Celal Gunes / Anadolu Agency
- The US once suffered a “mini-default” in 1979, thanks in part to glitchy word-processing equipment.
- The incident caused Treasury yields to spike up by 60 basis points or 0.6 percent and cost billions long-term.
- The US is now flirting with a full default as Republicans in Congress demand spending cuts in exchange for paying America’s debt.
There’s a looming possibility that the United States could soon default on its debt, but it actually wouldn’t be the first time the US didn’t pay its bills on time.
More than four decades ago, glitchy word-processing equipment caused a so-called “mini-default,” where some Treasury bill payments were delayed.
The minor snafu ended up costing the US billions of dollars in the long term, researchers later found — underscoring just how serious the repercussions of a full default would be.
The ‘mini-default’ of 1979
Under the Carter administration in late April and early May of 1979, the US defaulted on some Treasury bills.
Roughly 4,000 Treasury checks for interest payments and maturing securities held by individual investors and worth an estimated $122 million weren’t sent out on time.
“Payment delays were chiefly due to back-office technical and organizational problems,” according to a report by the Congressional Research Service, a nonpartisan public policy research institute of Congress.
The report noted that, at the time, more than 90% of marketable Treasury securities were held in book-entry form. The then-Bureau of the Public Debt was in the middle of automating its own system of accounts.
“The US Treasury’s check issuance operations were also in the midst of a relocation and word processing equipment failed unexpectedly,” the report said.
In a 1989 Financial Review article, researchers Terry Zivney and Richard Marcus said the Treasury blamed the delay on “an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.”
The issue was corrected within three weeks, according to Reuters.
But the incident caused T-bill interest rates to permanently spike by 60 basis points, according to Zivney and Marcus.
That spike made it more expensive for the federal government to borrow money, costing roughly $12 billion in the long term, the Congressional Research Service noted.
Is the US headed for a full default?
Meanwhile, time is running out for the US to avoid a disastrous and unprecedented default on its debt now in 2023.
Last week, Treasury Secretary Janet Yellen warned Speaker of the House Kevin McCarthy that the US could run out of money to pay its bills as early as June 1 if Congress does not step in to address the debt ceiling so the US can pay its debts.
A default would hurl the US into an economic crisis that would cost millions of jobs, see retirement savings depleted and wreak havoc on the global economy, White House advisors have warned.
According to a recent analysis from the White House Council of Economic Advisers, if there’s a short default, the US would lose half a million jobs, and unemployment would jump by 0.3%, as Insider has previously reported.
In the worst-case scenario — a protracted default — the US would lose 8.3 million jobs, and unemployment would jump by 5%, according to the analysis.
Congress has raised the debt ceiling multiple times under previous administrations without negotiations — including under President Donald Trump. But Republicans in the House and Senate are now demanding spending cuts in exchange for addressing US debt payments.
President Joe Biden has refused to negotiate over the debt ceiling, while Republicans are also holding firm on their demands.