US never defaulted on its debt? Not so fast

WASHINGTON (AP) The same proud claim is made every time Washington wrestles with the debt limit: The United States has never defaulted. But the record's not that clean. America has stiffed creditors on at least two occasions.

Once, the young nation had a dramatic excuse: The Treasury was empty, the White House and Capitol were charred ruins, even the troops fighting the War of 1812 against the British weren't getting paid.

A second time, in 1979, was a back-office glitch that ended up costing taxpayers billions of dollars. The Treasury Department blamed it on a crush of paperwork partly caused by lawmakers who this will sound familiar bickered too long before raising the nation's debt limit.

These lapses, little noted outside financial circles in their day, are nearly forgotten now as Thursday's deadline for a debt limit increase approaches, leading to pronouncements that the U.S. could default for the first time if Congress extend the federal government's borrowing authority so it can pay its bills.

Indeed, Treasury Secretary Jacob Lew frequently declares that the United States has always met all of its obligations; a Treasury spokeswoman declined to discuss any possible exceptions. President Barack Obama, reminding Congress of the urgency of raising the debt limit before a Thursday deadline, warned of "the chaos that could result if, for the first time in our history, we don't pay our bills on time."

Historian Don Hickey isn't surprised that the default in November 1814 gets overlooked. After all, he titled his book, "The War of 1812: A Forgotten Conflict."

"He doesn't know his history," Hickey said of the president. "It's that simple."

To be fair, not many people do. The failure to pay some bondholders on time doesn't make it into many history texts, said Hickey, a professor at Wayne State College in Nebraska.

And the narrow lapses of the past don't compare with the kind of turmoil Lew predicts would occur these days if Treasury couldn't borrow enough money to pay what it owes to all sorts of people, from overseas bondholders to Social Security pensioners. If that's a financial hurricane, the 1979 Treasury bill glitch was more like a draft of chilly air.

Conservative tea party Republicans who have called on Obama to defund his health care overhaul law weren't the first to make the debt limit a bargaining chip. Over the years, congressional Democrats and Republicans alike have held it up for strategic reasons.

In 1979, it was lawmakers determined to attach a strong balanced budget amendment to the bill. They finally relented, the day before federal Social Security pension checks were expected to start bouncing.

The tumult contributed to Treasury's failure to redeem $122 million in maturing T-bills, touted as one of the world's safest investments.

Some investors that April and May waited more than a week for their money. Treasury blamed problems with its newfangled word-processing equipment. The system was stressed, officials said, when the booming popularity of T-bills collided with the last-minute debt ceiling increase from Congress.

Investors called it a "default" and sued for interest to cover the gap. Treasury called it a "delay."

Most Americans didn't notice at all. But the bond market did.

T-bill interest ticked up 0.6 percent, a lasting bump that added about $12 billion to the cost of paying the national debt, according to a 1989 study in The Financial Review journal. It's title: "The Day the United States Defaulted on Treasury Bills."

That certainly counts as a default, even though it was unintentional, said Urban Institute economist Donald Marron, a former member of Obama's Council of Economic Advisers.

"History tells us that mistakes sometimes happen," Marron said. When Congress keeps Treasury waiting for an increase in its borrowing limit, he said, "the cushion against mistakes gets smaller and smaller."

Instead of claiming the United States has "never" defaulted, it's safer to say America was born in default.

The former colonies emerged from the Revolutionary War deeply in debt. In 1790 the first secretary of the Treasury, Alexander Hamilton, took the issue in hand. His Treasury assumed responsibility for the states' debts, offered creditors less than they were owed and borrowed more money to put the new nation on solid financial footing.

Other maneuvers that undercut investors get labeled "technical defaults" by some historians and economists. A leading example is 1933, when President Franklin D. Roosevelt took the nation off the gold standard amid the bank panics of the Great Depression. The nation's creditors were paid with dollars of much lower value than the gold they were due.

The Supreme Court said the government could do it, but mourned the abandonment of "the solemn promise of bonds of the United States."

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