Financial History Issue 114 (Summer 2015) | Page 26

A Brief
History of
the Default
on the Fourth
Liberty Loan

AN EXCEPTION

By Joshua Herbstman
If one were to ask a financial professional about the safety of US Treasury
bonds, the answer likely proffered would
be something along the lines of the following: “US Treasury securities are the safest
assets in the world. They are the benchmark of all debt instruments, sovereign or
otherwise. Treasuries always pay. Always.”
For almost every investor alive today,
this answer is perfectly sound. You buy a
Treasury bill, note or bond, and America
will pay you, in full, every dime of principal and interest you are owed. Be it a time
of war, recession or political disagreement, the United States always pays its
debt obligations.
That is not to say people have not lost
money on government bonds. Due to
the ever-changing financial markets, the
price of Treasuries continually fluctuates
to reflect prevailing interest rates. Failing
to hold a bond until maturity may very
well result in a loss. Leveraged positions
betting on the direction of interest rates
may also produce a red balance sheet.
But if you purchase a Treasury security
and hold it until maturity, you are going
to receive 100 cents to the dollar on your
investment. That is a promise that millions
of individuals and institutions around the
world have (literally) “taken to the bank.”
And it has always been the case.
Except for this one time…

© CORBIS

A century ago, during the summer of 1914,
armies across Europe embarked on what
would be the bloodiest war humanity had
yet experienced. The root causes of the

24    FINANCIAL HISTORY  |  Summer 2015  | www.MoAF.org

“Clear the Way!” Fourth Liberty Loan poster
by Howard Chandler Christy, circa 1918.