A Short History of US Credit Defaults

by John S. Chamberlain

On July 13th, the president of the United States angrily walked out of ongoing negotiations over the raising of the debt ceiling from its legislated maximum of $14.294 trillion dollars. This prompted a new round of speculation over whether the United States might default on its financial obligations. In these circumstances, it is useful to recall the previous instances in which this has occurred and the effects of those defaults. By studying the defaults of the past, we can gain insights into what future defaults might portend.

The Continental Currency Default of 1779

The first default of the United States was on its first issuance of debt: the currency emitted by the Continental Congress of 1775. In June of 1775 the Continental Congress of the United States of America, located in Philadelphia, representing the 13 states of the union, issued bills of credit amounting to 2 million Spanish milled dollars to be paid four years hence in four annual installments. The next month an additional 1 million was issued. A third issue of 3 million followed. The next year they issued an additional 13 million dollars of notes. These were the first of the “Continental dollars,” which were used to fund the war of revolution against Great Britain. The issues continued until an estimated 241 million dollars were outstanding, not including British forgeries.

Congress had no power of taxation, so it made each of the several states responsible for redeeming a proportion of the notes according to population. The administration of these notes was delegated to a “Board of the Treasury” in 1776. To refuse the notes or receive them below par was punishable by having your ears cut off and other horrible penalties.

The notes progressively depreciated as the public began to realize that neither the states nor their Congress had the will or capacity to redeem them. In November of 1779, Congress announced a devaluation of 38.5 to 1 on the Continentals, which amounted to an admission of default. In this year refusal to accept the notes became widespread, and trade was reduced to barter, causing sporadic famines and other privations.

Eventually, Congress agreed to redeem the notes at 1,000 to 1. At a rate of 0.82 troy ounces to the Spanish milled dollar and $36 (2011) dollars to the troy ounce of silver, this first default resulted in a cumulative loss of approximately $7 billion dollars to the American public.

Benjamin Franklin characterized the loss as a tax. Memory of the suffering and economic disruption caused by this “tax” and similar bills of credit issued by the states influenced the contract clause of the Constitution, which was adopted in 1789:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts.

Lower the Debt Ceiling

by Mark Thornton

Originally posted on Mises.org

Currently, the big show in Washington, DC, centers around raising the debt ceiling. Congress began setting this ceiling in 1917 so that the Treasury could independently issue debt. The debt ceiling is like the limit on your credit card, except the federal government sets the limit on itself. When President Nixon took us off the gold standard in 1971, the national debt was $400 billion. The increase in the national debt last year alone was four times the entire debt in 1971.

Both Democrats and Republicans tell us that not raising the debt ceiling would have a negative — even catastrophic — effect on the American and world economies. They are in agreement on this. The only matter of debate is what concessions are necessary in order to establish a bipartisan majority to pass a bill raising the ceiling. Democrats seem to want larger cuts and tax increases, while Republicans want smaller cuts with no tax increases. The multitrillion-dollar cuts that they are discussing only occur over a ten-year time frame and do not balance the budget, so no one except Ron Paul is really discussing the kinds of budget cutting that would actually help the economy.

What we really need to do is to lower the debt ceiling. If Congress passed legislation that systematically reduced the debt ceiling over time, the economy could be rebuilt on a solid foundation. Entrepreneurs in the productive sectors would realize that an ever-increasing proportion of resources (land, labor, and capital) would be at their disposal, while companies that capitalized on the federal budget would have an ever-declining share of such resources.

Congress would have to cut the pay and benefits of its employees (FDR cut them by 25 percent in the depths of the Great Depression) as well as the number of such employees. Real wage rates would decline, allowing entrepreneurs to hire more employees to produce consumer-valued goods.

Congress would have to cut back on its far-flung regulatory operations, which are in fact one of the biggest drags on the economy due to the burden and uncertainty that Obama and Congress have created in terms of healthcare, financial-market, and environmental regulations. A recent study by the Phoenix Center found that even a small reduction of 5 percent, or $2.8 billion, in the federal regulatory budget would result in about $75 billion in increased private-sector GDP each year and the addition of 1.2 million jobs annually. Eliminating the job of even a single regulator grows the American economy by $6.2 million and creates nearly 100 private-sector jobs annually.

Under a reduced debt ceiling, the federal government would also have to sell off some of its resources. It has tens of thousands of buildings that are no longer in use and tens of thousands of buildings that are significantly underused — about 75,000 buildings in total. It also controls over 400 million acres of land, or over 20 percent of all land outside of Alaska, which is almost wholly owned by the government. There is also the Strategic Petroleum Reserve and many other assets that could be sold off to cover short-term budget shortfalls.

Of course, reducing the debt ceiling would force the government to stop borrowing so much money from credit markets. This would leave significantly more credit available for the private sector. The shortage of capital is one of the most often cited reasons for the failure of the economy to recover.

