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.