Forget the Debt-Ceiling Crises, the U.S. is Already a Serial Defaulter

Understanding the past highlights the importance of trust in the dollar

Stephen Foerster
7 min readMay 16, 2023

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Picture of dollar bills
Photo by Alexander Grey on Unsplash

For decades I’ve been telling thousands of business school students that U.S. Treasury bills and notes are risk-free. Well, that’s arguably not quite true. For example, in 1979, Mrs. Claire Barton, a small investor from Enrico, California tried to signal to the world that the U.S. Treasury had stiffed her and others. She sued and wanted compensation, in a largely-forgotten David (or rather Claire) versus Goliath story. Her case was dismissed “with prejudice” which barred her from refilling her claim. It’s easy to understand why her case is largely forgotten. In 2011, the National Archives and Records Administration destroyed all of the case records. But 1979 wasn’t the first time the U.S. had arguably defaulted.

Why does this matter now? In 1917, Congress placed restrictions on how much money the government can borrow. The debt ceiling has since been raised 78 times. Every time a debt-ceiling game of chicken plays out among politicians, like in 1995, 2011, and 2013, investors and credit rating agencies are on high alert, wondering what might happen with a default. Investors get nervous and demand higher yields. That costs the government more money to borrow. And it costs it its reputation as a safe haven. Let’s review the case for claiming the U.S. is actually already a serial defaulter.

Default Defined
Before we recount the default stories, we need to start with what we actually mean by default. According to the Merriam Webster dictionary, to default is defined as “to fail to fulfill a contract, agreement, or duty, such as to fail to meet a financial obligation.” Default generally is derived from contract law when terms of a private contract are violated. For example, if a firm borrows by issuing a bond and then fails to make scheduled interest or principal payments, then it is deemed to have defaulted. In such a case, the party that has been damaged can sue to either compel the other party to perform as agreed, or to seek some other remedy.

Sometimes it isn’t crystal clear when a default has actually occurred. Default can depend on judgment. For example, there are derivative products…

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Stephen Foerster

I’m a Finance prof, CFA, and author of In Pursuit of the Perfect Portfolio (with Andrew Lo). I write stories about investing. (I don’t give financial advice.)