We Accidentally Breached The Debt Ceiling In 1979. It Wasn't Pretty

Here’s a little historical perspective on today’s political battles: The last time the nation breached the debt limit, it was a small accident and cost us big time.

It was 1979. The Treasury accidentally defaulted on about $122 million worth of Treasury bills thanks to a combination of unexpectedly high demand and a computer glitch. The screw up was in part the result of a “back office on the fritz in the wake of a debt limit showdown,” Donald Marron, the director of economic policy initiatives at the Urban Institute, wrote on his blog last week.

The problem lasted from late April to early May of that year. The fallout came quickly: “The U.S. went from being in investors’ minds a ‘100 percent sure no matter what’ investment to 99.99 percent,” Robert Wright, the chair of political economy at Augustana College, said in an interview with HuffPost.

The slight drop in confidence raised the nation’s borrowing costs by about 0.6 percent or $12 billion, a 1989 study in the Financial Review found. And that was after Treasury quickly corrected the issue. The U.S. was also sued by bondholders for breach of contract, noted Jason Zweig in the WSJ in 2011 -- the last time we had to talk about the possibility of default.

If lawmakers don’t raise the debt ceiling by Oct. 17 and push the nation into defaulting on a much larger scale, the result will be much worse, said Wright, the author of “One Nation Under Debt: Hamilton, Jefferson and the History of What We Owe.”

That's a distinct possibility. Republican lawmakers are saying they would use the debt limit as leverage for other legislation, like delaying certain provisions of Obamacare. The Obama administration has said it will not compromise on the debt ceiling. The standoff could get ugly.

A similar battle in 2011 cost the U.S. its top credit rating, shook business and consumer confidence and hit the stock market.

“It could end up costing many billions,” Wright said. “And that’s just if the market takes it the same way as it did in 1979, as sort of an aberration. There’s going to be a lot more volatility if there were to be a default that based on politics.”