A s Congress considers how to reconcile rising federal debt levels and the debt limit, discussions about the role of the debt limit among Members of Congress, researchers, and the media promise to become more frequent.¹ During debt limit episodes in the last decade, misleading or less than fully accurate claims have, at times, surfaced. This report provides clarifications on five common debt limit contentions.

The statutory debt limit, which has been modified 18 times since 2002, provides Congress a means of controlling federal borrowing.² The limit was reset at just over $28.4 trillion at the beginning of August 2021, after a two-year suspension. The Bipartisan Budget Act of 2019 (BBA 2019; P.L. 116-37), enacted in August 2019, had suspended the debt limit through July 31, 2021. The limit was then raised, as specified in the BBA 2019, to accommodate debt accumulated during the suspension.³

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")⁴ and the Borrowing Clause ("Power ... To borrow Money on the Credit of the United States")⁵—establish the basis of the congressional power of the purse.⁶ 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.⁷ The total amount of outstanding federal debt, with minor exceptions, is constrained by a statutory debt limit.⁸

When that limit is close to binding, the Treasury Secretary can invoke authorities to employ extraordinary measures to finance federal expenditures.⁹ 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.¹⁰

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.¹¹ During wars, however, the U.S. Treasury was often granted more leeway in deciding terms offered to investors.¹² 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, Congress authorized issuance of bonds simply to "meet the current expenses of the Government."¹³

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.¹⁴

During the 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.¹⁵ That helped the Treasury develop more modern means of public finance, such as using auctions to set interest rates.¹⁶ In July 1939, Congress set an aggregate limit (P.L. 76-201) on federal debt, while allowing Treasury officials to decide how to manage that debt.¹⁷ Thus, the modern debt limit—meaning an overall limit on federal debt without sublimits—was established in 1939.¹⁸ That policy decision, like the passage of the Second Liberty Bond Act, marked one point in the evolution of how Congress controls debt policy, rather than a new assertion of authority.¹⁹

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

Some contend 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" and "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 typically refer to violations of a legal agreement—such as a loan or securities contract—not involving failure to pay.²⁰ Instead of relying on bond contracts or similar legal instruments, Treasury offering circulars govern the issuance of Treasury securities. Circulars are federal documents that can govern agency operations and procedures. The Treasury offering circulars used in the 1970s do not address failure to pay or other types of default events.²¹ Nor does the Uniform Offering Circular, which has governed issuances of Treasury securities since 1993, reference those terms.²²

Moreover, a breach of the debt limit—that is, a situation in which total federal debt subject to the limit exceeded that limit—does not necessarily imply delayed or missed payments or other failures to uphold the federal obligations. In three episodes in the late 1970s, lapses in a temporary debt limit increase left the amount of outstanding federal debt above its limit. Those lapses resulted in no payment delays, and thus were not defaults in the ordinary sense of that term. That said, Treasury officials and others viewed those lapses as close calls that raised substantial risks to the U.S. government's financial credibility and its ability to respond to disasters and emergencies.²³

Lapse of Temporary Debt Limit Increase in October 1977

From 1954 until 1983, Congress addressed the debt limit through a series of temporary increases and infrequent permanent increases. Reliance on temporary debt limit increases implied that if Congress did not act before the temporary increase expired, the federal debt would be hundreds of billions of dollars above its statutory limit. In 1971, the permanent debt limit was raised to $400 billion—$100 billion over its level at the end of World War II.²⁴ The permanent limit was not raised again until December 1980. In the meantime, a series of temporary debt limit increases were enacted.

On June 30, 1977, the limit was temporarily increased to $700 billion until September 30, 1977 (P.L. 94-334). Congress did not act until after the expiration of that temporary debt limit increase, which left total federal debt about $300 billion above its statutory limit for 2 business days. Several factors contributed to this outcome, including rising polarization on debt issues in the House²⁵ and a two-week filibuster aimed at postponing action on measures to deregulate or loosen a federal price cap on interstate transportation of natural gas.²⁶ Action on the debt limit was delayed when the House voted down an initial debt limit measure on September 19, 1977, on a 180-201 vote.²⁷ On September 28, 1977, two days before the temporary debt limit increase was to lapse, the House passed a second measure (H.R. 9290, 95^th Congress) on a 213-202 vote "after some arms were twisted."²⁸

Meanwhile, a filibuster of a natural gas measure had tied the Senate in knots since mid-September 1977.²⁹ The Carter Administration, as part of its National Energy Plan, had proposed capping prices of "new" natural gas.³⁰ On September 16, 1977, the Senate took up a bill (S. 2104, 95^th Congress) to raise and extend certain price limits on interstate gas sales. A motion to table a substitute amendment (Bentsen-Pearson) proposing to eliminate price caps on "new" natural gas markets was voted down, signaling the strength of Senate support for deregulation. Senator Metzenbaum and Senator Abourezk then submitted hundreds of amendments.³¹ After a cloture motion was agreed to on September 23, 1977, they called up amendments and took other actions to delay action on deregulation of natural gas prices.³² In particular, on Friday, September 30, 1977, Senator Abourezk stated that he would object to a unanimous consent agreement to call up the debt limit measure.³³

That evening, however, the Senate did take a late night break to act on a House-passed measure to raise the debt limit by $72 billion for one year.³⁴ Senator Harry Byrd, Jr., proposed an amendment providing for a six-month increase of $52 billion instead, to which the Senate agreed.³⁵ After a short discussion, the Senate passed the bill as amended, 58-30. The next day, during a Saturday session, the Senate, without debate and by voice vote, insisted on its amendment to the House debt limit measure and requested a conference.

