Clearing the Air on the Debt Limit 
Released: 2017-11-02T00:00:00

T he statutory debt limit, currently suspended through December 8, 2017, provides Congress a means of controlling federal borrowing. As the date when that suspension will lapse approaches, discussions about the role of the debt limit among the media, researchers, and Members of Congress promise to become a more frequent. In recent discussions, misleading or less than fully accurate claims have at times surfaced. This report provides clarifications on five common debt limit contentions.

The debt limit represents one way that Congress exerts control over fiscal policy, which stems from closely related constitutional provisions. Those provisions—the Taxing and Spending Clause ("Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States") and the Borrowing Clause ("Power ... To borrow Money on the Credit of the United States") —establish the basis of the congressional power of the purse. Congress, under its Borrowing Clause powers, has authorized the Department of the Treasury to borrow through various debt instruments to finance expenditures not covered by federal receipts. The total amount of outstanding federal debt, with minor exceptions, is constrained by a statutory debt limit.

When that limit is close to binding, the Treasury Secretary can invoke authorities to employ extraordinary measures to finance federal expenditures. If expenditures persistently outrun receipts, and if the debt limit is not modified, at some point Treasury's cash balances and borrowing capacity would be exhausted, leaving the Treasury without means to meet federal obligations.

The latest debt limit episode was resolved on September 8, 2017, when a continuing resolution measure ( P.L. 115-56 ) was enacted that included a suspension of the debt limit through December 8, 2017. Once that debt limit suspension lapses, the Treasury Secretary may again invoke authorities to use extraordinary measures, which would likely suffice to meet federal obligations well into 2018.

Point of Clarification 1: The United States Had Debt Limits Before 1917

Federal debt has been subject to limits since the beginning of the U.S. government. Before 1917, Congress typically specified the interest rates, maturities, call options, and other aspects of debt issuances. During wars, however, the U.S. Treasury was often granted more leeway in deciding terms offered to investors. At times, Congress designated loan proceeds for specific purposes such as rolling over existing federal debt, helping construct an intercontinental railroad in the 1860s, or financing the Panama Canal after the turn of the 20 th century. At other times, bonds were authorized simply to "meet the current expenses of the Government."

Enactment of the Second Liberty Bond Act of 1917 (P.L. 65-43, 40 Stat. 288) on September 24, 1917, marked a turning point in federal debt policy, but maintained substantial constraints on Treasury debt operations. The act imposed the first aggregate limit on federal borrowing, but retained individual limits on separate bond issues as well.

During 1920s and 1930s, Congress allowed the U.S. Treasury more leeway to manage federal debt in order to roll over World War I-era debt. In July 1939, Congress set an aggregate limit (P.L. 76-201) on federal debt, allowing Treasury officials to decide how to manage that debt. Thus, the modern debt limit—meaning an overall limit on federal debt without sublimits—might more properly be said to have been established in 1939.

Point of Clarification 2: Did the Federal Government Default in the 1970s?

Some contend that the federal government suffered technical defaults in the late 1970s. An examination of the historical record suggests otherwise. While the meanings of the terms "default" or "technical default" are clear in private contracts, they are less clear when applied to the federal government. Private-sector contracts normally spell out "events of default," such as failure to pay on time as well as other lapses. Technical defaults refer to violations of a legal agreement—such as a loan or securities contract—not involving failure to pay. The issuance of Treasury securities, however, is governed by the Universal Offering Circular, which does not address failure to pay or other types of default events.

Moreover, a breach of the debt limit—that is, a situation in which total federal debt subject to limit exceeded that limit—does not necessarily imply delayed or missed payments or other failures to uphold the federal obligations. In certain past episodes, breaches caused by lapsed temporary debt limit increases resulted in no payment delays, and thus were not defaults in the ordinary sense of that term. In the present context, however, a fully binding debt limit or breach could quickly lead to systematic payment delays and damage to the federal government's fiscal reputation, its credit rating, and its ability to borrow at advantageous rates.

Political scientists Thomas Mann and Norman Ornstein contend that a technical default occurred in October 1977, when a temporary debt limit increase lapsed before a revised debt limit measure was enacted. The previous debt limit measure ( P.L. 94-334 ), enacted on June 30, 1976, included three temporary increases in the debt limit for specific time periods above a "permanent" limit of $400 billion. The last temporary increase of $300 billion lapsed after Friday, September 30, 1977. While both the House and Senate had approved a debt limit measure by that date, differences were not resolved until Tuesday, October 4, 1977, when it was enacted. Thus, for two business days, federal debt, which was close to $700 billion, was above its statutory limit of $400 billion. After the temporary debt limit increase lapsed, Treasury could not borrow, though its cash reserves were sufficient to meet federal obligations until the new measure was enacted, even if some special financial measures were employed. No federal payments, however, were missed or delayed—suggesting that no technical default occurred. Moreover, federal officials responsible for issuing that debt acted within their statutory authorities.

