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Article 150927776

Why a treasury default is likely
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Why Default on U.S. Treasuries is Likely Jeffrey Rogers Hummel* PRINTEMAILCITECOPYRIGHT SHARE Home | Articles | Featured Article "Buried within the October 3, 2008 bailout bill was a provision permitting the Fed to pay interest on bank reserves. Within days, the Fed implemented this new power, essentially converting bank reserves into more government debt. Now, any seigniorage that government gains from creating bank reserves will completely vanish or be greatly reduced." Almost everyone is aware that federal government spending in the United States is scheduled to skyrocket, primarily because of Social Security, Medicare, and Medicaid. Recent "stimulus" packages have accelerated the process. Only the naively optimistic actually believe that politicians will fully resolve this looming fiscal crisis with some judicious combination of tax hikes and program cuts. Many predict that, instead, the government will inflate its way out of this future bind, using Federal Reserve monetary



"Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered." [1]

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of 1839 2 References 3 Links In the panic of 1837, during the first three weeks of April 1837, 250 business houses failed in New York. Within two months the losses from bank failures in New York alone aggregated nearly $100 million. <span>"Out of 850 banks in the United States, 343 closed entirely, 62 failed partially, and the system of State banks received a shock from which it never fully recovered." [1] History[edit] The price inflation began long before the panic of 1837. The wholesale prices reached a trough of 82 in July 1830 and then rose by 20.7 percent in three years to reach 99




The reason for the price rise is simple: The total money supply had risen from $109 million in 1830 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent. Breaking the figures down further, the total money supply had risen from $109 million in 1830 to $155 million a year and a half later, a spectacular expansion of 35 percent. This monetary expansion was spurred by the still-flourishing Bank of the United States, which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent. The total money supply rose from $150 million at the beginning of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84 percent, or 21 percent per annum.[2]

The notes and deposits of the BUS had risen, from January 1823 to January 1832, from $12 million to $42.1 million, an annual increase of 27.9 percent. This sharp inflation of the base of the banking pyramid led to a large increase in the total money supply, from $81 million to $155 million, or an annual increase of 10.2 percent. Clearly, the driving force of this monetary expansion of the 1820s was the BUS, which acted as an inflationary spur rather than as a restraint on the state banks.

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er fully recovered." [1] History[edit] The price inflation began long before the panic of 1837. The wholesale prices reached a trough of 82 in July 1830 and then rose by 20.7 percent in three years to reach 99 in the fall of 1833. <span>The reason for the price rise is simple: The total money supply had risen from $109 million in 1830 to $159 million in 1833, an increase of 45.9 percent, or an annual rise of 15.3 percent. Breaking the figures down further, the total money supply had risen from $109 million in 1830 to $155 million a year and a half later, a spectacular expansion of 35 percent. This monetary expansion was spurred by the still-flourishing Bank of the United States, which increased its notes and deposits from January 1830 to January 1832 from a total of $29 million to $42.1 million, a rise of 45.2 percent. The total money supply rose from $150 million at the beginning of 1833 to $267 million at the beginning of 1837, an astonishing rise of 84 percent, or 21 percent per annum. [2] The notes and deposits of the BUS had risen, from January 1823 to January 1832, from $12 million to $42.1 million, an annual increase of 27.9 percent. This sharp inflation of the base of the banking pyramid led to a large increase in the total money supply, from $81 million to $155 million, or an annual increase of 10.2 percent. Clearly, the driving force of this monetary expansion of the 1820s was the BUS, which acted as an inflationary spur rather than as a restraint on the state banks. Furthermore, the inflationary boom of the 1830s began, not with Jackson’s removal of the deposits in 1833, but three years earlier, as an expansion fueled by the central bank. Thus, the




here is no question, however, that the money supply and the price level rose spectacularly from 1833 to 1837. Total money supply rose from $150 million at the beginning of 1833 to $276 million four years later, an astonishing rise of 84 percent, or 21 percent per annum.

