Rhyming History Without Reason

All the attention on the federal debt ceiling, deficits and debt may be a mistimed priority as some commentators and historians argue U.S. policymakers should focus instead on stimulating consumer demand to get economic recovery into full gear.

"Most people realize that a failure to raise the debt ceiling could be catastrophic," says Millsaps College historian Robert McElvaine, who is author of The Great Depression: America, 1929-1941. "But the drastic cuts in federal spending that some Republicans are demanding in exchange for an increase in the debt ceiling would be a repeat of the mistakes that prevented a full recovery in the 1930s and then caused a secondary collapse in 1937. Enacting these cuts is the most likely scenario in which the current recession could become a new depression."

"The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty," writes David Leonhardt, economics reporter for the New York Times. "The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,' Mellon said, according to his boss, President Herbert Hoover. 'It will purge the rottenness out of the system.' History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day."

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What If the Sky Falls?

You don't have to be a political junkie to be aware of the clash on Capitol Hill over the federal deficit, national debt and the debt ceiling. Some say doomsday is just around the corner. Others claim it is a political hoax to cow Congress into raising more revenue.

Whether doomsday or hoax, a lot of average Americans are beginning to wonder what exactly would happen come August 2 if U.S. deficit spending exceeds the current debt limit. Opinions run the gamut, but there has been a relatively recent incident that foreshadows what might happen.

The Washington Post recalls a similar game of political chicken occurred in 1979, when the debt limit was raised eventually to $830 billion, a pittance to today's $14.3 trillion debt ceiling.

Congress managed to avert a major disaster by approving a debt ceiling increase at the last minute, but not before "a flood of investor demand" for payments of U.S. Treasury bills, The Post reports. "A series of technical glitches in processing the backlog of paperwork resulted in thousands of late payments to holders of Treasury bills that were maturing."

So, the United States technically has defaulted on its debt. "It might have been small, it might have been inadvertent, but it happened," Terry Zivney, a finance professor at Ball State University, told the Post.

The technical default involved about $120 million in late payments – payments that eventually were paid in full, with interest, but attracted a class action suit in the process.

Few people remember the incident, other than, of course, the investors who held the $120 million in Treasury bills that temporarily were unpaid. There was no lasting damage to the U.S. reputation as a safe, reliable place to invest your money.

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