Over the weekend, Austan Goolsbee, the chairman of the president’s Council of Economic Advisers, argued that Congress should raise the debt ceiling. In an interview with ABC’s “This Week,” he said, “If we hit the debt ceiling, that’s essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic.”
The merits of raising the debt ceiling aside, Professor Goolsbee isn’t quite right that an American debt default would be “totally unprecedented.” As Carmen Reinhart documented in her impressive chartbook of the last several hundred years of international financial crises, the United States has actually defaulted on its debt obligations before.
The first time was in 1790, the only episode Professor Reinhart unearthed in which the United States defaulted on its external debt obligations. It also defaulted on its domestic debt obligations then, too.
Then in 1933, in the midst of the Great Depression, the United States had another domestic debt default related to the repayment of gold-based obligations. Additionally, there were two episodes when a spate of American states defaulted on their debts, in 1841-42 (nine states) and 1873-84 (10 states). The havoc wreaked by these state-level defaults is part of the reason that so many states now have constitutional balanced-budget requirements.
Mr. Goolsbee’s misstatement may be understandable, though. Countries do not like to remember embarrassing episodes of default, as Professor Reinhart and her co-author Kenneth Rogoff discovered when painstakingly compiling historical financial data for their best-seller “This Time Is Different.” As a result, countries do not keep good records of their financial blemishes, and subsequent policy makers often never learn about them.
For example, upon circulating a draft of one paper that would eventually make it into the book, Professors Reinhart and Rogoff received unhappy correspondence from a senior official in the Japanese finance ministry who was miffed because they’d accused Japan of defaulting on its debt. The Land of the Rising Sun would never do something so dishonorable, the official wrote.
Mr. Rogoff subsequently sent the official a 1942 clipping from The New York Times, which documented the forgotten default.
“Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.”