On Tuesday, October 4, 1977, the House agreed to the Senate amendment to the original House measure (H.R. 9290, 95^th Congress). The floor manager, Representative Bernice Sisk, conveyed the recommendation of Ways & Means Chairman Al Ullman to adopt the Senate amendment, rather than going to a conference committee, given that it was "imperative" to restore normal operations at the U.S. Treasury. Sisk lamented that this was necessary "due to the circumstances under which the other body has conducted its proceedings for the past two weeks." President Carter then signed the bill into law (P.L. 95-120) on the same day.³⁶

Treasury Operations During the 1977 Debt Limit Lapse

The lapse in the temporary debt limit resulted in a level of federal debt that for 2 business days stood $300 billion above the statutory limit of $400 billion. During those days, Treasury could not borrow, though it had about $19 billion in cash reserves that sufficed to meet federal obligations for a few days.³⁷ The lapse disrupted Treasury's operations by forcing suspensions of Treasury auctions and savings bond sales scheduled for the first few days of October 1977.³⁸

The lapse also prompted an emergency loan from the Federal Reserve. A World War II era exception to the ban on direct purchases of Treasury securities by Federal Reserve banks permitted loans up to $5 billion.³⁹ On September 30, 1977, the Federal Reserve's Federal Open Market Committee voted unanimously to purchase a $2.5 billion certificate of indebtedness from the Treasury, thus providing an equivalent amount of cash to Treasury. The certificate was retired on October 4, 1977, when the debt limit was again raised.⁴⁰

No federal payments were missed or delayed because Treasury's cash balances were high enough to cover federal financial obligations for the two days during which it was unable to borrow. Treasury officials responsible for issuing that debt had acted within their statutory authorities. No contractual obligations were breached. Furthermore, no credit rating agency then altered its assessment of federal debt. Given that a technical default is normally defined as "violation of a financial covenant in a loan agreement"⁴¹ and that Treasury securities were not and are not governed by such financial covenants, how the October 1977 incident could be classified as a technical default—as some have asserted—is unclear.⁴²

Financial markets did not appear to react strongly to the violation of the debt limit.⁴³ Newspaper coverage of the debt limit landed in the back of business sections, rather than on front pages.⁴⁴ Given that both the House and Senate had approved measures to increase the debt limit, it may have seemed clear that the lapse would be short. Treasury Secretary Michael Blumenthal, in an October 3, 1977, Cabinet meeting, outlined "Treasury's plans to borrow money in the absence of Congressional action on legislation to raise the debt limit," but noted no financial market disruptions according to minutes of that meeting.⁴⁵

Incidents in 1978 and 1979

Another temporary debt limit increase expired on Tuesday, July 31, 1978, leaving federal debt above its statutory limit. While the House had passed a debt limit increase on July 19, 1978,⁴⁶ the Senate did not approve that measure until Thursday, August 2, 1978. President Carter signed it into law the following day (P.L. 95-333).⁴⁷ That lapse left the U.S. Treasury unable to issue securities to borrow funds during three business days.

The August 1978 act raised the temporary part of the debt limit to $398 billion through Saturday, March 31, 1979. On March 27, 1979, the Senate passed on a 62-33 vote a bill (H.R. 2534, 96^th Congress) to increase the debt limit temporarily. That bill included an amendment to require the President to submit a plan for a balanced budget in addition to the ordinary budget submission. The House did not take up and approve the Senate measure until Monday, April 2, 1979.⁴⁸ President Carter signed the bill the same day (H.R. 2534, P.L. 96-5).⁴⁹

Due to those delays, the debt limit therefore again reverted to its permanent level of $400 billion. Prior to the House taking action, Treasury officials had briefed some Members that Social Security and other checks set to be mailed April 3, 1979, might not clear and that $3.3 billion in maturing Treasury bills could not be redeemed without an increase in the debt limit, which would allow a resumption of the Treasury's capacity to issue debt.⁵⁰ Media reports noted that the U.S. Treasury had called in tax receipts held in commercial banks, arranged for a Federal Reserve loan, and made plans to suspend interest payments to Social Security and Civil Service trust funds.⁵¹

In a September 1979 report, the General Accounting Office (GAO; now the Government Accountability Office) detailed disruptions in Treasury operations and summarized costs due to forgone interest income, cancelled securities sales, and disruptions of government programs. The report also criticized the use of temporary debt limit increases.⁵² The Comptroller General warned that:

The Government has never defaulted on any of its securities because cash has been available to redeem them upon maturity or demand. It is unlikely that the Congress would intentionally delay action on public debt legislation long enough for a default to result. Nonetheless, the possibility exists.⁵³

Payment Delays in Spring 1979

Less than four weeks after the temporary increase in the debt limit (P.L. 96-5) was enacted on April 2, 1979, problems in computerizing some Treasury debt operations delayed interest and principal payments to some small investors holding Treasury securities.⁵⁴ Some contended this constituted a "mini-default." A closer examination of those events and market reactions suggests a different conclusion. In particular, market movements in interest rates on critical dates seem to track anticipated changes in the Federal Reserve's monetary stance.