Lowering the debt ceiling would force federal-government budget cutting on a large scale, and this would free up resources (labor, land, and capital) and force a cutback in the federal government’s regulatory apparatus. This would put Americans back to work producing consumer-valued goods.

Passing an increase in the debt ceiling merely perpetuates the myth that there is any ceiling or control or limit on the government’s ability to waste resources in the short run and its willingness to pass the burden of this squander onto future generations.

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Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory. Send him mail. See Mark Thornton’s article archives.

Are we this pathetic?

by Mike Calpino

President Obama has now tried to jump start negotiations over the debt ceiling by stating that he could not guarantee government checks for Social Security, veterans benefits, and military pay, to name a few, will go out on time in August if the debt ceiling is not raised. Obviously, this is a scare tactic to get all those government dependents across the land, a majority of us unfortunately, to pressure their congressmen to agree to something. Raising current taxes or reducing future benefits, it doesn’t matter to most people, as long as that government money is in the account on the first of the month. Whether the threat is real or not, the fact is there are a lot of people across the land for whom even the threat of not receiving their government benefits on time raises the specter of real privation.

How sad. How absolutely pathetic. How did the wealthiest nation in the history of mankind fall to the point where the majority of its citizens depend on a pitiful allowance consisting of money stolen from others or borrowed from future generations? How did we come to the point where the ineptitude of our national leaders can impact whether or not we can buy groceries next week? How did we allow ourselves to become so dependent on our masters in Washington that when they so mismanage their financial affairs as to bring us to bankruptcy, the serfs on the land will be reduced to absolute poverty?

Liberty, that antiquated idea that this country was founded upon, is the idea that each man will make choices about his life and he will either benefit from the results or suffer for them. He and he alone. His prosperity or poverty is based only on his decisions and hard work. Your prosperity or poverty should be based only on your decisions and hard work. It should not be based on what happens in Washington, things you have no control over. Our destiny, our ability to meet our basic needs, and our ability to secure our future, should reside within ourselves, our hearts and minds.

Oh, how far the mighty have fallen. Strong, independent American men and women who once viewed obstacles as challenges and whose hard work and persistence built a nation out of the wilderness have been reduced to sniveling beggars who grovel before their masters in Washington, begging them to continue their idiocy just a little longer so they can have their bowls filled with poisonous gruel.

Where are you standing? If the checks stop coming in August will you quickly slide into homelessness and hunger? Does your entire life depend on receiving stolen and borrowed money from the government? It doesn’t matter if the president was lying about the ability to pay benefits or not. The question is whether or not your survival depends on the goodwill of Washington and its ability to continue its financial insanity. We will all suffer when that insanity comes to its logical conclusion whether in August or the next month or year. However, the more independent and better prepared you are, the better position you will be not only to weather the storm but provide a beacon of liberty to show your neighbors the way forward.

“They are obscure, unorganized, inarticulate, each one rubbing along as best they can. They need to be encouraged and braced up, because when everything has gone completely to the dogs, they are the ones who will come back and build a new society, and meanwhile your preaching will reassure them and keep them hanging on. Your job is to take care of the Remnant.”

                              Albert Jay Nock

Madison warned us not to pass on debt

“Each generation should be made to bear the burden of its own wars, instead of carrying them on, at the expense of other generations.”                            President James Madison

Muir Boda

Since Barack Obama has become President, he and Congress have become responsible for 1/3 of the current National Debt. Record spending levels for entitlements, war, bailouts to banks, businesses and states have paved the way for future unfunded liabilities to reach $100 Trillion.

Obama and Democrats, who hold to the Keynesian Theory of economics, spout the class warfare argument that we need to tax corporate jet owners, raise taxes on Millionaires and Billionares and preserve all the sacred cows of government. The clueless leadership in the Republican Party demand spending cuts, which what is offered is only symbolic. If both get their way to “close loopholes” and cut spending, there still is not enough money to reduce the National Debt which is the greatest threat to our National Security.

Both sides will agree to raise the debt ceiling. Essentially we are borrowing on the earnings of future generations, our children and grandchildren that have not joined the workforce or even been born yet.

Madison warned us of the need for each generation to pay for their wars. If he could have envisioned the burden we have heaped on the backs of future generations, he would have been appalled at the corrupt and morally decrepit actions of our elected leaders at all levels of government.  I know I am.

Muir Boda is the Vice-Chair of the Maryland Libertarian Party and is the Managing Editor of IndependentWord.com.

I received a call this morning from MdLP Party Chair Bob Johnston that The Baltimore Sun published this version in their editorial section today. The thing is they did not have a dashing photo to go with it.

