I am writing this post in the light of one remarkable piece of false historical revisionism that is being peddled in the context of the deficit negotiations currently underway in the US.  This is the claim that the US has never previously defaulted on its debts.

This is simply untrue.  In 1933 the US government decided that it would no longer honour its obligation to exchange its currency for gold and to pay its debts in gold as it had previously committed itself to do.  It simultaneously devalued its currency reducing its value as against what those who were holding it had thought it was worth.  This was an openly acknowledged default as was admitted at the time and as a Judgment of the US Supreme Court shortly after confirmed.  In 1971 the US government broke the remaining link between the US dollar and gold, which meant that the US thereafter refused to honour its previous obligation to exchange dollars for gold on demand from foreign (principally European) central banks.  That too by any definition was a default.

The UK has similarly made grandiose claims about how it too has supposedly never defaulted on its debts since the fourteenth (or was it the thirteenth?) century.   This too is nonsense.  In 1931 the British government also decided that it would no longer honour its previous commitment to exchange its currency for gold and to pay its debts in gold.  This was possibly the biggest psychological shock the world financial system has experienced to date.  The British government had succeeded in maintaining sterling’s value on the gold standard without interruption since the sixteenth century.  The idea that sterling might come off the gold standard and no longer be exchangeable for gold in peacetime was thought inconceivable.  The entire world financial system had been constructed on the assumption of sterling’s stability and convertibility into gold so sterling’s sudden devaluation caused a total collapse in confidence across the whole world financial system.  To make matters worse the British government shortly after in 1932 announced that it was making a straightforward default on repayment of its war debt to the US, which it had incurred during the First World War.  The ensuing panic caused a bank run in the US and led directly to the US default of 1933.

The UK undertook two further major devaluations of its currency in 1948 and 1967.  These too should be treated as defaults since they took place during a time of fixed exchange rates.  The effect of these devaluations was that individuals who held sterling on the assurance that it could be converted into other currencies at a certain value found overnight that their holdings of sterling were worth less than the British government had told them would be the case.  Subsequent devaluations that have happened since 1967 differ in that save for the brief period when sterling was within the European Exchange Rate Mechanism the British government has not committed itself to holding sterling to any particular value.

These are the most obvious and best known defaults by the US and British governments made over the course of the twentieth century.  There have certainly be others in previous centuries.  Charles I was for example obliged to convene parliament in 1641 because he too could not honour his debts.  I believe that the US government also defaulted on its debts during the Civil War.

I do not know where the fantasy that the US and the UK have never defaulted on their debts comes from but as I hope I have made clear in this post this claim has no basis in fact.


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