Was having a friendly conversation (heh) with a buddy of mine and he pointed out the US defaulted on its debt in 1933. I had never heard of this so I did some googling. I found some sites talking about the US going off the gold standard and those notes that were previously payable in gold were no longer so. I don’t gather it’s a default in the typical sense of the word, so what’s the Straight Dope?
Hoping this can stay GQ.
Yes we did go off the gold standard and no it wasn’t a default. Sovereign states essentially only default when they truly wish to do so. This is because states can always print more money or do other various things.
The Eastern Roman Emperors devalued the Byzant several times by reducing the amount of gold in it, for example.
When you have commodity-backed currency or currency that is made of a commodity like silver/gold/copper governments have and did just reduce the portion of the coin that contained the valuable metal.
With paper currency backed by a precious metal you can simply change it to fiat currency.
With fiat currency you can just keep printing more of it.
The only reason a government is ever at risk of default is because sometimes it may be less painful for a government to default than it is to hyperinflate its debts away. Greece is in a situation where it does not have control of its currency so it was in danger of default (although Greece could have left the Eurozone in theory.)
I also heard that there was a brief default in 1978 and interest rates went up but was otherwise unnoticed.
There was an issue in 1979 when the government couldn’t pay off T-bills for a few weeks. A recent WSJ article described it thusly:
I guess it’s a matter of debate whether this constitutes a default or not. In my mind, that’s just a dealy: a default would be when a cuurrency or commodity becomes worthless, as happened with Confederate money.
It was actually in 1979 when the US defaulted, briefly, on its debts. It did result in an increase in interest rates. The Washington Post summarized the events in this article.
And seeing as it was caused not by not raising the debt ceiling in time, but pushing it to close to the wire, it could still happen again. It’s the first real argument I’ve seen for lowering out debt rating.
I don’t think the 1933 situation was a default. Debts were presumably measured in dollars not ounces of gold and the government paid out the required amount of dollars, even if they were arguably worth less.
Actually, it’s further evidence for why we should simply repeal the debt ceiling, as suggested by Moody’s in the weeks leading up to the recent showdown. Far from doing what it is intended to do, it simply provides a golden opportunity for political grandstanding and brinksmanship. Only one other country (Denmark) has a debt ceiling, and theirs is set so high as to not become an issue in the immediate future.
If we MUST have such a thing, it would seem more logical to state it as some percentage of GDP.
Credit derivatives contracts have very specific lists of what constitutes a “credit event” and what doesn’t; late payment (“failure to pay”) is one of the possibilities, and there’s usually a grace period involved.