Economists are worried about the possibility that the United States could default on its debts. The source of their worry: whether Congress will be unable to pass legislation that raises the debt limit.
The debt limit is the maximum amount of money the United States can borrow cumulatively by issuing bonds.
The statutory debt limit is currently about $31.4 trillion, and if that level isn’t raised or affirmatively waived, the United States wouldn’t be able to cover its bills, imperiling ordinary citizens and roiling the U.S. economy and global financial markets.
Voting to raise the limit has political costs: Opponents can make it look as if a lawmaker is abetting wasteful government spending rather than staving off global economic trouble.
Concerns that a legislative standoff will lead to a debt limit breach have arisen periodically, and arose anew after the Republican Party seized control of the House in the 2022 midterm elections.
House Republicans can now leverage the urgent need for a debt limit hike to extract desired spending cuts. But because the Democrats control the Senate and the White House, both parties must sign off on a debt limit increase, and they have widely differing ideas about how to spend federal revenue.
CNN reported that Rep. Kevin McCarthy, R-Calif., pledged to pair a debt limit increase with spending cuts as he negotiated for votes for the House speakership role. The scale of those cuts might be unacceptable to President Joe Biden and the Senate Democratic majority, and if so, passing a timely debt limit increase would get harder.
During a Jan. 8 interview on NBC’s “Meet the Press,” the House Democrats’ new leader, Rep. Hakeem Jeffries of New York, said a debt default would be unprecedented.
“Our concern right now … is making sure that we don’t default on our debt for the first time in American history,” Jeffries said.
Experts say there’s variation in how “default” is defined, but they agreed that a debt-ceiling default the way Jeffries referenced hasn’t occurred before. Jeffries’ office did not respond to an inquiry.
“The Republicans are talking about putting the U.S. government in the position of not being able to pay the bills that it has already incurred, via legislation that Congress itself passed,” said Neil H. Buchanan, a University of Florida economist and law professor and author of “The Debt Ceiling Disasters.” “That has never happened, and it never should.”
Possible precedents for defaults
In a 2021 op-ed in The Hill, a political news outlet, Alex J. Pollock, a former Treasury Department official, argued that there are four precedents for U.S. defaults.
Pollock cited cases of the U.S. Treasury:
• Resorting to paper money largely not supported by gold during the Civil War in 1862;
• Redeeming gold bonds with paper money rather than gold coins during the Great Depression in 1933;
• Not honoring silver certificates with an exchange of silver dollars in 1968; and
• Abandoning the Bretton Woods Agreement in 1971, which included a commitment to redeem dollars held by foreign governments for gold.
Also, a 2016 analysis by the nonpartisan Congressional Research Service noted that in 1979, the Treasury failed to make on-time payments to some small investors because of technical glitches. Most were paid within days or a week. The research service concluded that although the temporary payment delays “inconvenienced many investors, the stability of the wider market in Treasury securities was never at risk.”
But multiple economic specialists agree that although these were notable episodes, they do not mirror the type of default to which Jeffries was referring.
The Committee for a Responsible Federal Budget, a group that urges fiscal restraint, said Jeffries was “basically right.”
“Academics can quibble over when and how the U.S. may have ‘defaulted’ in the past, but failure to raise the debt ceiling would be unprecedented,” the group said in a statement.
Gary Richardson, an economist and historian of the Federal Reserve system at the University of California-Irvine, said that by the same logic, one could argue that any time the Federal Reserve expands the money supply — as it has done repeatedly over the years — it reduces the value of existing money and thus shrinks the real value of payments promised to debt holders.
“Inflation occurs almost every day,” he said. “Why isn’t this also labeled a default?”
Experts said the 1933 gold bonds example may come closest to a default while still falling short.
“After 1933, people could no longer exchange their dollars for a specified amount of gold,” said Gary Burtless, an economist with the Brookings Institution, a Washington, D.C., think tank. They could, however, “buy whatever they wanted, aside from gold, with the principal and interest payments they continued to receive.”
That’s a different situation than the complete nonpayment that would follow a congressional debt limit standoff, he said.
Jeffries said that a “default on our debt” is unprecedented in American history.
There have been instances in which the U.S. government changed the terms for bondholders, such as preventing them from trading paper holdings directly for precious metals. But experts say these don’t constitute a true default, in which bondholders are simply not paid.
With the possible exception of a temporary delay in payments in 1979 because of technical glitches, the U.S. has not experienced the type of default that could happen if the debt limit isn’t raised in time to meet the nation’s payment deadlines.
We rate the statement Mostly True.