America’s Default On Its Debt Is Inevitable

America’s default on its debt is inevitable (Washington Post, by Jim Grant, Oct 11, 2013):

There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”

How wrong he is.

The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts. The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen.

Things were very different when America owed the kind of dollars that couldn’t just be whistled into existence. By 1790, the new republic was in arrears on $11,710,000 in foreign debt. These were obligations payable in gold and silver. Alexander Hamilton, the first secretary of the Treasury, duly paid them. In doing so, he cured a default.

Hamilton’s dollar was defined as a little less than 1/20 of an ounce of gold. So were those of his successors, all the way up to the administration of Franklin D. Roosevelt. But in the whirlwind of the “first hundred days” of the New Deal, the dollar came in for redefinition. The country needed a cheaper and more abundant currency, FDR said. By and by, the dollar’s value was reduced to 1/35 of an ounce of gold.

By any fair definition, this was another default. Creditors both domestic and foreign had lent dollars weighing just what the Founders had said they should weigh. They expected to be repaid in identical money.

Language to this effect — a “gold clause” — was standard in debt contracts of the time, including instruments binding the Treasury. But Congress resolved to abrogate those contracts, and in 1935 the Supreme Court upheld Congress.

The “American default,” as this piece of domestic stimulus was known in foreign parts , provoked condemnation in the City of London. “One of the most egregious defaults in history,” judged the London Financial News. “For repudiation of the gold clause is nothing less than that. The plea that recent developments have created abnormal circumstances is wholly irrelevant. It was precisely against such circumstances that the gold clause was designed to safeguard bondholders.”

The lighter Roosevelt dollar did service until 1971, when President Richard M. Nixon lightened it again. In fact, Nixon allowed it to float. No longer was the value of the greenback defined in law as a particular weight of gold or silver. It became what it looked like: a piece of paper.

Yet the U.S. government continued to find trusting creditors. Since the Nixon default, the public’s holdings of the federal debt have climbed from $303 billion to $11.9 trillion.

If today’s political impasse leads to another default, it will be a kind of technicality. Sooner or later, the Obama Treasury will resume writing checks. The question is what those checks will buy.

“Less and less,” is the Federal Reserve’s announced goal. Under Chairman Ben Bernanke (with the full support of the presumptive chairman-to-be, Janet Yellen), the central bank has redefined price “stability” to mean a rate of inflation of 2 percent per annum. Any smaller rate of depreciation is an unsatisfactory showing to be met with a faster gait of money-printing, policymakers say.

In other words, the value of money has become an instrument of public policy, not an honest weight or measure. In such a setting, an old-time “default” is impossible. How can a creditor cry foul when the government to which he is lending has repeatedly said that the value of the money he lent will shrink?

The post-1971 dollar derives its value from the stamp of the government that issues it. Across the seas, this imprimatur is starting to look a little tenuous. Lend us your dollars for 10 years, the Treasury proposes. We will pay you the lordly interest rate of 2.7 percent per annum. And at the end of those 10 years, we will hand you back your principal, which will almost certainly buy less than the money you lent.

This is the unsustainable conceit of the world’s superpower-cum-super debtor. By deed, if not audible word, we Americans say: “The greenback is the world’s great monetary brand. You have no choice but to use it. Like it or lump it.” But the historical record of paper currencies is clear: Governments always over-issue it. The people finally do lump it.

What to do? Let us face facts: We have defaulted in the past. Let us confront the implied message of the Federal Reserve’s pro-inflation policy: We will default in the future, though no lawyer will call it “default.” And let us preempt the world’s flight from our intangible money by taking steps to fashion a 21st-century improvement. We have the gold and the brains to find the solution.

3 thoughts on “America’s Default On Its Debt Is Inevitable

  1. I would not be so sure of having the gold or (especially) the brains to find a solution. The US is in a different situation…….it has total fools in power, and they could not find their way out of a paper bag without help. Americans, instead of running their country, went to sleep and let the government rule itself. Now awakening, they confront an Orwellian nightmare with incredible fools in power. These people are stupid…….
    If they allow this nation to default on their own foolish and selfish demands, they ought to be jailed and tried for treason. They won’t be because the system is so corrupt, it allows such fools to make decisions far beyond their abilities to understand.
    Whoever wrote this does not understand the fundamental problem. The problem isn’t the type of currency a nation uses……it is trust. Once trust is lost, nobody with any sense will put any money into a US based enterprise or investment. Foreign investment is a trickle of what it was before the crash of 2007-2008 because the US did nothing to fix the problems that caused entire nations to go bankrupt, and the problems continue around the world today……over five years later. The FED now carries 68% of the National Debt……..and that is all we have left….debt.
    The nation has been gutted of it’s MFG powers, R & D have gone offshore……everything we had is gone. All that is left is debt.
    A stable world economic system cannot subsist without trust. The US has been a major player, but is no longer. The only people who don’t seem to know this (beside the author of this article) are the leaders and those Americans fool enough to listen to US corporate news via TV. It is pretty obvious to the rest of us.
    The dollar has been dumped by half the world over the past three years, and the number of nations abandoning the dollar continue to rise. Why? No trust. People are leaving the banks for credit unions…….they no longer trust the banks….and for good reason.
    The banks are huge shells of paper, there is nothing there….it is all leveraged…..nobody with any sense can trust them.
    It is about trust, and nobody trusts the US government, and nobody trusts the US. Therein lies the problem. We don’t trust our politicians or our leaders, they are not trustworthy.
    There can be nothing without trust……and nothing is what the US has left.

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