Is the Fourteenth Amendment to the Constitution all that stands between us and even gloomier economic times?
With China holding $800 billion of United States government debt, President Obama's trip to Beijing was described as a visit to the nation's banker. Indeed, the Chinese hold more than ten percent of the more than $7 trillion of debt held outside the federal government. A loss of Chinese confidence in our fragile economy, we are warned, could put the tentative business recovery at risk, particularly since the government will need to keep borrowing to meet its mounting deficits.
But savvy Chinese buyers of American bonds get something from American bonds that is not available with most debt instruments, even those issued by other sovereign nations: a guarantee written in a national constitution.
A little-known provision of the Fourteenth Amendment of the Constitution, adopted after the Civil War, states, "The validity of the public debt of the United States... shall not be questioned." In 1868, that guarantee was the flip side of a ban on repaying Confederate debts. To ensure that southern politicians would never push the costs of the rebellion onto the rest of the nation, the Radical Republicans barred such repayment. While they were at it, they guaranteed the federal debt.
The truth is that while government bonds are safer than many investments, most nations have defaulted on their debt at some point in history. Argentina repudiated debts in 1980 and 2001. Russia did it in 1998. And in 1957. And 1917. France defaulted in 1932.
In the first half of the twentieth century, China was a serial defaulter -- 1921, 1929, 1935, and 1939.
One question immediately occurs, however: just how good is that guarantee in the section 4 of the Fourteenth Amendment?
Like so much in life, not quite as good as it seems at first.
Only once has the guarantee been questioned seriously. That test came during the Great Depression. In 1933, President Franklin Roosevelt persuaded Congress to change the "gold clause" in certain federal bonds, which promised repayment in gold. Bondholders, Congress decreed, would have to accept repayment in American currency.
Because the dollar was devalued at the same time, elimination of the "gold clause" reduced considerably the payout on the bonds.
Outraged bondholders sued, complaining they would receive devalued paper money instead of the sturdy gold they had been promised. By a narrow 5-4 margin, and through tightly clenched teeth, the Supreme Court ruled against them.
Chief Justice Charles Evans Hughes sternly lectured Congress that its power to borrow money does not include any authority "to alter or destroy those obligations." Rather, Hughes continued, the Fourteenth Amendment denied to Congress the power to eliminate the gold clause.
Though the Chief Justice insisted that the gold clause "remains binding upon the conscience of the sovereign," the bondholders were still out of luck. Because the government enjoyed sovereign immunity, that final refuge for bad government decisions, the bondholders could not pursue their claims in the courts. The enraged dissenting judges predicted that the Court's decision would bring "unending humiliation" and "moral chaos."
For Chinese investors, then, the picture is mixed, at best. Their bonds are guaranteed by the Constitution. The only catch is that they can't enforce the guarantee.
So maybe President Obama did the right thing, flying to Beijing to reassure them that the recovery is under way.
Then again, what are they going to do, buy Russian bonds?