A libertarian view: Neither party is serious about debt reduction (Baltimore Sun Version)

President James Madison said each generation should bear the burden of its own wars, not foist their expense off on future generations. Since Barack Obama became president, he and the Congress have been responsible for one-third of the current national debt. Record spending for entitlements, war, bailouts to banks, businesses and states have paved the way for future unfunded liabilities of up to $100 trillion.

Obama and the Democrats, who hold to the Keynesian theory of economics, spout the class warfare argument that we need to tax corporate jet owners and raise taxes on millionaires and billionaires to preserve the sacred cows of big government.

Meanwhile, the clueless leadership of the Republican Party demands spending cuts that are only symbolic. Even if both parties got their way — by closing tax loopholes and cutting spending — the savings wouldn’t be enough to reduce our national debt, which is the greatest threat to our nation’s security.

Essentially, we are borrowing on the earnings of future generations, our children and grandchildren who have not joined the workforce or even been born yet.

Madison warned us of the need for each generation to pay its own way. If he could have envisioned the burden we are heaping on the backs of future generations, he would be appalled by the corrupt and morally decrepit actions of elected leaders at all levels of government. I know I am.

Muir Boda

The writer is vice chair of the Maryland Libertarian Party and managing editor of IndependentWord.com.

A Run on the United States Government

by Michael S. Rozeff

A run is a mass withdrawal of cash funds from a borrower. We are in the midst of a continuing worldwide credit crisis, punctuated by “runs” of varying prominence and publicity.

These runs are rational, not panics and not due to quirks of psychology. They occur when investors realize that their funds are endangered in an institution. They try to get them out before they lose them.

The danger comes when the institution no longer is getting cash inflows in sufficient amounts to pay off all its obligations. In businesses, this comes about through sour investments. In governments, it comes about through wasteful spending that fails to be recovered in tax revenues.

In the year 2008, we saw runs on major Wall Street investment banks, money market mutual funds, domestic banks and foreign banks. Now we are seeing runs on governments in Europe such as Greece and Portugal. Sovereign debts are being sold down hard as investors flee from them, converting their bonds into currency.

Three years from the 2008 credit crisis, the Federal Reserve is still providing massive credit to U.S. banks. This props them up against bank runs. Every so often, the FED extends credit to foreign central banks to prop them up so that they can prop up their financial institutions. These are stopgaps. All of this propping up depends on faith in one currency: the U.S. dollar.

Competing Currencies – a Defense Against Profligate Government Spending

by Ron Paul

The end of June marked what is hopefully the end of the Federal Reserve’s policy of quantitative easing. For months the Fed has purchased hundreds of billions of dollars of Treasury debt, enabling the government to fund its profligate deficit spending, push the national debt to its limit, and further devalue the dollar. Confidence in the dollar is plummeting, confidence in the euro has been shattered by the European bond crisis, and beleaguered consumers and investors are slowly but surely awakening to the fact that government-issued currencies do not hold their value.

Currency is sound only when it is recognized and accepted as such by individuals, through the actions of the market, without coercion. Throughout history, gold and silver have been the two commodities that have most fully satisfied the requirements of sound money. This is why people around the world are flocking once again to gold and silver as a store of value to replace their rapidly depreciating paper currencies. Even central banks have come to their senses and have begun to stock up on gold once again.

But in our country today, attempting to use gold and silver as money is severely punished, regardless of the fact that it is the only constitutionally-allowed legal tender! In one recent instance, entrepreneurs who attempted to create their own gold and silver currency were convicted by the federal government of “counterfeiting”. Also, consider another case of an individual who was convicted of tax evasion for paying his employees with silver and gold coins rather than fiat paper dollars. The federal government acknowledges that such coins are legal tender at their face value, as they were issued by the U.S. government. But when it comes to income taxes owed by the employees who received them, the IRS suddenly deems the coins to be worth their full market value as precious metals.

Ron Paul Launches Nationwide Grassroots Campaign to Stop Debt Ceiling Betrayal

Calls on Republicans to Stop Congressional leaders’ sellout

Congressman Ron Paul

LAKE JACKSON, Texas – 2012 Republican presidential candidate Ron Paul has launched a major effort to mobilize grassroots opposition to a deal on the debt ceiling that is rumored to be in the works between the Obama administration and House Republican leaders.

“The fact is, Republicans were put back in power during the last election to stop the runaway spending in Washington, D.C.—not to cut “deals” that increase taxes and spending,” said Paul.

“If Republicans cave on their Tea Party mandate now, I believe they will pay a severe price at the ballot box in 2012, and I also think that President Obama believes the same. That is why he is pushing for this deal, but Republicans should not fall for it.”

Congressman Paul is leading the nationwide push urging people to contact Congress and tell them not to go for the purported deal. The effort began over the weekend by Paul contacting hundreds of thousands of supporters from his email list, and is expanding this morning with millions being contacted via email and social media. By late Monday there will be internet advertising up, and radio and TV ads are planned for later this week.

