In fact, there was one short-lived incident in the spring of 1979 that offers a glimpse of some of the problems and costs that might arise if the stalemate on Capitol Hill continues. Then, as now, Congress had been playing a game of chicken with the debt limit, raising it to $830 billion – compared with today’s $14.3 trillion – only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.
That last-minute approval, combined with a flood of investor demand for Treasury bills and 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 that April and May.
“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,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode entitled “The Day the United States Defaulted on Treasury Bills.”
All things considered, the incident amounted to a minor blip. The Treasury had missed payments on about $120 million worth of bills, a tiny amount even then, given the global investment in U.S. debt. Investors, some of whom joined a class-action suit against the government to recover damages, eventually were paid in full with back interest. T-bills, as they are known, continued to be considered a safe investment. Treasury officials both then and now argued that the event was not even a default, but merely a delay caused by the internal logjam.
“It was quickly forgotten,” said Jim Angel, a finance professor at Georgetown University.
And yet, the study by Zivney and his partner, Dick Marcus, found that even that brief failure to meet some obligations had expensive consequences. The pair concluded “that the series of defaults resulted in a permanent increase in interest rates” of more than half a percent, which over time translated into billions of dollars in increased interest payments on the nation’s debt, a cost shouldered by taxpayers.