WHEN THE U.S. DEFAULTED ON ITS OBLIGATIONS

   

Congressional fights over raising the debt limit often result in superlatives. A failure to raise the debt limit would almost certainly shake the financial markets unless, perhaps, it was only a brief, technical breach with a clear resolution in sight.

But one superlative that should be retired is unprecedented. The debt limit has only been in effect since 1917 — Congress got tired of having to approve every spending request from the Treasury during World War I — but there are at least four instances in U.S. history when one could argue the United States defaulted on its obligations.

Some of these cases have been lost to mists of history, though one default was recently the subject of an interesting book titled American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold. It was written by Sebastian Edwards, a professor at the University of California at Los Angeles, who had become involved in litigation over Argentina's default on its debt in 2001. Argentina argued to investors that its actions were rooted in the precedent set by the United States in the 1930s.

Some might argue these cases are not comparable to a failure to raise the debt limit — and many took place before the world economy was so interconnected. But they are all examples of when the U.S. government reneged on commitments it had made to investors. We were aided in our research by Alex J. Pollock, a former banker and Treasury official who is the author of Finance and Philosophy: Why We're Always Surprised.

   

1862
The original greenbacks were demand notes that Congress authorized when waging the Civil War proved more expensive than expected. Previously, there had been no national currency. These notes, on their face, declared a promise to pay to the bearer on demand precious metal coins. But that quickly became untenable as the dollar depreciated and U.S. gold and silver reserves were depleted.

So, Congress in 1862 abandoned the promise and declared the paper notes were legal tenure even though they were no longer backed by the equivalent in gold or silver. This is why U.S. currency to this day has the notation: This note is legal tender for all debts, public and private. (A lengthy history on the saga was written in 1869 by E.G. Spaulding, chair of a key House Ways and Means panel during this period.)

To read the complete article, see:
Why a debt ceiling breach would not be the first U.S. default (https://www.washingtonpost.com/politics/2021/10/07/why-debt-ceiling-breach-would-not-be-first-us-default/)

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