Was There Ever a Default on U.S. Treasury Debt? Well, yes, Alex J. Pollock explains:
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.Granted, the circumstances were somewhat different in those days, since government finance still had a real tie to gold. 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.
Nobody doubted the clarity of this “gold clause” provision or the intent of both the debtor, the U.S. Treasury, and the creditors, the bond buyers, that the bondholders be protected against the depreciation of paper currency by the government.
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.
This went to the Supreme Court, which ruled in favor of Congress by a vote of 5 to 4. The majority opinion, written by Chief Justice Hughes, made this point:
Contracts, however express, cannot fetter the constitutional authority of the Congress.
Justice McReynolds, writing on behalf of the four dissenting justices, made these points:
- The enactments here challenged will bring about the confiscation of property rights and repudiation of national obligations.
- The holder of one of these certificates was owner of an express promise by the United States to deliver gold coin of the weight and fineness established.
- Congress really has inaugurated a plan primarily designed to destroy private obligations, repudiate national debts, and drive into the Treasury all gold within the country in exchange for inconvertible promises to pay, of much less value.
- Loss of reputation for honorable dealing will bring us unending humiliation.
None of this would have shocked David Hume, who said the following in his Of Public Credit:
Contracting debt will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills upon posterity.