U.S. May Join Germany of 1933 in Pantheon of Defaults By John Glover October 14, 2013 7:39 AM EDT [On a rainy 13th day of a government shutdown with a possible debt default looming, the Senate comes into session but the House is closed, on Capitol Hill on October 13, 2013. Photographer: Melina Mara/The Washington Post via Getty Images] Reneging on its debt obligations would make the U.S. the first major Western government to default since Nazi Germany 80 years ago. Germany unilaterally ceased payments on long-term borrowings on May 6, 1933, three months after Adolf Hitler was installed as Chancellor. The default helped cement Hitler’s power base following years of political instability as the Weimar Republic struggled with its crushing debts. “These are generally catastrophic economic events,” said Professor Eugene N. White, an economics historian at Rutgers University in New Brunswick, New Jersey. “There is no happy ending.” The debt reparations piled onto Germany, which in 1913 was the world’s third-biggest economy, sparked the hyperinflation, borrowings and political deadlock that brought the Nazis to power, and the default. It shows how excessive debt has capricious results, such as the civil war and despotism that ravaged Florence after England’s Edward III refused to pay his obligations from the city-state’s banks in 1339, and the Revolution of 1789 that followed the French Crown’s defaults in 1770 and 1788. Failure by the world’s biggest economy to pay its debt in an interconnected, globalized world risks an array of devastating consequences that could lay waste to stock markets from Brazil to Zurich and bring the $5 trillion market in Treasury-backed loans to a halt. Borrowing costs would soar, the dollar’s role as the world’s reserve currency would be in doubt and the U.S. and world economies would risk plunging into recession -- and potentially depression. Senate Talks Senate leaders of both parties are negotiating to avert a U.S. default after a lapse in borrowing authority takes effect Oct. 17, even as senators block legislation to prevent one and talks between the White House and House Republicans have hit an impasse. Democratic lawmakers said Oct. 12 that the lack of movement may have an effect on financial markets. After Oct. 17, the U.S. will have $30 billion plus incoming revenue and would start missing payments sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office. Serial Defaulter Germany, staggering under the weight of 132 billion gold marks in war reparations and not permitted to export to the victors’ markets, was a serial defaulter from 1922, according to Albrecht Ritschl, a professor of economic history at the London School of Economics. That forced the country to borrow to pay its creditors, in what Ritschl calls a Ponzi scheme. At the Root of It All “Reparations were at the heart of the issue in the interwar years,” Ritschl said in a telephone interview. “The big question is why anyone lent a dime to Germany with those hanging over them. The assumption must have been that reparations would eventually go away.” While a delinquent corporation may go out of business, be broken up, sold to a competitor, or otherwise change its shape, sovereign defaulters are different. Weimar Germany deferred payments, stopped transfers, reformed the currency and wrote down debt, wringing a series of agreements from its creditors before the Nazis repudiated the obligations in 1933. It took until the 1953 London Debt Agreement to lay to rest the nation’s reparations difficulties, essentially by postponing any payments until after reunification in 1990 of East and West Germany, according to Timothy Guinnane, Professor of Economic History at Yale University in New Haven, Connecticut. The U.S., eager to ensure Germany was a bulwark against communism, pressured creditors to agree to debt relief, according to Guinnane. ‘Economic Strain’ “The U.S. was not being generous or magnanimous in the London Debt Agreement, it rarely is,” Guinnane said in an e-mail. “Rather, it understood that if Germany was forced to repay all the debts it technically owed, it would put the new Federal Republic under intolerable political and economic strain.” Payments on about 150 million euros ($203 million) of bonds issued to fund reparations ended in October 2003, according to the Associated Press. After sovereign defaults and before a nation is allowed to borrow again, some sort of repayment is typically made, Carmen Reinhart and Kenneth Rogoff wrote in their 2009 book on sovereign bankruptcies “This Time Is Different.” While Russia’s Bolshevik government refused to pay Tsarist debts, when the country re-entered debt markets it negotiated a token payment on the debt, according to the book. Germany, France Germany and France have both defaulted eight times since 1800, according to Reinhart and Rogoff. While Germany was sufficiently big and strategically important to be helped to peaceful prosperity by its creditors, default typically doesn’t end well for smaller nations. The U.S. has even failed to honor its obligations to the letter in the past. In 1979 it was late making payments on about $122 million of bills, blaming technical difficulties that the Treasury said stemmed from a failure in word processing equipment, Terry Zivney and Richard Marcus wrote in August 1989 in “The Financial Review.” In 