Harlan Giles Unger’s The Last Founding Father: James Monroe and a Nation’s Call to Greatness contains an anecdote about James Monroe’s time as a Virginia delegate to the Confederation Congress that seems somehow apropos:
Monroe, on the other hand, arrived in Annapolis all but penniless—as yet unpaid for his government services in Virginia.
“There is not one shilling in the Treasury,” [future Chief Justice John] Marshall wrote to Monroe late in February, after Monroe had pleaded to his friend for help, “and the keeper of it could not borrow one on the faith of the government. The extreme inclemency of the season has rendered it impossible for the Sheriffs to make tax collections and I have my fears that you will not receive [your pay] till some time in April.” To add to Monroe’s financial woes Marshall reported that a Richmond merchant had demanded payment on merchandise Monroe had purchased and that his landlady “begins to be a little clamorous” for overdue rent.”
This I think captures what happens if the Treasury isn’t allowed to engage in new formal borrowing better than the vague term “default.” The government of Virginia owed James Monroe money. But tax collections had fallen short of the government’s obligations. The reasonable approach would be for Virginia to borrow some money in order to meet its obligations, and then pay what was owed at a later date when the revenue situation was more promising. But nobody would lend Virginia money, so instead you got what amounted to a forced loan from Monroe to Virginia. That’s what’ll happen on Aug. 2, the government will start “borrowing” money from state governments, federal employees, government contractors, and others who are owed payment in the form of simply not paying them.
It is worth dwelling on the fact that the founders of the country were acutely aware of what it was like to inhabit a country with a lot of wealth (in their case, land) but a depressed trade due to a dysfunctional financial system due to a lack of state capacity to make and meet credible financial commitments. The constitutional system was intended to remedy precisely this problem. But now it’s failing, and failing rather badly.