Government debt is a favored investment class all over the world, but it has a colorful history full of financial adventures. Often enough, historically speaking, it has resulted in investors gazing sadly on unpaid sovereign promises to pay, to paraphrase Max Winkler’s “Foreign Bonds: An Autopsy,” his chronicle of the long list of government defaults up to his day in the 1930s. The list has grown much longer since.
Here are six sets of years. What do they represent?
- 1827, 1890, 1951, 1956, 1982, 1989, 2001, 2014
- 1828, 1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986, 1990
- 1826, 1843, 1860, 1894, 1932, 2012
- 1876, 1915, 1931, 1940, 1959, 1965, 1978, 1982
- 1826, 1848, 1860, 1865, 1892, 1898, 1982, 1990, 1995, 1998, 2004, 2017
- 1862, 1933, 1968, 1971
All these are years of defaults by a sample of governments. For the first five of them, see Carmen Reinhart’s “This Time Is Different Chartbook: Country Histories.” They are, respectively, the governments of:
And No. 6 is the United States.
In the case of the United States, the defaults were: The refusal to redeem greenbacks for gold or silver, as promised, in 1862. The refusal to redeem gold bonds for gold, as promised, in 1933. The refusal to redeem silver certificates for silver, as promised, in 1968. The refusal to redeem the dollar claims of foreign governments for gold, as promised, in 1971.
The U.S. government has since stopped promising to redeem money for anything else, making it a pure fiat currency, and stopped promising to redeem its bonds for anything except its own currency. This prevents future defaults, but not future depreciation of both the currency and government debt.
Winkler related a great story to give us an archetype of government debt from ancient Greek times. Dionysius, the tyrant of Syracuse, was hard up and couldn’t pay his debt to his subjects, the tale goes. So he issued a decree requiring that all silver coins had to be turned in to the government, on pain of death. When he had the coins, he had them reminted, “stamping at two drachmae each one-drachma coin.” Brilliant! With these, he paid off his debt, becoming, Winkler says, “the Father of Currency Devaluation.”
Observe that Dionysius’s stratagem was in essence the same as that of the United States in its defaults of 1862, 1933, 1968 and 1971.
So advantageous it is to be a sovereign when you are making promises.
Image by Soifer