LOCAL COLUMNIST

History Minute: How the debt ceiling came to be, and the risk of defaulting

By Dr. Ken Bridges

The federal government is facing a deadline on its ability to pay the country's bills. Unless a new limit is authorized, the government will hit the debt ceiling, cutting off the government's ability to borrow money to pay its existing bills.

With the debt ceiling issue, the question is not one of whether the U.S. should add more debt or what it should spend; instead, it is a question of paying the nation's existing debts. Many governments have faced similar situations in the past, and any discussion of large-scale finances often become very complex. The question of debt has a very long history.

Currently, the U.S. government owes $31.4 trillion. About one-fourth of this debt is what the government owes to itself, borrowing from various trust funds like Social Security. The rest, the "public debt," as it is called, is owned by various banks, state and local governments, corporations and individuals mostly in the form of bonds, essentially interest-bearing IOUs from the government which mature over time.

Governments have been borrowing money for centuries. Sometimes governments have refused to pay back their loans. These defaults played out in different ways, but it would always cause some damage.

Spain had borrowed heavily from banks in Germany but defaulted three times in the early 1600s. These defaults caused few problems for Spain in the short-term, but it caused a meltdown of the German banks, resulting in economic and political chaos. Spain's wealth steadily declined, and the country was bankrupt by the early 1700s.

When France refused to repay its loans to Italian banks in 1648, the banks collapsed. None of these banks had any means of collecting their debts from these governments, leading to ruin. France faced little fallout in the short-term.

For smaller and weaker nations, defaulting on a debt has sometimes meant invasion. Larger nations would often invade to seize a country's treasury to ensure that loans would continue to be repaid.

This was the case in Mexico in 1862 when the French government declared that Mexico had defaulted on a debt and invaded, occupying the country with a puppet government until 1867.

Argentina in 1890 found itself unable to pay its massive debts. The shock wave spread worldwide. Argentina sank into a deep recession while the British banking system nearly disintegrated. In the meantime, Argentina's default caused American stocks to plummet and caused a recession in neighboring Brazil. In each of these cases, these nations faced financial chaos in the years after default.

Meanwhile, the United States struggled after the American Revolution. The U.S. had a national debt of $75 million, which the nation could not pay. The debt certificates issued were worth only pennies on the dollar at maturity, effectively putting the government into a default situation. The country couldn't pay its bills. In 1790, Treasury Secretary Alexander Hamilton devised a new system of interest-bearing bonds (the savings bonds that would become so popular) to finance debt. In this way, the government had time to pay off its debts while providing a safe investment.

When President Andrew Jackson left office in 1837, the United States was entirely debt-free. Jackson was the last president to leave office without a national debt. Subsequent economic depressions and the Civil War a quarter century later began adding to the national debt again.

World War I would cost the U.S. more than $31 billion (or more than $950 billion in 2023 dollars). This is money the U.S. did not have.

Up to this point, Congress authorized the treasury to issue specific amounts of bonds to pay for each new debt incurred. Because of the uncertainty of war funding, in 1917, Congress authorized the treasury to be able to issue debt bonds up to a specific amount instead. Thus, the debt ceiling was created, giving the federal government the ability to borrow money to finance debts quickly as Congress passed spending bills to pay for the war. Congress would periodically raise the debt ceiling in future years as debts increased.

By 1930, the national debt was at $16 billion ($283 billion in 2023 dollars). In 1933, to help curb the deflation that was crippling the economy, the nation untied the value of the dollar to gold, which some critics called a default. While this ended deflation and allowed the economic freefall to end, the national debt rose as more money was spent to rebuild the economy.

In Arkansas, the pressures of the Great Depression led the state to default on its debts, which severely limited its abilities to finance any long-term projects (particularly road projects) for many years.

World War II caused the national debt to spike, rising to $270 billion by 1946 (or $4.5 trillion in 2023 dollars). The national debt nearly doubled between 1970 and 1978, leveling off near $900 billion by 1980 ($3.5 trillion in 2023 dollars). The national debt spiked to $5 trillion by 1995. By 1997, the budget deficit had been eliminated, and the national debt began to decline.

Recessions and war in the Middle East caused the national debt to spike again after 2001 to $13.5 trillion by 2010. The national debt increased again by $8 trillion between 2017 and 2020. From the 1970s until the 1990s, Congress authorized debt ceiling increases with each new budget. The debt ceiling has been raised dozens of times by Congress without incident along the way. Regardless of the debt size, the nation still paid its bills.

The federal government is expected to reach the debt ceiling by June 1. If borrowing authority is not raised, then the government will not be able to pay its existing bills, from Social Security checks to paychecks for soldiers, all spending already authorized by Congress – a default.

Some have proposed bypassing the debt ceiling with a number of accounting tricks, minting a large coin to count as money in the treasury, or declaring that the debt ceiling is unconstitutional under the Fourteenth Amendment and paying the bills regardless. However, all these questions have many legal and financial uncertainties surrounding them.

How the federal government will respond to the question of the debt ceiling is unresolved as of this writing.

Dr. Ken Bridges is a professor of history and geography at South Arkansas Community College in El Dorado and a resident historian for the South Arkansas Historical Preservation Society. Bridges can be reached by email at kbridges@ southark.edu.