U.S. Treasuries have been considered the safest debt on the planet ever since the end of World War II. But they are backed only by the “full faith & credit” of the U.S. government. Despite the two major political parties squabbling every couple of years over raising the debt ceiling in order to pass a budget with increased spending and borrowing, they’ve never actually shut down the government long enough for the U.S. to default on its debt. Has there been any other time in history that America has done so?

Yes. The U.S. government has defaulted four times in the past. And that’s not even counting the financial mess it found itself in during the war of 1812 because that occurred before we even had a stable national banking system.

The first “official” U.S. government debt default occurred in 1861 when our country’s first paper currencies were issued. They were known as Demand Notes and payable in gold coin. By 1862 the costs of the Civil War had escalated to the point where the government could no longer redeem them in gold. So they passed the Legal Tender Act making the notes legal tender (i.e. money to be used for all legal debts) but no longer exchangeable for gold. (Seventeen years later Silver Certificate U.S. Dollar paper money pegged to the value of silver was issued, and the value of all legal tender was linked to gold again under the Gold Standard Act of 1900).

A second default occurred with Liberty Bonds in 1934. They had been introduced in 1917 as a way to help finance the costs of World War I. In order to bring the country out of the Depression, President Roosevelt suspended the gold clause in all Federal and private debt, and then authorized the Reconstruction Finance Corporation to begin buying gold at increasing prices fixed by the government. The purpose was to bolster commodity prices, but one outcome was to devalue Liberty Bonds since they could now only be redeemed for dollars that were becoming less and less valuable in gold terms. 

In 1968 the U.S. government refused to honor its promise to redeem Silver Certificate paper dollars for silver dollars. (Note however that U.S. dollar Silver Certificates are still legal tender today and, as a collector’s item, may be worth more than their face value).

In 1971 President Richard Nixon temporarily suspended the government’s commitment to redeem dollars held by foreign governments in gold. That commitment had been part of the Bretton Woods Agreement between developed countries created after World War II to foster global trade and prevent future economic crises. Among other things it established a fixed exchange rate system pegging other currencies to the U.S. dollar and the dollar to gold at a fixed price. The outcome of Nixon’s action was the collapse of the gold standard for international currency and the advent of floating rates for currency exchanges that we operate under today.

You might argue that most of these defaults only involved the linking of government debt to various precious metals. There were no economic upheavals. But according to Investopedia, the high-inflation low-growth stagflation of the 1970s was an outcome of Nixon’s action. (On the positive side it allowed the U.S. to transition to a true fiat money system giving the government full control of fiscal & monetary policy).

The federal government has the power to do many things. Roosevelt’s actions survived a Supreme Court test at the time. Could our current administration renege on its debt obligations? No one knows for sure.

(Artie Green is founder of Cognizant Wealth Advisors dba Perigon Wealth Management, LLC, a registered investment advisor. For more information visit cognizantwealth.com. More information about the firm can also be found in its Form ADV Part 2, which is available upon request by calling 877-977-2555 or by emailing compliance@perigonwealth.com).