Professor: US Did Default in 1979

Monday, 11 Jul 2011 11:03 AM

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Despite the chatter that the United States has never defaulted on its financial obligations, it did. A series of events conspired in 1979 that resulted in the country briefly defaulting on its bills, with real consequences, The Washington Post reports.

At the time, Congress and the White House were haggling over raising Debt Limit, Economythe debt limit to $830 billion, which is a long way from today’s debt limit of $14.3 trillion. At the last minute, and with then-Treasury Secretary W. Michael Blumenthal warning the country was hours away from the first default in its history, a deal was made.

However, a series of technical problems and a rush in demand for Treasury bills resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did . . . It might have been small, it might have been inadvertent, but it happened,” Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode titled “The Day the United States Defaulted on Treasury Bills,” told the Post.

As a result, Treasury missed payments on about $120 million worth of bills. Treasury officials argue that the event was not a default, but a delay caused by the internal logjam. However, the study by Zivney and his partner, Dick Marcus, found that even that brief failure to meet some obligations had major consequences, the Post reported.

They found “that the series of defaults resulted in a permanent increase in interest rates” of more than half a percent. That half a percent translated into billions of dollars in increased interest payments on the nation’s debt. “The impact is smaller at first because only new debt is affected,” they wrote according to the Post. “But over time, as the older debt matures and becomes refinanced at higher rates, the entire cost of the default is realized.”

The 1979 event is tiny compared to the size of payments the Treasury could have to forego if it can no longer borrow money Aug. 2. However, it does show what can happen if a payment is missed. “It creates doubt, and I think that’s the real lesson,” Zivney told the Post.

“The market has a much longer memory than individuals.”

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