Obama is woefully ignorant concerning US history, or he wouldn’t keep saying that the US has never defaulted on its debt. He has also stated that a default would be “catastrophic.” Neither statement is true. I will demonstrate to you in this article that the US has defaulted on its debt obligations THREE times – and survived. In addition, the US has defaulted on two monetary instruments in its short history. So, if we default it will not be the first time it has happened.
What is a default? Well, it’s not an economic meltdown, and it’s not a catastrophe, as Obama and Company would have you believe. In simple terms, a default on debt is the failure to pay interest or principal in a timely manner.
Obama and the Democrats have repeatedly used these terms regarding a possible default:
· “Unprecedented Default!” (Harry Reid)
· “Has Never Happened in US History!” (Obama)
· “Unthinkable!” (Obama)
· “Catastrophic & Unprecedented!” (US Treasury website)
If you repeat a lie often enough, uninformed people will believe it. Even FOX News, normally a reliable source for news, has repeated the lie that if we default it will be for the first time in history. Let’s look at the facts.
We will look at:
1) Debt Default #1 – 1790
2) Debt Default #2 – 1933
3) Debt Default #3 – 1971
4) Monetary Default #1 – 1792
5) Monetary Default #2 – 1876
Debt Default #1
In the late 1700’s the United States was just a puppy of a country. Lots of people gave us a “snowball’s chance” to survive a century. We made mistakes, many of them costly.
One of the first was the Default of 1790. This Default on the National Debt was orchestrated by the Treasury Secretary at the time, Alexander Hamilton. It resulted in the deferment of debt payments for 11 years and a restructuring of the national debt.
But was this really a “Default?” Let’s ask an expert on the National Debt. John Steele Gordon is an economist author and commentator on business and economic matters. He has also written a definitive book on the history of the National Debt.
Steele says, "Default is nothing more than a failure to pay the interest or principal on a debt in a timely manner.” The default of 1790 certainly qualifies under that definition. Interest payments were not made until 11 years after they were due. And "restructuring" simply means a partial default in which part of the debt is “written off.”
Debt Default #2
The next Default was in 1933. By Executive Order, FDR took the nation off the Gold standard, and confiscated all Gold and Gold Certificates. The 1933 Default on the National Debt was sparked by the nation's abrogation of the Gold Clause, which gave investors who purchased the US bonds that helped finance World War I the right to be repaid in gold coin, according to Reinhart and Rogoff. Instead of Gold, they were paid in worthless Federal Reserve Notes, which were nothing more than debt instruments. So their debt was “repaid” with more debt.
Carmen Reinhart and Kenneth Rogoff (see LINK to their website below) are the authors of “Eight Centuries of Financial Folly.” They list two other Debt Crises in their research on debt defaults. These began 1841 and 1873. I have not included these in the five defaults described in this article, because they involved state debts, not federal debts.
In 1841-1842 eight US states plus the then-territory of Florida did the unthinkable: they defaulted on their debts. Keep this in mind when you consider buying state bonds. In six of these cases the states “restructured” their debts; in the other three cases, the states repudiated their debts entirely. (See LINK “When States Default”)
Also, in 1873-1884 ten states defaulted on their debts. The worst of these was West Virginia. It didn’t pay off the last of its creditors until 1918 – 45 years late. A sub-story of this event is that Americans back then felt a moral duty to pay their debts. So two states (Indiana and Ohio) increased their property taxes eight-fold to pay their debts. And four states that had no property taxes instituted them. (Yes, Virginia, there was a time when Americans did not pay property taxes. Debt changed all that.)
Debt Default #3
The final federal default occurred in 1971 under Richard Nixon. This is the date when many believe the US went off the Gold Standard. That actually happened for American citizens in 1933 when Roosevelt stole our gold. Until then Americans could redeem paper money for Gold coin. After 1933 only other nations could redeem dollars for Gold. In my thinking, when Americans could no longer get Gold for their money, we were off the Gold Standard.
To understand what happened in 1971 we must go back to the 1944 Bretton-Woods Accords. While World War II was still raging, representatives of 44 nations met to design a new international monetary system. A lot happened during this conference, but the most important for the purpose of this article, there were two key agreements:
1) The other 43 nations tied the value of their currencies (or “pegged” them) to the US Dollar.
2) The Dollar became the World Reserve Currency.
3) The US agreed to redeem Dollars in Gold, which gave the other nations much more confidence.
