Donald Marron has this super post linking to a paper (gated though). It mentions how US defaulted temporarily on its T-bills in 1979. It did pay but alongwith interest for the period it remained unpaid.
- During Alexander Hamilton’s time in 1790s (as per Rogoff-Reinhart 800 years study of crisis)
- In 1933, when US was asked to pay its gold obligations. In WW-I, govt. issued bonds to finance the War which gave them the option to be repaid in gold coin. In wake of Great Depression, govt. decided to depreciate the currency and not pay back in gold. Finally, bondholders got depreciated money. In a way it was a default as well
- In 1979 – when it did not pay T-bill redemptions on May 3 and May 10, 1979.. The reasons were failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.
Marron says 1979 was indeed a default as people were not paid at the time of contract maturing:
This default was, of course, temporary. Treasury did pay these T-bills after a short delay. But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.
Some may quibble about whether this constitutes default. After all, the United States did eventually make its payments. And the disruption applied to only a sliver of its debt – certain T-bills owned by individual investors.
But I think it’s unambiguous. A debt default occurs anytime a creditor fails to make a timely interest or principal payment. By that standard, the United States did default. It was small. It was unintentional. But it was indeed a default.
He points to the study which shows T-Bill rates jumped by 60 bps after first default and remained elevated for few months. This led to higher borrowing costs.
What about now? We see similar debt ceiling issues though Treasury has much better technology to make checks
The financial world has changed dramatically in the intervening decades. T-bill rates hover near zero compared to the 9-10 percent range of the late 1970s; that means a temporary delay in payments would be less costly for creditors. Treasury’s IT systems are, one hopes, more reliable that 1970s vintage word processors. And one should take care not to make too much of a single data point.
But it’s the only data point we have on a U.S. default. Not surprisingly it shows that even temporary default is a bad idea.
Nice bit of history.