Others have pointed to a 1979 episode when some interest and principal payments to some small investors holding Treasury securities were delayed. In late April and early May 1979, about 4,000 Treasury checks for interest payments and security redemptions were delayed due to back-office technical and organizational problems, in part related to a reorganization of Treasury debt operations. Delays affected payments estimated at $122 million, with foregone interest totaling an estimated $125,000. Those amounts represented a small share of the market in Treasury securities: for instance, a few days before those delays, the U.S. Treasury rolled over $6 billion in debt. The federal government may have reached a settlement with affected investors.

Some ascribe those payment delays to a debt limit episode. A temporary increase in the debt limit ( P.L. 96-5 ), however, was enacted on April 2, 1979—more than three weeks before the first delayed payment. Those payment delays were also blamed for increasing federal borrowing costs. Market interest rate movements on the date of the first payment delay—April 26, 1979—were more plausibly affected by significant Federal Reserve announcements made that day rather than payment delays that were not reported until a week and a half later.

Point of Clarification 3: Were "Clean" Debt Limit Increases Once the Norm?

Some commentators have claimed that contentious debt limit episodes are a recent phenomenon. Debt policy, however, has been a divisive issue since the beginning of American government. Debt, by its nature, allows government to shift the fiscal burden of current expenditures or lessen the burden of current taxes by transferring obligations to future taxpayers. Shifting fiscal burdens into the future through debt management is a powerful and potentially beneficial tool of fiscal policy, but can also become a means of avoiding fiscal responsibility in the present. Debt policy discussions, therefore, often become contentious.

Since 1978, 27 of a total of 56 debt limit modifications were "clean"—meaning that a debt limit measure wa s not linked to other provisions. That delineation, however, is imperfect. In some cases a debt limit provision might have been attached to another measure that acted as a convenient legislative vehicle for passage. In other cases, combining a debt limit modification with other provisions may have resulted from a broad fiscal compromise among policymakers. In addition, a debt limit modification enacted as a standalone measure could have resulted from a policy compromise involving other issues. For instance, on February 15, 2014, a "clean" debt limit increase ( P.L. 113-83 ) was enacted. On the same afternoon another measure ( P.L. 113-82 ) was enacted to reverse certain reductions in cost-of-living adjustments to working-age military retiree pensions that had been included in the Bipartisan Budget Act of 2013 (BBA2013; P.L. 113-67 ). Although nothing formally linked the two measures, their passage in quick succession may have reflected a fiscal compromise.

Debt limit measures have been informally or formally linked with other issues for many decades. In 1939, when Congress was considering creating what became the modern debt limit, Senator George Norris offered an amendment to allow the Tennessee Valley Authority (TVA) to use bonds to consummate purchases of some power plants. Once a separate TVA measure was agreed to, the amendment to the debt limit measure (H.R. 5748) was withdrawn. In 1957, Congress declined to raise the limit until the following February, in part to "compel more economy of efficiency, better management of money and manpower in the defense program." In the 1960s, debt limit debates provided a forum for those concerned about the expansion of federal spending due to federal credit guarantees, new social insurance programs, and the escalation of the Vietnam War. In the early 1970s, debt limit measures were embroiled in debates over campaign finance reform and in congressional conflicts with the Nixon and Ford Administrations. In the mid-1980s, a debt limit provision was packaged with the Gramm-Rudman-Hollings budget constraints. The debt limit episode of 1995-1996 was described by the U.S. General Accounting Office (GAO; now Government Accountability Office) as a "crisis."

Point of Clarification 4: Could a Platinum Coin Avoid a Binding Debt Limit?

Some commentators have pointed to a statutory provision that allows minting of platinum coins as a purported solution to the prospect of a binding debt limit. Unlike other provisions governing coinage, the face values of platinum coins are not limited. That provision, according to its author, was introduced to give the U.S. Treasury flexibility in minting relatively low-denomination platinum coins for collectors.

