A number of newspapers claim that the US federal government has never defaulted on its loans (though I noted that it did restructure them in 1930).

In particular, the Economist states in the article “The Debt Ceiling and Default”, Jan 13th 2011, that the US has never defaulted:

I have yet to find a similar ranking for the federal government. This should not be surprising; the United States has never defaulted. There is the fourteenth amendment to the constitution which says: “The validity of the public debt of the United States… shall not be questioned.” The purpose of this section was to forbid the United States from honouring Confederate debts. The Supreme Court has apparently ruled that it also bars Congress from voiding a government bond, although not from abrogating the gold clause as it did in 1934.

In contrast, Kenneth Rogoff states that the USA has defaulted before:

“We went off the gold standard,” he observes, and the price of gold, which used to be $20 an ounce, suddenly jumped to $35 an ounce.

That was a default on domestic debt,” Rogoff observes. “You would be amazed at how many countries have amnesia with respect to their default(s).”

Both are references from eminent professionals, so I'm left wondering which is correct.

Why's there a disagreement between what Kenneth Rogoff states and what the Economist states – is it just a matter of semantics?

Are there indisputable examples of where the US federal government has defaulted?

  • If you set the laws that determine what default is. Then change the laws after you agree to a loan by the old laws so that the old loan now has to use the new laws which allow you more time to make payments, would that count as a default? What if elected officials of certain states take out a loan for you and then you declare those loans void, is that default? – Chad Aug 11 '11 at 15:54
  • @Chad: Good question. Default is a failure to pay according to the terms of the contract. Even where the debt is governed by the law of the debtor, legislating changes to the debt shall constitute a default, in the eyes of creditors', insofar as that legislation alters or effectively makes changes to material terms of the contract (i.e. terms relating to the amount and timing of payments). – Brian M. Hunt Aug 11 '11 at 16:03
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    The gold standard is an irrelevancy here. A default is when somebody fails give back what they borrowed (with the agreed interest). The fact that the thing is not worth the same according to some exchange rate is irrelevant, If I lent you a thousand US dollars five years ago, can I claim you defaulted because the thousand US dollars you gave back aren't worth the same number of Canadian dollars? If I lend you my Picasso painting, and Picasso goes out of favour while you have it, did you default when you give it back because it isn't worth the same number of dollars? Of course not. – DJClayworth Aug 11 '11 at 19:47
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    @DJClayworth On the gold standard, I am not sure it was irrelevant. It is arguable that breaking from the gold peg constituted a default to some holders for a couple reasons: 1.) the US explicitly guaranteed until then full convertibility of currency at a pegged rate with gold, and unilaterally broke its guarantee; 2.) US dollars were bought with the expectation of a peg to gold, and holders relied on that expectation to their detriment; 3.) gold was the international norm for reserves and unpegging was a violation of that norm; and 4.) converting to fiat devalued the dollar. – Brian M. Hunt Nov 22 '13 at 14:51
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    @Oddthinking: Oh I see. The bonds are paid automatically - and have been for quite a long time, so I imagine it could be unmanned or have a skeleton crew of essential workers. – Brian M. Hunt Nov 22 '13 at 15:10

The answer is yes. The US has defaulted on their debt once. In 1979 it postponed sending some of the checks on time for technical reasons.

From the article Delayed payments in 1979 offer glimpse of default consequences dated July 10, 2011 in the Washington Post, citing Terry Zivney and Richard Marcus, "The Day the United States Defaulted on Treasury Bills," The Financial Review 24 (3). (1989): 475–489.:

In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did . . . It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode entitled “The Day the United States Defaulted on Treasury Bills.”

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    If just missing a payment counts then it happens all the time. The government has a accounting class for paying interest penalties for not meeting their payment dates. Its right in the budget. In 1996 I got $128 extra because my tax refund was not processed until August. – Chad Aug 12 '11 at 14:57

There is this example from 1933:

The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin Roosevelt​'s presidency. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court.

In particular, U.S. bonds, including those issued to finance the American participation in the First World War​, provided the holders of the bonds with an unambiguous promise that the U.S. government would give them the option to be repaid in gold coin.

Unfortunately for the bondholders, when President Roosevelt and the Congress decided that it was a good idea to depreciate the currency in the economic crisis of the time, they also decided not to honor their unambiguous obligation to pay in gold.

