“The United States pays its bills. It’s who we are. It’s who we’ve been. It’s who we’re going to continue to be, God willing. … Over more than 200 years, America has built this hard-earned reputation of the strongest, safest and most secure investment in the world.”
— President Biden, remarks at a meeting with financial leaders, Oct. 6
“An actual default would be unprecedented.”
— Jamie Dimon, chief executive of JPMorgan Chase, speaking to Biden
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.
Story continues below advertisement
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.
Advertisement
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.
Advertisement
Story continues below advertisement
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.)
1933
When Franklin D. Roosevelt became president during the Great Depression, U.S. bonds — some of which had been issued to finance World War I — had a clause that promised holders they could be repaid in gold coin.
But Roosevelt wanted to depreciate the value of the dollar relative to gold — by more than 50 percent — so at the urging of the administration, Congress passed a joint resolution canceling all the gold clauses. Holders of the bonds thus were denied an instant windfall. Congress in essence repudiated the government’s obligations, and bondholders were left with depreciated paper money.
Advertisement
Story continues below advertisement
The Supreme Court, in a 5-to-4 ruling, essentially upheld the ability of Congress to change the terms of bonds, even though it found the action distasteful and unconstitutional.
Roosevelt also issued an executive order ordering Americans to give up any gold holdings under threat of criminal penalty — and it remained illegal to own gold until the 1970s.
“The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin D. Roosevelt’s presidency,” Pollock wrote in a 2009 article. “This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court.”
Story continues below advertisement
In his book on the case, Edwards concludes that this was considered “an excusable default” because many people believed that abandoning the gold standard and devaluing U.S. currency would help end the Great Depression. (By contrast, while Argentina tried to claim the 1933 U.S. action was precedent, that government was perceived as acting in bad faith.)
Advertisement
Pollock said in an interview that despite suddenly changing the terms of the bonds, the United States was able to quickly sell new debt. He added that the long court battle — the Supreme Court ruling on the action’s legality was not issued until two years later — allowed people to get “used to the idea and life goes on.”
1968
Here, the United States reneged on a promise to repay dollars known as “silver certificates” in actual silver dollars.
Story continues below advertisement
An 1878 law had allowed people to deposit silver coins at the Treasury in exchange for easier-to-carry certificates. “This certifies that there is on deposit in the Treasury of the United States of America one dollar in silver payable to the bearer on demand,” said the face of the dollar silver certificate.
As the value of the dollar depreciated in the early 1960s and became less valuable than the silver equivalent, long lines of people stood outside the Treasury demanding that their paper certificates be exchanged for silver coin.
Advertisement
Starting in 1964, the government said the certificates would be exchanged for silver nuggets, not coin. Finally, in 1968, the government announced that the certificates would only be exchanged for paper currency — nullifying the original agreement with holders of the silver certificates.
Story continues below advertisement
Pollock estimates that the silver promised in a dollar certificate today would be worth $20 in paper money.
1971
Under the Bretton Woods agreement of 1944, world currencies were linked by fixed exchange rates to the dollar — and the dollar could be redeemed for gold at a set price ($35 an ounce). But the pinch was on, and by 1970, the United States was in danger of not having enough gold to meet its commitments.
So, in a surprise announcement on Aug. 15, 1971, President Richard M. Nixon unilaterally declared that the 27-year-old deal was over and the gold window was closed. His “new economic policy” also included a 10 percent surcharge on all dutiable imports, a 10 percent reduction in foreign assistance expenditures and 90-day wage-and-price controls.
Advertisement
Story continues below advertisement
The action led almost immediately to a 20 percent depreciation of the dollar and a new worldwide agreement on exchange rate policies. But it was also basically a default.
“No prior consultation happened with IMF,” noted Indian investment manager Nilesh Shah in a 2013 article on Nixon’s move. “No approval was taken from nations holding dollar. No option was given to nations who were holding dollars on the explicit commitment of the US on the gold peg. There was no choice but for dollar holders to believe the credo ‘In God We Trust.’ In one quick swoop, pine trees with some green color became billion dollars without the backing of gold.”
(About our rating scale)
Send us facts to check by filling out this form
Sign up for The Fact Checker weekly newsletter
The Fact Checker is a verified signatory to the International Fact-Checking Network code of principles