Updated: 10/14/2013 8:18 AM KSTP.com By: Jennie Olson
Photo: MGN Online
You hear the same proud claim every time Washington wrestles with the debt limit: The United States has never defaulted. But the record's not that clean. America has stiffed creditors on at least two occasions.
Once, the young nation had a dramatic excuse: The Treasury was empty, the White House and Capitol were charred ruins, even the troops fighting the War of 1812 weren't getting paid.
A second time, in 1979, was a back-office glitch that ended up costing taxpayers billions of dollars. The Treasury Department blamed it on a crush of paperwork partly caused by lawmakers who - this will sound familiar - bickered too long before raising the nation's debt limit.
These lapses, little noted outside financial circles in their day, are nearly forgotten now.
Indeed, Treasury Secretary Jacob Lew frequently declares that the United States has always met all of its obligations; a Treasury spokeswoman declined to discuss any possible exceptions. President Barack Obama, reminding Congress of the urgency of raising the debt limit before a Thursday deadline, warned of "the chaos that could result if, for the first time in our history, we don't pay our bills on time."
Historian Don Hickey isn't surprised that the default in November 1814 gets overlooked. After all, he titled his book, "The War of 1812: A Forgotten Conflict."
"He doesn't know his history," Hickey said of the president. "It's that simple."
To be fair, not many people do. When it comes to the War of 1812, naval heroics and the rockets' red glare get the ink. The failure to pay some bondholders on time doesn't make it into many history texts, said Hickey, a professor at Wayne State College in Nebraska.
And the narrow lapses of the past don't compare with the kind of turmoil Lew predicts would occur these days if Treasury couldn't borrow enough money to pay what it owes to all sorts of people, from overseas bondholders to retirees on Social Security. If that's a financial hurricane, the 1979 Treasury bill glitch was more like a draft of chilly air.
Still, there are lessons in history:
PLAYING WITH FIRE IS RISKY
Tea party Republicans weren't the first to make the debt limit a bargaining chip. Over the years, congressional Democrats and Republicans alike have held it up for strategic reasons.
In 1979, it was lawmakers determined to attach a strong balanced budget amendment to the bill. They finally relented, the day before Social Security checks were expected to start bouncing.
The tumult contributed to Treasury's failure to redeem $122 million in maturing T-bills, touted as one of the world's safest investments.
Some investors that April and May waited more than a week for their money. Treasury blamed problems with its newfangled word-processing equipment. The system was stressed, officials said, when the booming popularity of T-bills collided with the last-minute debt ceiling increase from Congress.
Investors called it a "default" and sued for interest to cover the gap. Treasury called it a "delay."
Most Americans didn't notice at all. But the bond market did.
T-bill interest ticked up 0.6 percent, a lasting bump that added about $12 billion to the cost of paying the national debt, according to a 1989 study in The Financial Review journal. It's title: "The Day the United States Defaulted on Treasury Bills."
That certainly counts as a default, even though it was unintentional, said Urban Institute economist Donald Marron, a former member of Obama's Council of Economic Advisers.
"History tells us that mistakes sometimes happen," Marron said. When Congress keeps Treasury waiting for an increase in its borrowing limit, he said, "the cushion against mistakes gets smaller and smaller."
IT COULD BE WORSE
Sure, it's tough dealing with bull-headed political foes. But at least Washington's not on fire.
The fall of 1814 was bleak. The British had burned the capital city, inspired "The Star-Spangled Banner" by bombarding Baltimore and blocked trade up and down the coast. Tax revenue plummeted, and the U.S. couldn't borrow all the money it needed. The War Department ran short of food and medicine.
In November, the government didn't have enough gold or silver in New England to pay bondholders their interest, as required by law.
Of course, logistics were tougher back then. The Treasury needed to physically transport precious metals to New England, not just log entries on computers. "We always have excuses, don't we?" Hickey said. "That just doesn't cut it."
Investors were quick to forgive, however.
"The war ended about three months later," Hickey said, "and so the financial crisis blew over."
COMPROMISE ISN'T EASY
Just like today, some politicians in the early 1800s believed their cause too crucial to negotiate.
"What you have at the time is a very bitter partisan divide between Federalists and Republicans that was, if anything, more bitter than the divide between the tea party and Democrats today," said historian J.C.A. Stagg, editor of President James Madison's papers at the University of Virginia.
"The Federalists thought (Thomas) Jefferson and Madison had ruined the country and had to be stopped," Stagg said.
Angry New Englanders were so opposed to the War of 1812 that their Federalist leaders seriously discussed seceding from the union. They were tagged as disloyal by Americans elsewhere, and that contributed to the party's downfall after the war.
The Jeffersonian Republicans, on the other hand, tried to blame all their troubles on Federalist opposition to the war, said Hickey, "just the way parties always blame their problems on the other side."
NEVER SAY NEVER
Instead of claiming the United States has "never" defaulted, it's safer to say America was born in default.
The former colonies emerged from the Revolutionary War deeply in debt. In 1790 the first secretary of the Treasury, Alexander Hamilton, took the issue in hand. His Treasury assumed responsibility for the states' debts, offered creditors less than they were owed and borrowed more money to put the new nation on solid financial footing.
Other maneuvers that undercut investors get labeled "technical defaults" by some historians and economists. A leading example is 1933, when President Franklin D. Roosevelt took the nation off the gold standard amid the bank panics of the Great Depression. The nation's creditors were paid with dollars of much lower value than the gold they were due.
The Supreme Court said the government could do it, but mourned the abandonment of "the solemn promise of bonds of the United States."
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