Instead, proponents of the platinum coin strategy have encouraged the U.S. Treasury to consider minting a high-denomination coin, which—according to proponents—could be deposited at the Federal Reserve and exchanged for cash for the U.S. Treasury's general fund. Officials of both the U.S. Treasury and the Federal Reserve System therefore would have to approve the strategy. Both the U.S. Treasury and the Federal Reserve, however, rejected such options in 2013. A Treasury spokesman stated that "Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit." The U.S. Treasury again rejected such stratagems in 2015.

Apart from various legal, accounting, and practical uncertainties, the platinum coin strategy would present several major policy issues. First, such actions by executive branch officials could be seen as undermining Congress's fiscal powers. Second, both the U.S. Treasury and Federal Reserve have sought for many decades to maintain a separation between fiscal and monetary policy. Governments can finance their expenditures through revenues or borrowing or by printing money. The latter option, however, would likely affect the value of the dollar by signaling either a reluctance to make fiscal adjustments or that monetary policy goals had been subordinated to other ends. As a senior Federal Reserve official stated, "central banks are generally assigned the responsibility for establishing and maintaining the value or purchasing power of the nation's monetary unit of account. Yet, that task can be undermined or completely subverted if fiscal authorities independently set their budgets in a manner that ultimately requires the central bank to finance government expenditures with significant amounts of seigniorage in lieu of tax revenues or debt." Third, were the U.S. Treasury to obtain cash balances via such a strategy, the debt limit would likely continue restricting the issuance of federal securities, potentially disrupting scheduled auctions and undermining the U.S. Treasury's reputation for regular and predictable debt operations. Such disruptions could raise federal borrowing costs.

Point of Clarification 5: Would the Fourteenth Amendment Allow the President to Act Unilaterally?

Some have contended that the Public Debt Clause of the Fourteenth Amendment—which states that the "validity of the public debt ... shall not be questioned" —would justify unilateral presidential actions, such as ignoring the debt limit, in order to avoid a federal default. Others argue that such executive branch actions would be extraconstitutional and would usurp the congressional power of the purse, but might be justified by an appeal to necessity. Although there is scant case law on the meaning of the Public Debt Clause, the clause would appear unlikely to justify the President spending funds in excess of a congressionally imposed debt ceiling.

Why Does the Fourteenth Amendment Have a Public Debt Clause?

Framers of the Fourteenth Amendment sought to assert federal powers to protect civil rights and ensure that the eventual reentry of former Confederate states would not lead to a rollback of constitutional reforms. During the latter part of the Civil War, Members of Congress began to consider the issue of reconstruction. In 1864, the Wade-Davis Bill, passed by Congress but pocket vetoed by President Lincoln, included a clause that "No debt, state or confederate, created by or under the sanction of the usurping power, shall be recognized or paid by the state." After the Confederate surrender, the assassination of President Lincoln, and the inauguration of President Andrew Johnson in April 1865, congressional leaders took more direct initiatives to shape the reconstruction process.

Establishment of federal guarantees for civil and political rights for former slaves became a central aim of a strong majority of lawmakers. Many realized that extending political rights to former slaves would mean superseding the three-fifths clause that set out rules for apportionment of House seats in Article I, Section 2 of the Constitution. Counting former slaves as whole persons for purposes of apportionment would eventually increase the size of delegations from former Confederate states. Representative James Garfield estimated that those states would gain at least 15 seats and others estimated gains of some 40 to 60 seats. Such potential shifts in political power raised alarms that a future coalition could emerge that would repudiate federal debts. While federal guarantees for an expansion of the franchise were viewed as a counterweight to such shifts, an explicit guarantee of the validity of federal debts was also included.

Does the Public Debt Clause Give the Executive Branch Powers to Avoid Default?

There is little doubt that Congress has an obligation to pay its debts under a variety of constitutional provisions, including the Borrowing Clause, the Due Process Clause, and theories of vested contractual rights. The failure of the government to pay its debts would also appear to violate the Public Debt Clause. The instant question, however, is not whether the government is legally obligated to pays its debts, but what powers are available to the President when a default on the public debt is threatened. Thus, the question arises as to whether the President could unilaterally pay for such threatened debt by, for instance, borrowing money in excess of the debt ceiling. Some commentators have made the argument that the Public Debt Clause provides the President sufficient authority to borrow money beyond the debt ceiling even if Congress has not allocated the President this borrowing authority under the Borrowing Clause.