So five of the nine justices explicitly stated that the obligations of the United States had been repudiated. There can be no doubt that the candid conclusion of this highly interesting chapter of our national financial history is that, under sufficient threat, crisis and pressure, a clear default on Treasury bonds did occur.

  • That's the same default as Rogoff refers to (from the question). Not a dollar default, but taking the US off the gold standard. – MSalters Aug 12 '11 at 12:40
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    Would it be fair to say that the US defaulted on an obligation to remain pegged to the gold standard? – Brian M. Hunt Aug 12 '11 at 13:17
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    Well, the majority opinion was no. All legal contracts are limited by law, and contract terms have to be interpreted no further than the law allows them to. In this case, the constitution specifically reserved a right to Congress, so the terms of the bond can not be read to bypass Congressional powers. In other words, the Executive cannot make promises on behalf of Congress, not even in the terms of a bond. (Shame on the minority opinion for suggesting such an easy loophole. "Congress shall make no law..."? Just make a promise in bond terms and suddenly you can?!) – MSalters Aug 12 '11 at 13:45
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    Well if I remember correctly owning gold was illegal at time. en.wikipedia.org/wiki/Executive_Order_6102 . So you cannot repay in gold because it will be crime. So if US gives today's bondholders cocaine bond, there will still be no legal way for them to take the payment. – Daniel Iankov Aug 12 '11 at 14:32
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    @Daniel Iankov If the bond holder wasn't a US citizen, then they couldn't have been affected by that order. – dtanders Aug 12 '11 at 18:48

The US Government has defaulted before. One troubling aspect of the political debate over the debt ceiling is the constant repetition of the statements that “the US has never defaulted on its debt”.

Note: This list does not include debt default via inflation.

  1. Default on the Continental Dollar. Our first default as a nation.

  2. In 1782, the Treasury failed to pay interest on Revolutionary War debt. Congress started defaulting on its debt starting in March of that year. As the next few years rolled on, he US made partial satisfaction of these debts. Then with the Funding Act of 1790, Congress repudiated these loans entirely. Congress offered to convert them to new loans with less favorable terms.

  3. In August of 1861, due to the Civil War, Congress created a new currency which became known as the "greenback." These notes were redeemable at any time at a rate of 0.048375 troy ounces of gold per dollar. Less than five months later, in January of 1862, the US Treasury defaulted on these notes by failing to redeem them on demand. Once again, the US Treasury changed the rules and now notes became "legal tender". Most people lost 20% to 40% trying to change in the old notes.

  4. For several decades prior to 1933, holders of US Treasury securities, known as Liberty Bonds, were, by contract, entitled to receive interest and principal payments in either dollars or gold. These contracts contained a “gold clause”, which enabled payees to receive proceeds in the form of gold, a promise from our Government. In 1934, after saying he would not, the President issued Executive Order #6102 where he ordered that the government ban ownership of gold and eliminate the right to exchange gold certificates for gold coins. After confiscation, he then immediately revalued gold from $20.67 per troy ounce to $35.00, devaluing the dollar wealth of all Americans by 40 percent overnight! People who bought US Treasury before the gold confiscation and were promised gold, were paid by a devalued paper currency and refused their contracted gold. These people lost 40% from devaluation and default, and lost the right to protect our assets, protecting ourselves from the destructive monetary policies of our own corrupt government.

  5. In 1968 the US once again reneged on the obligation and promises to the citizens of the US by no longer honoring silver certificates.

  6. 1971, or more specifically, August 15, 1971. The President of France Charles De Gaulle fearing a future default by the USA on its gold backed dollars attempted to redeem US paper currency for gold the US had promised to pay. Nixon and the full faith and credit of the United States defaulted by saying "NO." The gold window was closed, and we broke our promise and defaulted on France. The reason for this default? The US was printing more money than we had gold to cover. The Nations of the world knew it and were coming to collect. Nixon/US Government knew they had to shut it down or be exposed. They choose default.

