The History of the Debt Ceiling

Benjamin Franklin once said that “The only things certain in life are death and taxes.” Mr. Franklin never encountered the 112th or 113th Congress. Since the debt limit was officially set in 1917, the threat of passing that limit usually saw a smooth increase in the limit. Now, things are more than a little different and more difficult.

Trying to visualize the national debt over the years is like looking up a steep staircase; each step being a hike in the debt limit. The interconnected national debt and hikes are a sign of a growing government and the history behind the graph is not always clearly articulated in the history books. Unfortunately, the higher you go, the more cataclysmic a default will be. The current limit is $16.7 trillion and is set to be breached on October 17.

According to the Treasury Department, for those who do not already know, “The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.”

There are a lot of “existing legal obligations” to pay for and without raising the limit, future obligations will be paid with whatever cash the government has left, if any. Throughout the 103 times the debt limit was raised since 1917, it has often been an easy vote.

The Gephardt Rule, named after former House Majority Leader Dick Gephardt, connected the debt increases to whenever a budget gets passed. The former Democratic representative from Missouri figured it made sense to let the Treasury take out enough debt if need be to pay for that fiscal year’s budget. That began back in 1979, but was only useful if a budget was passed.

The current situation appears to be blamed on Republicans, but that has not always been the case. Historically, political parties in general have fought over debt. Even before there was a statutory limit, default has been likened to a mortal wound that has been inflicted on the U.S. on more than one occasion.

The Second Liberty Bond Act put an end to Congress authorizing loans individually from department to department. Even back then, it was a little different.

Between its inception and throughout the 1930s, the economy saw an immense boom and bust, otherwise known as the “Roaring Twenties” and the Great Depression.

It takes great economic damage for the nation’s debt to even be put in a situation like the one it is facing on October 17. Between the effects of the Revolutionary War and the Great Depression, the treasury secretary has faced tough decisions on how much to pay out to creditors and which creditors they may be.

and creditors received a slight haircut in the money they were owed in the form of the less valued paper dollar.

Defaults like that have happened in the past and not just between Democrats and Republicans. The first secretary of the treasury, the Federalist Alexander Hamilton, had to consolidate the newly formed states’ debts and borrow to get the U.S. out of an $11.7 million debt hole, an exorbitant amount of money in the late eighteenth century.

Even before there was a statutory limit, default has been likened to a mortal wound that has been inflicted on the U.S. on more than one occasion.
Brandon Fallon

World War II saw the debt and likewise the debt ceiling increase. Likely realizing the excessive debt-to-GDP ratio and seeing the war finally end, Congress did the unthinkable. They had the good monetary sense to lower the debt ceiling from $300 billion to $275 billion. It took another 35 years for the limit to reach $1 trillion.

Now, it is taking the treasury secretary turning to extreme measures to hopefully give Congress enough time to pass a debt increase. Former Secretary Geithner did it in 2011 and current Treasury Secretary Jacob Lew reverted to “extraordinary measures” again in 2013.

The tricks can only last a short time and the conservative House of Representatives sought to ban such tactics in their failed debt limit deal. The treasury is bound by the laws made by Congress, but extending the date the borrowing limit is reached can be a useful tool for both parties to employ.

The amount of time these measures can hold off the U.S. from reaching its borrowing limit depends on how much money it is bringing in. While extremely conservative GOP members, nicknamed “Debt Ceiling Truthers,” argue that these tax revenues are enough to pay interest on the debt and that the treasury can prioritize payments with what is left, it is a foolish assertion, according to International Monetary Fund managing director Christine Lagarde.

Strenuous economic times often bring out the worst in monetary debates. The Great Recession caused slower growth with lower tax revenue while at the same the U.S. still has obligations to entitlement beneficiaries. Bills continue to require payment and if the U.S. loses its ability to borrow more money to meet those previous obligations, it will run out of money.

In a worst case scenario, Secretary Lew would have to decide who to pay first with what cash the government still has on hand, a catastrophe that will exponentially get worse in a short amount of time. The current debt deal being worked out in the Senate looks promising because it includes re-opening the government as well and a possible fix to the sequester. Democrats and Republicans need to overcome their self-imposed impasse to prevent default from happening.

Photo Credit: Christopher Penler / Shutterstock.com