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n 1830 to $155 million at the end of 1831, a spectacular expansion of 35 percent in one year. This monetary inflation was sparked by the central bank, which increased its notes and deposits from January 1830 to January 1832 by 45.2 percent. T<span>here is no question, however, that the money supply and the price level rose spectacularly from 1833 to 1837. Total money supply rose from $150 million at the beginning of 1833 to $276 million four years later, an astonishing rise of 84 percent, or 21 percent per annum. Wholesale prices, in turn, rose from 84 in the spring of 1834 to 131 in early 1837, a rise of 52 percent in a little less than three years—or an annual rise of 19.8 percent. The monetar




The spark that ignited the inflation was an unusual and spectacular inflow of Mexican silver coins into the United States—brought about by the minting of debased Mexican copper coins which the Mexican government tried to keep at par value with silver. The system of fractional reserve banking, however, fundamentally was to blame for magnifying the influx of specie and pyramiding notes and deposits upon the specie base. In 1837, the boom came to an end, followed by the inevitable bust, as Mexico was forced to discontinue its copper coin issue by the outflow of silver, and the Bank of England, worried about inflation at home, tightened its own money supply and raised interest rates. The English credit contraction in late 1836 caused a bust in the American cotton export trade in London, followed by contractionist pressure on American trade and banks.

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rices, in turn, rose from 84 in the spring of 1834 to 131 in early 1837, a rise of 52 percent in a little less than three years—or an annual rise of 19.8 percent. The monetary expansion, however, was not caused by state banks going hog wild. <span>The spark that ignited the inflation was an unusual and spectacular inflow of Mexican silver coins into the United States—brought about by the minting of debased Mexican copper coins which the Mexican government tried to keep at par value with silver. The system of fractional reserve banking, however, fundamentally was to blame for magnifying the influx of specie and pyramiding notes and deposits upon the specie base. In 1837, the boom came to an end, followed by the inevitable bust, as Mexico was forced to discontinue its copper coin issue by the outflow of silver, and the Bank of England, worried about inflation at home, tightened its own money supply and raised interest rates. The English credit contraction in late 1836 caused a bust in the American cotton export trade in London, followed by contractionist pressure on American trade and banks. In response to this contractionist pressure—demands for specie—the banks throughout the United States (including the old BUS) promptly suspended specie payments in May 1837. The governme




banks throughout the United States (including the old BUS) promptly suspended specie payments in May 1837.

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tes. The English credit contraction in late 1836 caused a bust in the American cotton export trade in London, followed by contractionist pressure on American trade and banks. In response to this contractionist pressure—demands for specie—the <span>banks throughout the United States (including the old BUS) promptly suspended specie payments in May 1837. The governments allowed them to do so, and continued to receive the notes in taxes. The notes began to depreciate at varying rates, and interregional trade within the United States was c




Moreover, the BUS had invested heavily in cotton speculation, and was forced once again to suspend specie payments in the fall of 1839. This touched off a new wave of general bank suspensions in the South and West, although this time the banks of New York and New England continued to redeem in specie. Finally, the BUS, having played its role of precipitating boom and bust for the last time, was forced to close its doors forever in 1841.

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w bonds, because of the cotton boom of 1838. But the boom collapsed the following year, and the states had to abandon the unsound projects of the boom. Cotton prices fell and severe deflationist pressure was put upon the banks and upon trade. <span>Moreover, the BUS had invested heavily in cotton speculation, and was forced once again to suspend specie payments in the fall of 1839. This touched off a new wave of general bank suspensions in the South and West, although this time the banks of New York and New England continued to redeem in specie. Finally, the BUS, having played its role of precipitating boom and bust for the last time, was forced to close its doors forever in 1841. The crisis of 1839 ushered in four years of massive monetary and price deflation. Many unsound banks were finally eliminated, the number of banks declining during these years by 23 perce




The crisis of 1839 ushered in four years of massive monetary and price deflation. Many unsound banks were finally eliminated, the number of banks declining during these years by 23 percent. The money supply fell from $240 million at the beginning of 1839 to $158 million in 1843, a seemingly cataclysmic drop of 34 percent, or 8.5 percent per annum. Wholesale prices fell even further, from 125 in February 1839 to 67 in March 1843, a tremendous drop of 42 percent, or 10.5 percent per year. The collapse of money and prices after 1839 also brought the swollen state government debts into jeopardy.