    • Bonus - Technically we also had a default in 1979 when the US Treasury failed to pay on $122M in Treasury bills, but since that was a technical default only, I won't count it as outright default as the holders were paid once the US Government ended the debt-limit crises.
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    Thanks for taking the time to post this. Unfortunately this post does not meet the standard of this post, which requires that you cite a work by an authority on the subject. I hope you are able to remedy your post. – Brian M. Hunt Sep 30 '13 at 16:44
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    "This list does not include debt default via inflation." Not sure why you feel the need to mention this - does anyone consider inflation to be a mechanism of debt default? – Oddthinking Sep 30 '13 at 17:10
  • Chad sure does - just read the comments thread after his answer. – dtanders Oct 2 '13 at 16:25

The US is in a unique situation as the US dollar has been accepted as the exchange standard and as the Reserve Currency. So when it needs to borrow money, it can borrow US dollars and repay with US dollars. In addition, the US Government is the only one allowed by law to print US dollars. Because it is held as a reserve and used for exchange, the US can get away with financing its own debt with the costs being absorbed by everyone who holds the dollar (which is a far greater number than all other countries).

The Federal Reserve is a govenment entity that is part of the Department of the Treasury that handles both the printing of money and issuing of Treasury Bonds. Because of this the US can choose never to default.

That said when you get a treasury bond for $1,000,000 you buy it for $999,500 with a 6 month maturity date you expect that in 6 months you will have a bond worth $1m. But if the government decides during that 6 month period to create a signifigant quantity of dollars, such that the value of the dollar is diluted so $1,000,000 is only worth $999,450, it is not default but it is also not what you expected when you purchaces your T-Bill 6 months earlier.

If the US had to buy, say, gold to back its T-bills, let's look at the two values: a 6 month T-bill bought Feb 1 for $1m versus a T-bill that promised an amount of gold worth $1m on Feb 1 with a July 1 Maturity.

Format is Currency $1m Feb 1 2011 - Value of return on July 1 2011 in US$ vs had you kept your original currency

US Dollar - $940253.16
Gold - $887230.95
Euro - $952920.52
Canadian Dollar - $967767.47

Feb1 xch rates
Jul1 xch Rates

So actual default? No. But If I took a $1,000 loan from the bank and when it came due I only paid them $940, they are not going to just accept that as paid in full. But government effectively does just that. This is changes in valuation not inflation.

US Inflation rate - 3.5588% (Per year)

Devaluation rate - 11.94% (Feb1-Jul12011)

To be fair QE is not the only downward pressure on the value of the dollar. We are currently reaping the result of overspending and policies that encourage wealth exodus. This is not the result of any one president, but goes back about 20 years, through several changes in leadership of all levels of government.

(Updated gold to reflect the same metrics as other currencies)


The whole point is of this is that while technically and legally, there is no default the expectation is that the government will honor its debt. If they allow their currency to devalue, allow hyper-inflation to set in, and print money to pay debt, then they are not doing that. If it was just gold that was going up then it would not hold water. But look at all of the currencies listed. It shows consistent losses by the dollar. Roughly around 6-8% almost across the board over 6 months. That is effective default even if it is not technically default.

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    If the bond pays in dollars and the correct number of dollars are paid, there's no default regardless of the value of the dollar with respect to commodities or other currencies. The last paragraph where you create a scenario that's an actual default and imply that's it's equivalent to not adjusting a bond to match inflation is just disingenuous. – dtanders Aug 11 '11 at 18:15
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    @Brain - Good point I think i have clarified that better now. I would argue that it started in the 30's when we left the gold standard but either way, we are now backed by alot of hot air and promises from Washington. Fortunatly they can all be trusted to do what is in our best interest. – Chad Aug 11 '11 at 18:46
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    It's not the same and even though I understand how it would feel that way form the lender's point of view, it's absurd to claim that just because a lender doesn't get back the value from an investment they expect that the legal concept of a default applies. If lenders want to guard against inflation, they need to, as you alluded to, demand higher interest rates, not use loaded language to make themselves look like victims of a scam. – dtanders Aug 11 '11 at 19:34
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    Gold standard is irrelevant here. If I lend a thousand things (dollars, yen, cowrie shells, ounces of gold) I expect to get back a thousand of those things. The fact that the exchange rate between them has changed is irrelevant - giving back the same number of things satisfies the debt. – DJClayworth Aug 11 '11 at 19:42
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    @dtanders: Agreed; creditors could also demand indexing to inflation (which is effectively a higher interest, contingent on inflation). They could also demand pegging to a basket of currencies, gold, oil, etc., to hedge their risk – though such would be unusual in bonds, more likely in derivatives. – Brian M. Hunt Aug 11 '11 at 20:03

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