Throughout our nation’s history, Americans have had a love-hate relationship with the national debt. Alexander Hamilton insisted that debt was the price of liberty. Without it, the young country would be unable to protect itself from foreign threats.
Yet, throughout much of U.S. history, many Americans regarded debt itself as a threat, to individual freedoms. The ability to raise debt was linked directly to power, and debt issued to finance the nation’s defense was viewed as particularly dangerous—a way to enrich “monied interests” and increase the power of government at the expense of everyone else.
To impede this potential for abuse, the Constitution vested the power to take on debt and regulate currency with the people—through Congress. As a Congressman during the 1790s, James Madison argued that debt and spending were equally important issues and should be debated separately, rather than rolled together in a single bill. Moreover, he felt that to not manage debt would have be an abdication of Congress’s role representing the people.
During our nation’s first 130 years, Congress authorized debt as needed to meet the challenges of the day. Government debt financed revenue shortfalls derived from wars, economic recessions or even infrastructure investments.
The big difference from modern times is that, back then, once the challenge precipitating the debt was resolved, Congress turned its attention to debt eradication.
President Andrew Jackson believed that repaying debt was a symbol that the nation could sustain independence. After the Civil War, Congress turned to paying off the national debt, which eventually fell from 32 percent of GDP in 1869 to 5 percent in 1916.
But America’s aversion to government debt changed throughout the 20th Century. At the forefront of this change were three major developments: the enactment of the first permanent income tax; the creation of the Federal Reserve and the onset of World War I.
The income tax created a new source of internal revenue to finance new debt. Previously, tariffs had been the main avenue for paying down debt. At the same time, countries like the U.S. who were on the international gold standard had to pay off debts to maintain the standard.
The Federal Reserve system created domestic demand for debt by standing ready to purchase Treasury debt.
And World War I created a significant demand for money. President Wilson vowed to protect future generations from being saddled by burdensome war debt by limiting federal borrowing to no more than half of the war’s cost. In the end, however, public debt financed almost 60 percent of the war effort, while money creation financed an additional 20 percent of the costs.
It was at this time that Congress began to turn over debt management to the executive branch. The First Liberty Loan Act of 1917 gave Treasury the authority to raise money by replacing specified debt authorizations with new limits on bonds and certificates of indebtedness (also called “war savings certificates”).
Four additional bills enacted between 1917 and 1919 imposed an aggregate limit on bonds and authorized Treasury to continue issuing certificates of indebtedness as long as their outstanding balance didn’t exceed a specified amount.
In 1935, Congress combined the limit on new issues of Treasury notes into a single revolving ceiling. Three years later, it established a new overall limit on bonds, notes, certificates of indebtedness and other forms of government debt. A second limit was placed on bonds to restrict the government’s ability to incur long-run liabilities, but that was replaced a year later with an overall limit on public debt.
Since then, the debt limit has become the flashpoint for many political battles. By 1953, the Senate used the debt limit authorization as leverage to get President Eisenhower and the House to accept more than 500 amendments to tax and appropriations bills.
Over the last 10 years, however, several things have changed. Importantly, the debt limit isn’t a limit at all. Since 2013, Congress has “suspended” the debt limit—effectively giving Treasury unlimited borrowing authority for a period of time. It is the abdication of responsibility that Madison so rightly feared. Meanwhile, some in Congress have considered eliminating the debt limit altogether.
Suspending the debt limit has been a mistake. Congress should reform the limit to impose additional controls on long-term debt.
It is unlikely, and wouldn’t be smart, to go back to a pre-1917 system where Congress micromanages debt. But Congress must not continue on its current trajectory of ceding its authority to raise debt. To do so would threaten to upend the balance of power, both within our government and between the people and their government.
This piece originally appeared in The Hill on 7/18/19