“Nothing is more important than mobilizing a grassroots army to stop this sellout of conservative principles by the Washington establishment of both parties. And it is vital that Congress hears from the people, loud and clear, that they cannot support more of the same reckless spending and government overreach they were sent to Washington to end,” continued Paul.

“We may be just days away from a betrayal of the voters’ trust, and we could end up with no balanced budget amendment and no real spending cuts, and a deal that puts an even greater burden on the American taxpayers. But I refuse to stand by without fighting it.”

Barack Obama Suicide Bomber

by Mike Calpino

As the debate over the debt ceiling heats up, each side is looking for an advantage. Except for a few principled holdouts, it would appear that both sides want to raise the ceiling, again, and are using it as a huge bargaining chip. The Republicans are trying to hold the line on taxes, or “revenue enhancements”, and get major spending cuts. We shall see whether they hold fast, the last several months of capitulation don’t hold much promise. The Democrats want to keep every program and increase spending and taxes, particularly on the “rich.” It is clear that President Obama wants to tax and spend, his recent speeches have made that abundantly clear. The question is, what is the end game?

Several years ago I postulated that the Democrats would use economic crisis to remove the Republicans from contention in politics for another generation. Their ability to demonize Republicans, particularly “conservative” Republicans, has been very successful over the years. If a “compromise” is reached, which is the most likely outcome, we will borrow even more and demonstrate to the world that we have no intention of reigning in our spending and balancing our budget. The compromise will probably take the following form. The Democrats will agree to a few trillion in cuts over the next ten years, meaning we’ll only borrow an additional twelve trillion dollars instead of sixteen trillion from our children and grandchildren. The Republicans will agree to some revenue enhancements like closing loopholes. Remember, a “loophole” is a legal way to keep more of your money so read that “tax increase”. This will anger the TEA party, conservatives and libertarians among the Republican party who will either actively abandon them and go elsewhere or simply give up and stop supporting them. This will ensure Democrat victory in the near term and as the economy continues to falter under the greater debt and tax load, more dependents will be created-read “Democrat voters.”

Is Higher Inflation Inevitable?

by Thorsten Polleit

Originally posted on mises.org

In view of the ongoing international financial and economic “crisis,” many investors increasingly ask, Is higher inflation inevitable?[1] At first glance, this question appears to be rhetorical. Technically speaking, inflation can of course be prevented.

Inflation is, in the economic sense, an increase in the money supply, which leads (and necessarily so) to a decline in the purchasing power of money as compared to a situation in which the money supply remains unchanged.

Today, government-sponsored central banks hold a money-production monopoly. So all it takes to end (and prevent) inflation is for central banks to stop expanding the money supply.

At second glance, however, the question of whether higher inflation is inevitable may be somewhat more difficult to answer. This is because of the economic and political consequences that ending decades-long increases in the money supply through central banking will entail.

To better understand these consequences, some insight into the nature and workings of today’s monetary regime is required. Milton Friedman, in Money Mischief, provides the following portrayal:

A world monetary system has emerged that has no historical precedent: a system in which every major currency in the world is … on an irredeemable paper money standard.[2]

And further, “The ultimate consequences of this development are shrouded in uncertainty.”[3]

The Perfect Storm

by Mike Calpino

 

Michael Calpino

Several months ago I wrote an article entitled “Three Months to Live?” about the end of the Fed’s “Quantitative Easing II” ending on June 30. That time is upon us. Where do we stand? Here are the facts.

In nine months the Federal Reserve has bought $600 billion worth of treasuries issues following $1.75 trillion in “QE I” from March 2009 to March 2010. It is this printing that has kept the economy going at all the last two years and created the illusion of normalcy for most.

Now that printing is supposedly going to stop.

The first question is “who is going to buy them?” We are running a deficit of around $1.5 trillion a year and right now the Fed is buying up 70% of that debt. If the Fed stops buying, who’s going to lend us over a trillion dollars a year? Where is the government going to get the money required for its insatiable spending? The debt ceiling may be immaterial if no one buys any more of our debt. We’ll deal with that in a minute.

What happens when the printing presses cool down for a moment? It’s speculation because no one’s ever done this much printing. We could see a short term rally in the dollar and a drop in commodity prices, including precious metals. People will think that prices will stop going up and start “hoarding” dollars (also referred to as “saving“) and Bernanke’s greatest fear, deflation, may rear its ugly head. Economic activity will slow even more. Then chairman Bernanke will crank up the presses again with “QE III”. When that happens, it will send a clear message to our creditors that they will never get the full value of their money back, that all debts will be repaid in devalued dollars. When “QE III” begins it will be the final nail in the coffin for the dollar.