In general, the adjudication of whether Congress has exercised an authority in a way that violates a provision of the Constitution has been allocated to the judiciary. Thus, under most circumstances, a holder of debt that is threatened or has been defaulted upon would turn, not to the President, but to the federal courts to seek relief. Whether the President would have a role in providing relief to debt holders would depend on whether the President has the delegated, inherent, or implied power to take action to relieve such debt, such as by exercising the power vested in Congress under the Borrowing Clause. The question of whether the President can exercise authority in an area where Congress has been assigned the principal constitutional power is addressed in the case of Youngstown Sheet & Tube Co. v. Sawyer.

In Youngstown , President Truman was faced with a potential nationwide strike of steel workers, which might have jeopardized the United States' fighting capability during the Korean War. To avert a strike, the President issued an Executive Order directing the Secretary of Commerce to seize and operate most of the steel mills. The President did not cite any statutory authority for this action, but argued that he was acting in his role as Commander-in-Chief of the Armed Forces and with the inherent powers vested in the President as Executive. Congress, however, had established a different statutory regime for seizure of industrial resources under its authority to "raise and support Armies."

The Court struck down the seizure of the steel mills as beyond the authority of the President to issue. Although Justice Black wrote the majority opinion, it is the concurring opinion of Justice Jackson that has most often been relied upon by the courts in this area. In Youngstown , Justice Jackson identified three different scenarios in which a President's exercise of authority in an area assigned to Congress by the Constitution might be exercised. The first is where the President acts pursuant to an express or implied authorization of Congress. In these cases, the President's authority is at its maximum, and would only be unconstitutional if the federal government as an undivided whole lacks power. The second is when the President acts in absence of either a congressional grant or denial of authority, so that he can only rely upon his own independent powers. In these cases, congressional "inertia, indifference or quiescence" may sometimes enable an independent presidential responsibility. The third is when the President takes measures incompatible with the expressed or implied will of Congress. In this scenario, his power is at its "lowest ebb," as he can rely only upon his own constitutional powers minus any constitutional powers of Congress over the matter. Under this "severe" test, courts can only sustain presidential control by disabling Congress from acting upon the subject: "Presidential claim[s] to a power at once so conclusive and preclusive must be scrutinized with caution, for what is at stake is the equilibrium established by our constitutional system."

The argument that the President can borrow in excess of the debt ceiling imposed by Congress would not be evaluated under the first scenario, as that analysis is reserved for when Congress has delegated power to the President to pursue a course of action. Here, such borrowing authority as has been delegated to the executive branch by Congress via the Secretary of the Treasury is explicitly limited by the debt ceiling, and the President has not been delegated the authority to exceed it. Nor would the argument be addressed under the second scenario, as that analysis is reserved for when Congress has been silent regarding a delegated authority. Thus, the instant case would seemingly fall into the third scenario, where there is a conflict between the purported authority of Congress and a presidential course of action. As Congress's power of the purse is well established, the focus of this scenario would likely be on what countervailing powers the President might have in this situation.

As noted, commentators have argued that the President's authority to borrow in excess of the debt ceiling may be found in the Public Debt Clause or that such actions might be justified by an appeal to necessity. However, in order to evaluate this authority under the third Youngstown scenario, a court would likely need to identify the precise language in the Public Debt Clause that provides the President borrowing authority. Then, under this "severe" test, a court would only be able to sustain the President's action if it could find that the borrowing authority is "within [the President's] domain and beyond control by Congress." This would appear to be a difficult test for the President to meet. The text of the Public Debt Clause, by itself, does not seem to allocate such power to either the President or the executive branch. The clause does not mention the President, nor is there any indication in the clause that its breach would imply the existence of a borrowing power in the executive branch. Rather, the clause appears to be a limitation on the ability of the government to default on debt that has been issued under the Borrowing Clause. Finally, it appears that no court has suggested that the Public Debt Clause serves as the basis for the exercise of Congress's borrowing authority by the President.

Concluding Question: Is the Debt Limit Obsolete?

Various officials and commentators have called for eliminating the debt limit on grounds that it is "obsolete," or simply gives a venue to "stir up debate about debt," or is redundant because the need to issue debt results from the excess of spending over revenues. Others argue that control over debt is a critical third leg of the power of the purse. While the other two legs—the power to authorize spending and the power to collect taxes—allow Congress to fine tune policies and priorities, the debt limit is a blunt instrument. Modifying the debt limit typically involves either a change in the limit amount or the date through when a suspension extends. That bluntness, however, may have the advantage of inducing policymakers to focus on fundamental fiscal issues from time to time.