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South and West, although this time the banks of New York and New England continued to redeem in specie. Finally, the BUS, having played its role of precipitating boom and bust for the last time, was forced to close its doors forever in 1841. <span>The crisis of 1839 ushered in four years of massive monetary and price deflation. Many unsound banks were finally eliminated, the number of banks declining during these years by 23 percent. The money supply fell from $240 million at the beginning of 1839 to $158 million in 1843, a seemingly cataclysmic drop of 34 percent, or 8.5 percent per annum. Wholesale prices fell even further, from 125 in February 1839 to 67 in March 1843, a tremendous drop of 42 percent, or 10.5 percent per year. The collapse of money and prices after 1839 also brought the swollen state government debts into jeopardy. State government debt had totaled a modest $26.5 million in 1830. By 1835 it had reached $66.5 million, and by 1839 it had escalated to $170 million. It was now clear that many states we




State government debt had totaled a modest $26.5 million in 1830. By 1835 it had reached $66.5 million, and by 1839 it had escalated to $170 million. It was now clear that many states were in danger of default on the debt. At this point, the Whigs, taking a leaf from their Federalist forebears, called for the federal government to issue $200 million worth of bonds in order to assume all the state debt. The American people, however, strongly opposed federal aid, including even the citizens of the states in difficulty.

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le prices fell even further, from 125 in February 1839 to 67 in March 1843, a tremendous drop of 42 percent, or 10.5 percent per year. The collapse of money and prices after 1839 also brought the swollen state government debts into jeopardy. <span>State government debt had totaled a modest $26.5 million in 1830. By 1835 it had reached $66.5 million, and by 1839 it had escalated to $170 million. It was now clear that many states were in danger of default on the debt. At this point, the Whigs, taking a leaf from their Federalist forebears, called for the federal government to issue $200 million worth of bonds in order to assume all the state debt. The American people, however, strongly opposed federal aid, including even the citizens of the states in difficulty. The advent of the Jacksonian Polk administration in 1845 put an end to the agitation for Federal assumption of the debt, and by 1847, four western and southern states had repudiated all




The advent of the Jacksonian Polk administration in 1845 put an end to the agitation for Federal assumption of the debt, and by 1847, four western and southern states had repudiated all or part of their debts, while six other states had defaulted from three to six years before resuming payment.

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ist forebears, called for the federal government to issue $200 million worth of bonds in order to assume all the state debt. The American people, however, strongly opposed federal aid, including even the citizens of the states in difficulty. <span>The advent of the Jacksonian Polk administration in 1845 put an end to the agitation for Federal assumption of the debt, and by 1847, four western and southern states had repudiated all or part of their debts, while six other states had defaulted from three to six years before resuming payment. The 1839–43 contraction and deflation was a healthy event for the economy, since it liquidated unsound investments, debts, and banks, including the Bank of the United States. But didn’t




The Jacksonians had no intention of leaving a permanent system of pet banks, and so Jackson’s chosen successor Martin Van Buren fought to establish the Independent Treasury System, in which the federal government conferred no special privilege or inflationary prop on any bank; instead of a central bank or pet banks, the government was to keep its funds solely in specie, in its own Treasury vaults or "subtreasury" branches. Van Buren managed to establish the Independent Treasury in 1840, but the Whig administration repealed it the following year. Finally, however, Democratic President Polk installed the Independent Treasury System in 1846, lasting until the Civil War.[3]

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in contrast, real consumption increased by 21 percent and real GNP by 16 percent during this period. It seems that only the initial months of the contraction worked a hardship. And most of the deflation period was an era of economic growth. <span>The Jacksonians had no intention of leaving a permanent system of pet banks, and so Jackson’s chosen successor Martin Van Buren fought to establish the Independent Treasury System, in which the federal government conferred no special privilege or inflationary prop on any bank; instead of a central bank or pet banks, the government was to keep its funds solely in specie, in its own Treasury vaults or "subtreasury" branches. Van Buren managed to establish the Independent Treasury in 1840, but the Whig administration repealed it the following year. Finally, however, Democratic President Polk installed the Independent Treasury System in 1846, lasting until the Civil War. [3] References[edit] ↑ Hubert H. Bancroft. The financial panic of 1837, from the The Great Republic By the Master Historians Vol. III. Referenced 2011-01-13. ↑ Murray N. Rothbard. A His