Financial history tends to get short shrift in the media, so I was thrilled to learn that Bloomberg had published a piece, “Worst US Bond Selloff Since 1787 …,” putting the recent decline in US Treasury prices in historical perspective. But then I read it and wondered why the reporter hadn’t reached out to either of the two living persons who collected the early bond data that the article references, Richard Sylla and myself, or at least looked at our publicly available publications and datasets.
If contacted, I would have offered three correctives to the piece:
The biggest early documented selloffs in US Treasuries occurred in 1791 and 1792, not 1787, as the headline implies. There was little organized trading before 1790 but we know that the prices of US and state debt dropped precipitously low in the years before the Constitutional Convention, and in fact helped to spur the movement for a stronger national government that began in Annapolis in 1786. The US government defaulted on its foreign debt in 1785 and had been “paying” interest with additional IOUs on domestic debt since 1782. So bond prices were already beaten down to pennies on the dollar before 1787.
Yes, US Treasuries traded in 1812, and every year before and after. Some years saw more activity than others but the volume data has been publicly available for about 15 years now. I summarized it in my 2008 book, One Nation Under Debt. By the time the US government paid off its debt in 1834, over 60,000 trades on over $128 million of its bonds had occurred.
By ignoring the 1791-92 panics, the article misses a key connection to present policies. During the 1791 and 1792 crises, Treasury Secretary Alexander Hamilton implemented what would later be called Bagehot’s Rule. Specifically, he called on the Bank of the United States (1791-1811) and the Bank of New York (1784-present) to lend freely at a penalty rate to all applicants who could post US bonds as collateral, counting them not at their falling market price, but at their rational or face value.
Accepting US Treasuries at their par value as collateral for loans is exactly what the Federal Reserve’s new Bank Term Funding Program (BTFP) does. Unlike loans made via its traditional “discount” window, the Fed does not publish the volume of loans taken under the BTFP, leading some to speculate that it is bolstering a good many banks that otherwise would have failed due to declining Treasury prices.
While many of us would prefer if poorly run banks folded, like Silicon Valley Bank and several others did earlier this year, the failure of numerous banks at once can damage the economy, as bank failure waves did during the Great Depression, the Savings and Loan crisis in the 1980s, and the 2007-10 meltdown. As I and others argued in Bailouts: Public Money, Private Profit, bailouts that follow Hamilton’s nee Bagehot’s Rule are less destructive than other types of bailouts, like investing taxpayer money in Too Big To Fail institutions, because they minimize moral hazard (risk-taking) and resource transfers.
Again, I encourage journalists to explore financial history, which has many lessons to offer, but they should really call me (along with AIER’s Pete Earle, or the handful of other financial history experts) before going to print.
