Default

Much was made in 2011 of the possibility of a US default. The republicans were rightly castigated for playing games with the financial credibility of the United States to pursue their slash-and-burn policies. It seemed unthinkable that they would risk sending us over the debt cliff for the first time since the beginning of the republic. As it turns out, that last part wasn’t exactly true.

On April 26th 1979, the US Government went briefly into default. The reasons are depressingly familiar:

Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.

The United States thus defaulted because Treasury’s back office was on the fritz.

The situation was small and temporary, but it was real and had the consequence of sharply raising the interest rate on T-bills for several months, essentially increasing the cost of government borrowing .

Presumably the Treasury IT infrastructure is today more robust than it was back then, and with interest rates that have been around zero for years, the immediate costs would not spike the way it did then, but this event proved even a small, short-lived default could be disastrous. Given the willingness of the teabaggers in Congress to play chicken with the full faith and credit of our (and their) government, we may still find out just how bad it could be…

h/t Donald Maron