Original Intent and the Debt Ceilingtags: debt ceiling
Robert E. Wright is co-author of The Wall Street Journal Guide to the 50 Economic Indicators That Really Matter and Nef Family Chair of Political Economy & Director of the Thomas Willing Institute for the Study of Financial Markets, Institutions, and Regulations at Augustana College.
If Congress does not raise the debt ceiling, the U.S. Treasury may have to default on its bonds or its other obligations. Allowing a default to occur would be both unwise and unconstitutional.
Any default, even a short-lived one, would hurt the government’s credit as well as its credibility. Interest rates would rise, as would the percentage of the budget devoted to making interest payments. Even if a power struggle over the ceiling led to substantially lower deficit projections over the next decade, the episode would signal to domestic and foreign creditors that the federal government is able to move toward fiscal responsibility only during a crisis and a sustained tussle over the ceiling that did not lead to significant fiscal improvement would send an extremely negative signal.
A default would also suggest that the U.S. government believes that it needs to pay its obligations only when politics dictates, a tenuous basis for public credit. “Who would lend to a government,” asked Alexander Hamilton (writing as Publius in Federalist No. 30), “that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying? The loans it might be able to procure, would be as limited in their extent, as burthensome in their conditions. They would be made upon the same principles that usurers commonly lend to bankrupt and fraudulent debtors ... with a sparing hand, and at enormous premiums."
A far better approach would be to move toward a balanced budget without threatening to disrupt capital markets and to make it clear, once and for all, that the government knows that purposefully defaulting on the national debt would be unconstitutional. As Thomas Geoghegan pointed out in a Politico op-ed posted on March 31, Article 1, Section 10 of the Constitution, as well as Amendments 5 and 14, strongly imply that the government should pay the national debt, if it can, because the government cannot lawfully impair contracts, take property without compensation, or question the validity of the public debt.
As ratified, the Constitution does not explicitly compel Congress to pay the national debt. James Madison’s notes on the convention debates, however, show that the delegates unanimously agreed that the Constitution should explicitly mandate that Congress “shall discharge the debts & fulfil the engagements of the U. States” because Madison and Elbridge Gerry “thought it essential that some explicit provision should be made on this subject, so that no pretext might remain for getting rid of the public engagements.” (All quotations herein are from Adrienne Koch’s 1966 edition of Madison’s notes, pages 511-12, 519, 528-30.) Delegate Pierce Butler later questioned the language “lest it should compel payment as well to the Blood-suckers who had speculated on the distresses of others, as to those who had fought & bled for their country.” Two days later, George Mason raised the same objection, warning that “the use of the term shall will beget speculations and increase the pestilent practice of stock-jobbing.” A debate on the specifics of debt repayment ensued until Edmund Randolph suggested language that did not commit Congress to a specific debt repayment policy. Randolph’s palliative passed ten states to one and ended up as the first clause of Article VI.
What this context reveals is that the Constitution did not explicitly state that Congress “shall” pay the nation’s debts only because the delegates were divided over the issue of “discrimination,” or the question of who the government should pay, original (mostly farmers and soldiers) or current bondholders (widely believed to be mostly wealthy speculators). The Framers believed, as Gouverneur Morris put it, that “the New Government would be bound of course” to pay the national debt. The original intent of the Framers, in other words, was that it was unconstitutional to purposefully default.
During the debt ceiling crises of 2002-4, Treasury avoided default by temporarily swapping interest-bearing, government-held bonds for non-interest bearing certificates. Legislation now pending before Congress would enjoin Treasury to pay bondholders before other government creditors. Rather than force Treasury to resort to legerdemain or to suspend payments to creditors, the President should instruct it to borrow above the debt ceiling if necessary. SCOTUS should look to original intent (and common sense) and uphold the constitutionality of Treasury’s actions and Congress should tie future ceilings to projected budget deficits as other nations do. That will reassure all the nation’s creditors and give lawmakers time to address America’s budget woes without jeopardizing public credit.
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