Keep in mind that the accords reached at Bretton-Woods were signed into a multi-lateral treaty among the participating nations. So when Nixon unilaterally abrogated the treaty, the Bretton-Woods agreement collapsed. This was referred to as the “Nixon Shock,” because the world was shocked that one nation could decide on its own to break a treaty among 44 nations.
Reinhart and Rogoff do not list this as one of the US federal defaults in their study. But I believe it was just as much a default as the one in 1933. In fact, one could argue that it was an even more serious default, because many more nations were impacted by the US breaking this agreement. Just as Americans were forced by FDR to accept worthless paper in place of Gold in 1933, 43 nation-states were forced to accept the “full faith and credit of the US Government” instead of the Gold they had been assured would always be there.
While abrogating money is not technically a sovereign debt default, it is certainly a close cousin. So we will close with an examination of two types of money issued by our government which the US later refused to honor.
Monetary Default #1
The first US currency was the Continental Dollar, initially issued in 1776. By 1792 it had been hyper-inflated to the point that it was almost worthless. At that point our government issued the US Dollar, and gave citizens one of the new Dollars for every 100 Continental Dollars they owned. This should set straight all those who believe that, no matter how high the US National Debt goes, we will never refuse to honor money issued by our government. We have already done so – twice.
Monetary Default #2
The other money that we refused to honor was the Asian Trade Dollar. In the 1860’s people in East Asia were smarter than most Americans are today. They didn’t trust paper money. They wanted only Precious Metals. So in order to compete with other nations trading in Asia, the US Congress passed the “Coinage Act of 1873,” which in part authorized the production of silver Trade Dollars. Later that year the first coins were minted.
The Trade Dollars were “demonetized” in 1879. This is a nice way of saying that the US refused to honor its commitment regarding these coins, resulting in millions of very ticked-off Asians.
So how does this impact your life today? First, it should remove the fear and panic that the Obama administration is trying to instill in your heart. While a default on the National Debt is not something any of us desire, it would certainly not be the catastrophe that they threaten us with on a daily basis. We have defaulted before – and we’re still here.
The Liberals are trying to tie the separate issues of the Debt Ceiling and the government shutdown together. By confusing these issues, and by choosing to selectively shut down government services that will cause the most pain, they hope to get at least a $1 Trillion increase in the Debt Ceiling. They claim that failure to raise the ceiling (in other words, failure to increase the National Debt) will cause irreparable harm to our national credit rating.
Obama and the fully Democrat-controlled Congress for his first two years have already done that. Under his massive National Debt increases, for the first time ever the US lost its AAA credit rating. If we don’t raise the ceiling we won’t even miss an interest payment – unless Obama decides to deliberately not make interest payments for political reasons.
John Steele Gordon says, "Failure to raise the debt ceiling would not prevent the government from paying the interest on the debt, which amounts to only 8% of revenues; nor would it prevent the government from rolling over existing debt, which it does routinely."
You see, the government takes in tens of Billions of dollars in taxes every day. It can easily allocate the money for the interest on the Debt from those monies, even if the so-called government shutdown continues for months.
This article has been mainly about debunking the lie that the US has never defaulted on its debt obligations. For a comprehensive look at the Debt Ceiling and what it means to you, attend a Webinar I will teach on October 14, 2013, titled, “The Truth About the Debt Ceiling.” Write to Webinars @ Bellsouth.net for an invitation to this free Webinar. If you read this article after the 14th, write to the same email address to receive a link to the recording.
The Bible says, “Let not your heart be troubled.” Don’t let the Liberals and their puppet media frighten you. The United States will not cease to exist as we know it if the Democrats don’t get their way and increase the Debt Ceiling once again. The government shutdown won’t kill us; we’ve had an average of one every two years for the last two decades.
This whole mess might even cause Congress to re-think borrowing almost 40 cents of every dollar it spends. I know, I know. Fat chance. But I can hope, right?
PUBLISHER’S NOTE: This is the third article in a series. I encourage you to read “Planned Economy or Planned Destruction?” and “Dictatorship by Executive Order” (LINKS below) for additional information on government misuse of its economic power, and for background on this article.
Planned Economy or Planned Destruction?
Dictatorship by Executive Order
Eight Centuries of Financial Folly (Reinhart and Rogoff)
86.4% of Spending Continues, in Spite of “Shutdown”
Wall Street Journal: When States Default
The Evolution of External Debt (Gold Clause, Pg. 4)