We often hear that if the US government defaults on its debt, that will be unprecedented. But one Treasury Secretary in our history actually structured a default on federal debt. Who was it? Hint: there’s a popular musical on Broadway by the same name. That’s right, it was Alexander Hamilton.
This is the opening paragraph of David R. Henderson and Jeffrey R. Hummel, “Hamilton’s Haircuts,” American Institute for Economic Research, May 4, 2023.
And:
The bottom line is that the funding of the domestic debt involved a haircut that, in all but name, was a partial default. Using a discount rate of 6 percent, we calculate that someone who exchanged $100 of the Continental Congress’s wartime debt, with one-third of that funded with deferred 6 percent consols received assets whose present value was only $82. At the same discount rate, the present value of $100 worth of 3 percent consols was $50. Moreover, Hamilton and Congress never even considered the idea of paying additional interest on the arrears of interest. And the assumed state debts had even a more severe haircut on principal and interest; the present value for $100 of that debt had been reduced to $59. Some holders of the Revolutionary War debt, particularly in New England, were outraged at the loss of a full 6 percent interest on all the new securities. Of course, prior to the refunding, the wartime debt securities had been trading well below their face value.
Read the whole thing, which is not long.
READER COMMENTS
Matthias
May 7 2023 at 1:30am
Very interesting!
Do you know why the Dutch loans got special treatment?
Jeff Hummel
May 7 2023 at 4:13pm
In the Continental Congress’s ongoing efforts to finance the Revolutionary War, foreign loans had become virtually the only source of specie (gold and silver) by 1782. Congress had already ceased issuing Continental currency, which had depreciated to around 100 to 1 relative to specie. Foreign loans had come from the French and Spanish governments as well as from private Dutch investors. But partly because the French government refused to roll over its loans with new ones after 1781, Congress suspended interest on its French debts in 1785 and defaulted on installments of the principal due in 1787. On the other hand, because Dutch investors confidently continued to help finance the U.S. government, there was no default on Dutch loans, which with their fifteen-year maturities became a mainstay of congressional finance up until and after adoption of the Constitution in 1788. Indeed, after Hamilton funded the war’s domestic debt, he even diverted proceeds from the Dutch loans to pay interest on the domestic debt. He also refunded the Spanish debt, paying arrears on interest, in part I suspect to help bolster the new government’s reputation for creditworthiness among foreign lenders generally.