There Is Life After Default
by Peter G. Klein
My father was a historian, and he helped organize local events to commemorate the bicentennials of the Declaration of Independence in 1976 and Constitution in 1987. I particularly remember the Freedom Train, a traveling exhibit housing memorabilia such as original copies of the Declaration, the Constitution, the Louisiana Purchase document, and (I learn from Wikipedia, though I don’t remember these) Judy Garland’s dress from The Wizard of Oz and Joe Frazier’s boxing trunks.
Several years later, my dad gave a conference paper (unfortunately unpublished) entitled “The Constitution as Myth and Symbol.” He noted that for many Americans the founding documents, the Liberty Bell, Independence Hall, images of George Washington and Betsy Ross, etc., play the same kind of role as Britain’s crown jewels, the Bastille, or Lenin’s tomb.
The Constitution is important, in other words, not only for its text (some would argue the text is largely ignored today anyway), but also for its symbolic value. It represents a particular myth of the American founding, usually associated with reason and noble ideals (e.g., Bernard Bailyn, Ayn Rand, Schoolhouse Rock), but occasionally with power or material self-interest (e.g., Charles Beard, Bertell Ollman).
In following the debates over raising the US debt ceiling, I’m struck by the frequent claim that defaulting on public debt is unthinkable because of the “signal” that would send. If you can’t rely on the T-bill, what can you rely on? Debt instruments backed by the “full faith and credit” of the United States are supposed to be risk-free – almost magically so – somehow transcending the vagaries of ordinary debt markets. The Treasury bill, in other words, has become a myth and symbol, just like the Constitution.
I find this line of reasoning unpersuasive. A T-bill is a bond just like any other bond. Corporations, municipalities, and other issuers default on bonds all the time, and the results are hardly catastrophic.