Duck, Duck, Default! Pt. 1

In George R. R. Martin’s A Song of Fire and Ice series, the Iron Bank is a quietly menacing figure that lingers in the background of Westeros’s civil war. The exact power wielded by the world’s most powerful financial institution is made clear when the Queen Regent Cersei Lannister informs the Iron Bank that she would delay repayment indefinitely. In response to Cersei’s default, her creditor throws its financial heft behind another rival, quadrupling his forces overnight and shifting the war’s balance in one fell swoop.

While Martin used the political pull of a sovereign state’s creditors to create a dramatic plot twist, this power is more than a medieval relic. Instead of gunboats, the modern version of the medieval financier—the bond trader—has more subtle tools. While some legal recourse exists, bond traders today respond to a dubious borrowing state by selling that nation’s bonds and currency, increasing the cost of borrowing to the point of potentially cutting off access to future credit and sparking inflation. Given these consequences, in 1994, then presidential advisor James Carville quipped that, if reincarnated, he no longer wished to be the President or Pope, but rather, “to come back as the bond market. You can intimidate everybody.” 

Since the Second World War, this intimidation has seemingly been reserved for developing economies, such as Argentina in the early 2000s. The world’s wealthiest economies, in contrast, have been taken as de facto stable, even with the relatively recent Euro Crisis. Yet this presumption is breaking. In 2023, UK Prime Minister Liz Truss was forced to resign when interest rates spiked on UK bonds following a budget proposing to borrow money to fund tax cuts. Similarly, in April 2025, US President Donald Trump announced a “90-day” pause on implementing his tariff agenda, noting that bond markets “were getting yippy.” 

For the US, this market pressure reflects a new global lending environment. Since the Great Recession, the national debt has rapidly expanded, reaching $38 trillion. Interest payments alone (projected at $890 billion annually) are approximately equal to total national defense spending, and the budget deficit (the negative difference between government expenditures and revenues) has steadily widened. Still, the federal government's response can only be described as blasé. The national debt ceiling, a Congressionally set limit on the total value of bonds the Treasury can issue, has become routine political theatre as both parties dismiss the possibility of defaulting. In 2016, then Presidential candidate Donald Trump observed, “This is the United States government… you never have to default because you print the money.” This sentiment has been echoed by liberal legal theorists, such as Harvard Law School’s Laurence Tribe. He argues that the Supreme Court decision in Perry v. United States (1935) determined that Section 4 of the 14^th Amendment, which states “the validity of the public debt of the United States… shall not be questioned,” created a constitutional duty for the President that superseded, if not rendered unconstitutional, the debt ceiling set by Congress. Furthermore, Perry ruled that Section 4 was a fundamental principle of the Republic “applying as well to bonds issued after, as to those issued before.”

History suggests this confidence is undeserved. While Trump and Tribe allude to the fact the United States can print the money to pay its debts nominally, economists Sebastian Edwards, Francis Longstaff, and Alvaro Garcia Marin note that “a recurrent myth regarding the U.S. economy is that the federal government has never defaulted on its debt.” During the Great Depression, the Roosevelt administration orchestrated a unilateral debt restructuring that imposed a 41 percent loss on investors. It did this through effectively a two-step process. First, on June 5, 1933, Congress passed a joint resolution that eliminated “gold clauses” in contracts and bonds, which enabled creditors to demand payment in gold rather than dollars. Moreover, the government effectively made it illegal to possess gold, forcing holders to surrender their gold to the Federal Reserve. Secondly, on January 31, 1934, following the passage of the Gold Reserve Act, President Franklin D. Roosevelt revalued the then gold-backed dollar from $20.67 per oz to $35 per oz. The maneuvers sparked a series of lawsuits, including Perry (1935), where the plaintiff argued that this devaluation amounted to an illegal seizure of property – his $10,000 Fourth Liberty Loan bond, purchased when a dollar was equal to 25.8 grains of gold, had now diminished to 15 and 5/21 grains of gold through legislative action. Perry demanded repayment on his bond dollars equivalent to the real gold value of the initial bond – approximately $16,900.

To be clear, Congress and Roosevelt’s action was not intended to repudiate or devalue the nation's debts. Instead, the government’s defense in the case was that it was leveraging its power of the purse (the ability to coin and value money) to combat deflation. By weakening the dollar, they hoped to spark modest inflation that would help farmers struggling with depressed crop prices. The gold clauses stood directly in the way of this, replacing Congress’s power to determine the value of the dollar with the world price of gold. Legal arguments aside, President Roosevelt added further pressure. After the Court ruled against the administration in previous cases, he drafted contingency executive orders to close the stock exchanges and wage a constitutional war against the Court if it ruled against the administration’s monetary policy. 

In a tight 5-4 ruling, Chief Justice Charles Evan Hughes ruled that Congress’s elimination of the gold clauses to public bonds was unconstitutional, violating “a fundamental principle” of the Constitution, expressed in the 14^th Amendment, that the United States’s debt should not be questioned. However, regarding Perry’s demand for $16,900, Hughes determined that there were no damages – Congress could choose to be on or off a gold standard, could choose to confiscate all gold in the country, and Perry had no right to claim additional compensation for an asset he legally had no right to. In effect, Hughes produced a paradoxical outcome: the United States could not textually default by rewriting the terms of its contracts, but it could effectively default by devaluing its currency. 

Yet this compromise produced startlingly few economic consequences. Despite a brief capital flight from the US, the dearth of safe savings options meant US bonds continued to sell without penalty, with interest rates remaining unchanged and without difficulty marketing funds. In fact, far from causing adverse effects, the revaluation of the dollar is now widely considered the central measure that jump-started American economic recovery from the Depression. The growth in the money supply supported banks, stabilized incomes, and stimulated some private investment. This begs the question: how bad would it be if the United States tried to print its way out of debt today?