo propter hoc fallacy. Just because individuals acted on the idea of government before people became healthier and stronger does not mean that the idea of government is the cause of such benefits. There could be any other cause for an increase in the health of individuals.

“We are not a country of anarchists. We are not a country of pessimists and ideologues whose motto is, ‘I’ve got mine, the rest of you are on your own.’ We are not a country that tolerates dangerous drugs, unsafe meat, dirty air, or toxic mortgages.”

Here, Sen. Warren proposes that one must either believe a government that regulates many aspects of the economy, or be a stereotypical bomb-throwing chaos-seeker who views selfishness as a virtue. This is a false dilemma fallacy, as it is quite possible to believe that people should form voluntary associations to solve problems without the use of force, fraud, or coercion.

“We are not that nation. We have never been that nation. And we never will be that nation.”

The future is unknown and unknowable. People once said that a constitutional republic would never work. People once said that (chattel) slavery would never end. People once said that landing on the moon was impossible. Now Sen. Warren says that the end of the state will never come. She is on the wrong side of historical precedent.

“The political minority in the House that condemns government and begged for this shutdown has its day. But like all the reckless and extremist factions that have come before it, its day will pass – and the government will get back to the work we have chosen to do together.”

There is no government shutdown; there is only a roughly 17 percent slowdown.

Sen. Warren comes full circle with the philosophically invalid terms “reckless” and “extremist.”