In a November 1983 letter to then-Senate Majority Leader Howard H. Baker Jr. (R-Tenn.), Reagan warned that without a higher debt ceiling, the country could be forced to default for the first time in its history.
Reagan wrote: “The full consequences of a default – or even the serious prospect of default – by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar.”
Treasury Secretary Timothy F. Geithner has issued similar admonitions to Congress in recent months. On Monday, U.S. borrowing is set to reach the $14.3 trillion limit, but Geithner is launching a series of special measures that will delay the day of reckoning until Aug. 2. Geithner says the United States will then begin to default on its obligations.
But GOP lawmakers in both chambers have not been so sure. Many of the skeptics are affiliated with the tea party, which is resistant to raising the debt limit without significant cuts to federal spending and dramatic changes in government health insurance programs.
In the Senate, freshman Sen. Pat Toomey (R-Pa.) has said the Obama administration has been exaggerating the effects of hitting the default mark. He says breaching the limit would cause only a partial government shutdown.
Other Freshman Republicans have said that Geithner could raise money to avoid defaulting by selling investments in private companies. The Republican Study Committee, which represents more than 150 lawmakers, sent a letter to Geithner last week pressing for more details about the Aug. 2 deadline.
House Speaker John Boehner (R-Ohio) has said it would be “irresponsible” not to raise the debt ceiling. But he, too, has criticized “those who insist we shouldn’t ‘play games’ with it,” according to remarks he made to the Economic Club of New York last week. “Others have gone further,” he said. “One prominent figure even went so far as to say ‘the people who are threatening not to pass the debt ceiling are our version of Al-Qaeda terrorists,’” referring to a Bloomberg Television interview with former Bush Treasury Secretary Paul O’Neill.
The 1983 letter was not the only time that Reagan warned of what could happen if lawmakers did not raise the debt ceiling. In a 1987 radio address during another such clash with Congress, Reagan wrote that “Congress consistently brings the government to the edge of default before facing its responsibility. This brinksmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the Federal deficit would soar.”
His language is remarkably similar to that used by Geithner in his letters to Congress.
Republicans are not the first to make the issue a political cause. When he was a senator, President Obama voted against raising the debt limit during the George W. Bush administration. There was no risk then, however, that the government would not get more borrowing authority. Obama recently said that his vote was a mistake.
Geithner’s special measures include the suspension of a program that helps state and local governments. On Monday, he is expected to declare a “debt issuance suspension period,” which would permit him to draw from a pension fund for federal workers.
The Government Accountability Office, among others, says the Treasury secretary could choose to pay only certain debts – primarily those to foreign investors -- if Congress fails to meet the August deadline. But Treasury officials have suggested that would spook the markets and imperil the nation’s economy.
“Adopting a policy that payments to investors should take precedence over other U.S. legal obligations would merely be default by another name, since the world would recognize it as a failure by the U.S. to stand behind its commitments,” Treasury deputy secretary Neal Wolin wrote earlier this year.
On Friday, Geithner wrote a letter to Sen. Michael Bennet (D-Colo.) that “failure to raise the debt limit would force the United States to default … [which] would inflict catastrophic, far-reaching damage on our Nation’s economy, significantly reducing growth, and increasing unemployment.”