1935, the Supreme Court ruled the federal government was within its rights to reject claims for payment in gold on bonds that gave holders the option to demand the metal. Because the terms of the contract weren’t fully honored, some would argue that was tantamount to a default. In 1790, the U.S. deferred interest payments on debt assumed by the new federal government until 1801, according to Reinhart and Rogoff. Court Pursuit Serial defaulters Argentina and Greece have retained political, if not economic independence. The Latin American nation failed to meet its commitments five times since 1951 and in 2001 gained the record for the largest-ever restructuring, a distinction it held until overtaken by Greece in 2012. Argentina’s bondholders are still pursuing the nation through the courts. Including 2012, Greece has defaulted six times since 1826, three years before it gained independence, and has spent more than half the years since 1800 in default, according to Reinhart and Rogoff. The biggest emerging-markets defaults in the past 15 years illustrate the cycle of contagion that typically marks sovereign debt crises. Russian Restructuring Russia halted payments on $40 billion of local debt in 1998 after oil, its main export, plunged 42 percent amid a global economic slowdown triggered by the Asian financial crisis. By the time it devalued the ruble and defaulted that August, the government had drained about half its foreign reserves and made an unsuccessful bid to increase the $22.6 billion international aid package it had received. Russia’s debt restructuring prompted investors to pull out of emerging markets, plunging Argentina into recession. By December 2001, when the South American country halted payments on $95 billion of bonds, the economy had contracted three successive years, cutting into tax revenue and pushing foreign reserves down to almost a six-year low. Those defaults took place because events had rendered the nations insolvent, something that doesn’t apply to the U.S., said the LSE’s Ritschl. “The only situation that really parallels the U.S. situation at present is the U.S. situation,” he said. “There’s really no doubt about the solvency of the U.S. Treasury.” To contact the reporter on this story: John Glover in London at [email protected] To contact the editor responsible for this story: Shelley Smith at [email protected] 992 COMMENTS bill 1 hour ago One party rule caused by economic collapse. Are we heading there? Judeth 3 hours ago I dont even listen to the sociopath boy king,if his lips are moving hes lying. his cheerleaders will be hardest hit when the stuff finally hits the fan 1EDWARDRMORROW1 3 hours ago Unemployed Matsuian is somewhat humorous; but he has no sense of German history 1920-1939. I expect his parents had eyewitness knowledge of the period. Bethel M 4 hours ago Matter of fact he was. He was Austrian by birth but German by descent. There are ethnic Germans in Poland, Switzerland Austria and even in Russia. So thats why he was able to be a member in the Reichstag. JDL51 4 hours ago First of all, theres no way to cut out $650 billion immediately without cutting SS and Medicare. Its pretty obvious republicans wont ever cut defense spending, cant cut the interest on the debt, or farm welfare, and will never, ever raise taxes so that leaves very few choices. And the time to take our medicine was back a few years ago when the republicans were in charge and spending like drunken sailors while at the same they looked the other way while Wall Street and the banking system went crazy loaning to unqualified people, which caused a huge drain on our resources to fix. It may shock you to learn that during the Bush administration, the guy and party you voted for, increased the size of govt more than any other administration since the Johnson era, even though he passed the biggest tax cut in history, all of which were still paying for. Funny how republicans are only for smaller govt when theyre not in the White House. If you want to see why were in the mess were in, take a look in the mirror and point your finger. Thats the one you want to blame. Murphcon 5 hours ago Yeah, but why would Obama default on debt payments ? Even if the debt ceiling isnt raised, he will still have over $200 billion per month in revenue to pay the $25 billion per month in debt payments. Debt gets paid first. Unless O decides to give it to the illegal invaders from south of the border, or the unemployed. mjmaxson 5 hours ago Lets get this straight: no debt increase does not equal default. The government can pay: 100% of debt interest 100% of social welfare programs 100% of military and still have $500 billion left to do everything else. redstate/2013/10/07/the-d... Show 3 replies JC 5 hours ago The modern day Left is a re-manufacured version of bolshivik communists. The problem is, Bernays taught the elites how to keep people dumb and uninformed, so most (Id say about 90% of lib dems) have zero knowledge of the history of their political ideology. JC 5 hours ago Sounds like youre cheering for Cloward-Piven...Obamas mandate.Nifty. JC 5 hours ago Its funny that America is facing the same problem as the German people did before the rise of Hitler. Oh, and theres a money issue too. Revisionist history > history written by the victors. 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