Treasury Secretary Timothy Geithner, the Obama administration’s lead official on raising the national debt ceiling, has insisted Congress must act soon to avoid the government experiencing its first-ever default. Such a development “would be catastrophic for the economy,” Geithner said on “Face the Nation,” adding that “no responsible leader would say the United States of America, for the first time in its history, should not pay its bills, meet its obligations.”

 

Truth be told, a default next month would not be a first for Washington.

 

In 1979, the government cut things too close to the deadline for upping the debt limit (to $830 billion). After a flood of investors demanded more Treasury bills and bureaucrats failed to process some paperwork on time, Washington wound up issuing late payments to holders of $120 million in T-bills.

 

“You hear lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did. . . . It might have been small, it might have been inadvertent, but it happened,” Terry Zivney, a finance professor at Ball State University, told the Washington Post.

 

The Treasury Department characterized the problem as a delay rather than a default. Although the incident affected only a fraction of 1% of the U.S. debt, short-term interest rates (then around 9%) jumped 0.6% and the U.S. was sued by bondholders for breach of contract.

 

Investors were eventually paid in full, with back interest.

-Noel Brinkerhoff

 

Delayed Payments in 1979 Offer Glimpse of Default Consequences (by Brady Dennis, Washington Post)

Own Government Bonds? Here's Why You Should Be Worried (by Jason Zweig, Wall Street Journal)

The Day the United States Defaulted on Treasury Bills (by Donald Marron, Forbes)