In October 2015, the U.S. Treasury argued that allowing the debt limit to constrain the government's ability to meet its obligations "would represent an irresponsible retreat from a core American value: we are a nation that honors all of its commitments"; and that "(f)ailing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations." 692 , some Members stated that a binding debt limit that would limit the Treasury Secretary's ability to meet federal obligations on a timely basis would be tantamount to default, while other Members stated that default would only encompass a failure to make principal and interest payments linked to U.S. Treasury securities. This report discusses the concept of default in the context of the federal government's financial obligations. During the 2011 debt limit episode, some noted that the U.S. Treasury had failed to make timely payments to some small investors in the spring of 1979, which in the eyes of some, constituted a "technical default." Moreover, third parties may have difficulty evaluating compliance because some contracts are private. Consequences of Default Depend on Expectations

The consequences of a failure to pay or a late payment by the federal government or any other organization depend on the expectations of counterparties and others. The expectation that some other federal payments will be made on time may be weaker. For example, if a sovereign government's fiscal agent is barred from making payments to creditors, the willingness of that government to pay does not excuse the government from its obligations or relieve it from the consequences of nonpayment. For instance, Secretary Lew on October 15, 2015, asked Congress to take action on the debt li mit so that the Treasury would not be "unable to satisfy all of these obligations for the first time in the history of the United States." First, Congress declined in 1811 to renew the charter of the first Bank of the United States, which acted as the government's fiscal agent. At that time, the Treasury had not exhausted its authority to borrow or issue notes. Government finances improved with the end of the war and the rebound in customs revenues stemming from the resumption of international commerce. The Great Depression and the Gold Clause Cases

The decision by President Franklin Roosevelt and Congress to move the U.S. government off the gold standard in 1933 and 1934, in the eyes of some, amounted to a repudiation of the contract terms, and in particular, to the terms of the Second Liberty Bonds issued in 1917. Economic Consequences of the Cancellation of the Gold Clauses

The cancellation of the gold clauses appeared to have little effect on Treasury's ability to borrow on financial markets. Several economists found that countries that left the gold standard earlier in the 1930s recovered more quickly than those that remained longer on the gold standard. While the 1979 payment delays certainly inconvenienced many small investors, the stability of the wider market in Treasury securities was not put at risk. Causes of payment delays were diverse. Under any reasonable definition of default, the federal government defaulted in 1814. In 1979, as noted above, a major shift in monetary policy and conditions can explain changes in market yields on Treasury securities. Market participants have stated that systematic payment delays by the U.S. Treasury could have serious economic consequences. The lack of a fiscal agent or the administrative capacity to administer internal revenues undermined the U.S. Treasury's ability to meet federal obligations during the War of 1812. Even if the payment history of the U.S. government is not completely unblemished, it does compare favorably to nearly all other advanced countries.
During recent debt limit episodes, federal officials have contended that if the debt limit were to constrain the government's ability to meet its obligations, that would be an unprecedented blemish on the nation's credit. For example, the U.S. Treasury has asserted that "(f)ailing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations" or that it "would represent an irresponsible retreat from a core American value: we are a nation that honors all of its commitments. It would cause the government to default on its legal obligations."
Failure to pay obligations on time is regarded as a central indicator of default, although default may be triggered by a wide range of contractual provisions. More generally, the concept of default stems from contract law, and thus may be ambiguous because contract terms may be private or contracts may be incomplete, in that the consequences of some contingencies are left unspecified. For instance, the terms under which Treasury securities are offered lack any mention of payment delays or nonpayment. The ambiguity of the term "default" leads many third parties to develop their own definitions to monitor compliance with promises to pay.
The U.S. Treasury in some historical instances was unable to pay all its obligations on time or made payments on terms that disappointed creditors. Those instances resulted from extraordinary stresses on public finances. Over time, the United States has managed its finances so that its credit history compares favorably to nearly all other advanced countries.
This report examines three episodes in the federal government's fiscal history when some have questioned the public credit of the U.S. government. During the War of 1812, the federal government eventually became unable to meet its obligations. Shortly before that war, Congress had declined to renew the charter of the first Bank of the United States, leaving the government without a fiscal agent. In addition, President Jefferson and Treasury Secretary Gallatin had dismantled the administrative machinery needed to collect internal revenues, leaving Treasury revenues heavily dependent on customs income. In 1814, military expenses and lagging revenue left the U.S. Treasury unable to meet all of its obligations, including some interest payments on federal debt. The end of that war, the establishment of the second Bank of the United States, and the rebound of tariff revenues put federal finances on a sounder foundation.
In March 1933, newly inaugurated President Franklin Roosevelt soon took steps to suspend the gold standard, as one measure to address severe disinflation, a collapse of the banking system, and other consequences of the Great Depression. While the Supreme Court upheld actions that suspended the gold standard, others contended that the cancellation of gold clauses in federal bond contracts amounted to a restructuring of debt. Although the cancellation of gold clauses in 1933-1934 had no discernable effect on the U.S. Treasury's ability to borrow, holders of Treasury securities lost money relative to what they had expected to receive.
More recently, when the U.S. Treasury failed to make timely payments to some small investors in the spring of 1979, some dubbed the incident a "mini-default." While the payment delays inconvenienced many investors, the stability of the wider market in Treasury securities was never at risk. Shifts in monetary policy, as constraining inflation became a policy priority, provide a stronger explanation for changes in yields in federal securities. Moreover, payment delays were not uncommon at that time, when automatic data processing was at a relatively primitive stage.
Other countries that defaulted in the 1930s or in the 19th century apparently suffered no lasting damage to their ability to borrow. Nonetheless, the prominent role of U.S. Treasury securities in global and domestic financial arrangements implies that systematic delays in Treasury payments now could have serious consequences.