The Congress shall have Power To...borrow Money on the credit of the United States....
The power to borrow money is essential to the existence and survival of a national government. In the Founding era, political leaders expected that in peacetime the Congress would craft the federal government's budget so that revenues equaled or surpassed expenditures. Indeed, the Treasury Department strictly complied with a policy of earmarking all revenues for particular government programs. Nonetheless, the nation could not successfully defend itself militarily without the power to borrow quickly and extensively when the need arose. The Framers therefore drafted the Borrowing Clause without an express limitation.
The Borrowing Clause, however, has a practical corollary. The terms upon which a nation could borrow money depended upon its credit standing. President George Washington's Farewell Address (1796) captures the general sentiment of the times:
As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible: avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear.
Although Federalists and Republicans agreed on the need to maintain the public credit, they diverged considerably on how the borrowing power should be implemented. Indeed, the core differences in the visions of the Federalists and Republicans in the Founding era relate to contrasting views of this power. Alexander Hamilton sought to assure a strong central government by interpreting the Borrowing Clause as authorizing Congress to charter the First Bank of the United States (established in 1791), which maintained federal control over the federal reserves and issued debt instruments that circulated like money. Hamilton viewed large federal issues of debt instruments as an essential stimulant to commerce, providing a source of capital to a capital-poor society, and equally important for revenue collection purposes. The Constitution, however, did not expressly authorize Congress to charter corporations, and the constitutionality of the bank was widely debated.
Thomas Jefferson dismantled much of Hamilton's program. To the Jeffersonian Republicans, a balanced budget reflected a popular desire to limit the size and power of the federal government and to protect states' rights. Jefferson repealed Hamilton's internal taxes (which provided security for the federal debt) and appointed Albert Gallatin as Secretary of the Treasury with a mandate to pay down the federal debt. With a few exceptions, subsequent administrations also prioritized balancing the federal budget, and Andrew Jackson successfully paid down the federal debt in 1835. In this, the early presidents were following the advice of George Washington in his Farewell Address.
Wartime exigencies and economic crises led the country toward the modern interpretation of the Borrowing Clause. A financial emergency that threatened national security during the War of 1812 led to the bipartisan acceptance of the need for federal government control of its reserves through the (Second) Bank of the United States, which was held constitutional in Justice John Marshall’s opinion in McCulloch v. Maryland (1819).
The policy dealing with incurring and repaying debt, however, remained relatively consistent from 1789 until 1917. Congress borrowed money to pay for wars and to sustain the economy during a recession, but it began paying it down upon the return to peace and financial stability. In 1917 Congress granted the Department of the Treasury standing borrowing authority, but for many years Congress continued to manage the incurrence and repayment of debt in substantially the same manner as before. After World War II, changed attitudes, including the influence of economic thinkers such as John Maynard Keynes and the expansion of government-funded entitlements as well as a large standing military force produced sustained peacetime deficits and very few periods of debt reduction. The past few decades have been punctuated by failed attempts at spending and debt limits, and the federal debt has reached unprecedented levels. One attempt, granting the President a line-item veto power, was struck down by the Supreme Court in Clinton v. City of New York (1998).
With respect to a federal currency, the Report of the Committee of Detail (debated at the Constitutional Convention) had given Congress the power to “borrow money, and emit bills on the credit of the United States.” The delegates voted to strike the power to “emit bills,” which strongly suggests that Congress was not authorized to borrow by means of issuing paper money, although it is clear that interest-bearing debt instruments were permissible. The Union’s financial crisis during the Civil War, however, led to the attempt by the federal government to issue and make legal tender a paper-money currency, which was held constitutional in The Legal Tender Cases (1871). Sixty years later, financial problems during the Great Depression led Congress to define what constitutes legal tender. In 1933, a congressional joint resolution prohibited the enforcement of gold clauses in both contracts between the government and individuals and in private contracts, thereby making Federal Reserve notes the exclusive legal tender. The Supreme Court held the resolution constitutional in The Gold Clause Cases (1935).
Legal disputes dealing with the Borrowing Clause today involve two issues. The most litigated issue involves the principle of intergovernmental-taxation immunity. The Supreme Court has held that the Supremacy Clause (Article VI, Clause 2) prohibits state and municipal governments from directly or indirectly taxing the interest income on federal government debt and thereby interfering with the federal government’s power under the Borrowing Clause. See State of Missouri ex rel. Missouri Insurance Co. v. Gehner (1930).
The clause also implicitly requires Congress to maintain the public credit. The Supreme Court has invoked the clause in treating the government like a private party in its contractual dealings by vesting Congress with the power to contract against subsequent repudiation or impairment of its obligations by future Congresses. In Perry v. United States (1935), the Court cautioned that the power to borrow money is a power vital to the government, upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit that is so pledged. Though having this power to authorize the issuance of definite obligations for the payment of money borrowed, Congress has not been vested with authority to alter or destroy those obligations. However, in United States v. Winstar Corp. (1996), the Court held, among other things, that contractual obligations of the government would be enforced unless doing so blocked the exercise of one of the government’s essential sovereign powers.
Because the Constitution imposes no express limits on the borrowing power, the political branches must decide the issue. As in the Founding era, the question of the extent to which the government should run deficits and maintain a large federal debt are at the essence of contrasting views about the proper scope of the federal government.
ALBERT S. BOLLES, THE FINANCIAL HISTORY OF THE UNITED STATES, 1774–1885 (vols. 1–3, reprinted 1969)
Kenneth W. Dam, The Legal Tender Cases, 1981 SUP. CT. REV. 367 (1981)
Anita S. Krishnakumar, In Defense of the Debt Limit Statute, 42 HARV. J. ON LEGIS. 135 (2005)
JAMES MACDONALD, A FREE NATION DEEP IN DEBT:
THE FINANCIAL ROOTS OF DEMOCRACY (2003)
JAMES D. SAVAGE, BALANCED BUDGETS AND AMERICAN POLITICS (1988)
McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819)
Perry v. United States, 294 U.S. 330 (1935)
United States v. Winstar Corp., 518 U.S. 839 (1996)
Bronson v. Rodes, 74 U.S. (7 Wall.) 229 (1868) Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869) The Legal Tender Cases, 79 U.S. (12 Wall.) 457 (1871),
overruling in part Hepburn v. Griswold, 75 U.S. (8 Wall.) 603 (1870)
Julliard v. Greenman, 110 U.S. 421 (1884)
Clinton v. City of New York, 524 U.S. 417 (1998)
Treasurer of New Jersey v. U.S. Dep’t of Treasury, 684
F.3d 382 (3d Cir. 2012)
Norman v. Baltimore and Ohio R.R., 294 U.S. 240 (1935)
Nortz v. United States, 294 U.S. 317 (1935)
Perry v. United States, 294 U.S. 330 (1935)
State of Missouri ex rel. Missouri Ins. Co. v. Gehner, 281 U.S. 313 (1930)
New Jersey Realty Title Ins. Co. v. Division of Tax Appeals, 338 U.S. 665 (1950)