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.


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.