This column has been updated
Now that the Treasury Department has nixed the odd idea of issuing a platinum coin to get around the federal debt limit, Congress once again will be forced to decide whether to raise the debt limit.
When this issue last loomed in 2011, we looked deeply at the question of whether the United States had ever defaulted before. (Answer: It is not entirely unprecedented. There are three instances when the United States could be seen to have defaulted on its obligations — in 1790, in 1933 and in 1971.)
The debt limit covers both publicly-held debt and debts the United States owes to itself (bonds to Social Security and Medicare for future obligations) so no matter what happens, the debt limit will have to be raised, one way or the other.
But for readers who have been wondering, here’s a history lesson on why the United States has a debt limit in the first place. Essentially, Congress was trying to make life easier for itself.
It started with a war.
In the early decades of the Republic, Congress preferred to issue debt for specific purposes, such as issuing bonds to build the Panama Canal. During the Spanish-American War of 1898, Congress authorized the Treasury secretary to issue short-term debt and some longer-term debt with specific limits on maturities.
But World War I was a conflict with unknowable costs, making targeted legislation difficult. At first Congress established a $5 billion limit on new issues of bonds, along with the immediate issuance of $2 billion in one-year certificates of indebtedness, in the First Liberty Loan Act of 1917.
But very quickly another law was needed — the Second Liberty Bond Act of 1917 — in which Congress set a general limit on borrowing: $9.5 billion in Treasury bonds and $4 billion in one-year certificates. This freed the Treasury secretary to begin to figure out the best mix of securities to issue, without nearly as much congressional oversight as before.
By the end of World War I, the limit on Treasury obligations had been raised to $43 billion, which was considerably more than the $25 billion in outstanding public debt in 1919. For decades, future increases in the national debt were simply amendments to the Second Liberty Bond Act. But it was not in 1939 — on the eve of World War II — that Congress eliminated all of the different limits on types of bonds, thus creating an overall aggregate limit on the national debt.
We learned much of this from an interesting 1954 history of the debt limit, published in the Journal of Finance, by H.J. Cooke and M. Katzen, which was posted on the Monkey Cage blog. The article notes that the debt limit generally was raised without controversy until a White House request to raise the limit in 1953 was sidetracked in the Senate, “where the ceiling was viewed as an instrument for forcing economy on the executive branch of the government.”
Hmm, that sounds familiar.
But in that case, it was a Republican president, Dwight D. Eisenhower, who faced a roadblock from a Democratic senator, Harry F. Byrd of Virginia, who then chaired the Senate Finance Committee.
(UPDATE: Mea culpa, Byrd was a key Eisenhower antagonist on the debt ceiling--and he chaired the committee after 1954--but in 1953 Republicans still controlled the Senate and refused to raise the debt limit. As an 1993 article noted: “The Eisenhower administration had confronted a Republican Congress on an important component of the nation's financial management and lost. Moreover, it signaled the start of a pattern that made debt ceiling legislation a component of the broader efforts by fiscal conservatives to control government spending.”)
Eisenhower wanted to build the national highway system, which he considered an important investment in the future, but Byrd was concerned that national debt built up during World War II and the Great Depression was becoming a permanent feature of the U.S. government. Eisenhower asserted that he had “moved promptly and vigorously” to cut spending but still needed the debt limit raised to pay outstanding bills.
But Byrd was not satisfied, and he demanded more cuts in exchange for a debt-limit increase. For a while, Byrd held the upper hand, forcing Treasury to take emergency measures to avoid default, but eventually Eisenhower got the debt ceiling raised in 1954, though not as much as he had hoped.
“An essential part of this preparedness [for national security] is a debt limit high enough to permit the Treasury, if necessary, to borrow the funds required to carry out the government’s obligations under the Constitution and under the laws of the Congress,” Eisenhower said when he signed the bill establishing the new debt limit.
In other words, there are no original ideas in politics. The debt limit was originally conceived as a way to make things easier for Congress, because lawmakers were tired of having to issue bonds for specific purposes. (Congress, after all, had already decided to spend the money.) But then Congress often finds a way to make the easy stuff harder.
Indeed, when he was a senator, President Obama also refused to approve a debt-limit increase in 2006 without a plan to reduce the deficit. The president now acknowledges that was a “political vote, as opposed to doing what was important for the country — which he regrets.
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