Little-Known Law Could Erase National Debt!

31 U.S.C. § 3108: An obligation issued under sections 3102–3104(a)(1) [Treasury bonds, notes and bills] and 3105–3107 [savings bonds] of this title may not bear the circulation privilege.


This law has been on the books long enough to control all outstanding Treasury debt instruments.

The “circulation privilege”? Yep, it means what any trader in U.S. debt securities would insist it cannot possibly mean: that the issuer may refuse to redeem the instrument if presented by any but the original obligee. See Hitner v. Lederer, 14 F.2D 991, 993 (E.D.Pa. 1926) (provision that bonds “shall not bear the circulation privilege” means that such bonds “are not a medium of exchange recognized by law”). What else could it mean?

Who might be the original obligee of an instrument issued in bearer form is an interesting question, but in recent time the vast majority of U.S. debt instruments have been issued in registered form. What about the Treasury practice of “registering” assignments of instruments? In the first place, administrative practices of the Treasury cannot alter the law, and 31 U.S.C. § 3108 is law. Secondly, the fact that the issuer may refuse to redeem upon presentment by someone other than the original obligee doesn’t mean that it must so refuse. And however consistently it does not, in practice, refuse, in principle its right to refuse remains unaffected.

How the nowadays vast and ever-churning market in Treasury debt securities came to operate in blithe disregard of this law is no doubt an interesting piece of history. One surmises that at a certain point, after the Treasury had disregarded § 3108 for a period of time, “the market” assured itself that the Government could not possibly risk crashing the financial system, and thus the economy, by all at once invoking it.

But now Messrs. Boehner and McConnell are promising to crash the financial system, and after that the question will be, “What can the U.S Treasury do to pick up the pieces?” In this light, the sudden discovery that by virtue of § 3108 very few holders of U.S. debt are in a position to make legal demand for payment might acquire new and previously unsuspected utility. The Treasury could announce a drastic restructuring (exempting such debt as is shown to be held by the original obligee) without triggering a “debt incident.” The rating agencies would no doubt come forward explaining that of course they had only meant their AAA rating to apply to U.S. debt instruments that had not been circulated in disregard of the law.

Treasury could then without qualm cover the costs of keeping the power on at the National Archives (thus saving the Declaration of Independence from crumbling into dust overnight), maintaining such vital services such as those provided by Blackwater USA and the like – oh, and even continuing to issue the Social Security checks.