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.⁵⁵ Delays affected payments estimated at $122 million, with foregone interest totaling an estimated $125,000.⁵⁶ 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.⁵⁷ The federal government may have reached a settlement with affected investors.⁵⁸

Those payment delays were also blamed for increasing federal borrowing costs.⁵⁹ Market interest rate movements on the date of the first payment delay—April 26, 1979—were more plausibly affected by release of higher than expected inflation estimates⁶⁰ and the anticipation of Federal Reserve responses to significant increases in money supply measures.⁶¹ At that time, the Federal Reserve's monetary policy responses targeted two money supply measures.⁶² As anticipated in the financial press, the Federal Open Markets Committee in its April 27, 1979, conference call decided to increase the federal funds rate.⁶³ As such, payment delays that were not reported until a week and a half later seem a less likely explanation.⁶⁴

Responses to Debt Limit Lapses in the 1970s

The 1977, 1978, and 1979 incidents prompted some House Members to explore ways to integrate consideration of debt limit measures with legislative action on budget resolutions. Although financial market reactions to those incidents appear to have been muted, many Members were nonetheless concerned about risks to federal credit and the financial system. The efforts of those House Members culminated in a change in the House rules, commonly called the Gephardt Rule, after Representative Richard Gephardt, who helped craft it.⁶⁵ The rule linked House agreement on a budget resolution to automatic enrollment of a bill to increase the debt limit to a level considered "appropriate" in that budget resolution.⁶⁶

Other Members sought to curtail the Treasury's authority to borrow from the Federal Reserve, which had been used briefly during the 1977 and 1979 lapses, as a means of tightening the congressional power of the purse.⁶⁷ While Congress in 1979 extended that authority for two years, it was not used again after the April 1979 temporary debt limit lapse described above.

Muted Reactions in Financial Markets

The muted financial market responses to lapses of temporary debt limit increases may reflect three factors. First, in the 1977, 1978, and 1979 incidents, both chambers of Congress had approved a debt limit measure and a rapid reconciliation of differences between the chamber versions seemed imminent.

Second, financial markets were simpler. Wall Street investment banks were typically structured as partnerships, rather than public companies, and therefore had less capacity and incentive to take on significant risks. Wall Street brokerage fees had only recently been deregulated, and London financial markets—a center for Eurodollar transactions—would not see major deregulation until 1984. Moreover, derivatives markets, while rapidly growing in the 1970s, were still an infant industry.⁶⁸ By contrast, the prospect of a debt limit impasse in 2011 generated serious concerns given the prevalence of high-leverage levels and the scale of the shadow banking system that has relied to a large extent on Treasury securities.⁶⁹

Third, as discussed below, the Federal Reserve then had authority to lend the U.S. Treasury up to $5 billion on short notice, which may have provided financial markets with a measure of reassurance.⁷⁰

Nonetheless, the three debt limit lapses and the resulting proximate risk of default raised concerns. Treasury Secretary Miller testified that

I know that this committee has made every effort in the past to assure timely action by Congress on the debt limit. Yes, the record of the past two years has not been good. During this period debt limit legislation was considered by Congress four times. On three occasions action was not taken before the expiration date, and the Treasury was unable to borrow until the Congress acted two or three days later. Significant costs were incurred by the Treasury, and extraordinary measures were required to prevent the Government from going into default.⁷¹

Congressional Responses to the Lapses

The episodes in the late 1970s in which federal debt exceeded its limit for a few days spurred conflicting congressional responses. Some sought to strengthen Congress's control over debt policy by limiting Treasury's ability to obtain emergency loans, which had been used in two of those episodes. Others sought to avoid impasses that led to those lapses by integrating debt limit decisions into a broader budgetary process. Those trends may parallel observations of some political scientists that Congress became a more polarized institution over the course of the 1970s.⁷²

Congress Extends and Limits Fed Authority to Lend to Treasury in 1979

The U.S. Treasury, as noted above, obtained emergency loans from the Federal Reserve in 1977 and 1979. In a 1979 hearing, a Federal Reserve governor and a Treasury official⁷³ stressed the utility of a lending facility available in an emergency.⁷⁴ A measure (H.R. 3404, 96^th Congress) to extend that authority for five years, however, was voted down in the House.⁷⁵ Opponents objected to the increase in the loan limit from $5 billion to $15 billion and argued the loan authority weakened congressional control of fiscal policy.⁷⁶ Supporters cited the need to respond to major emergencies.⁷⁷ Two weeks later the House passed an amended version that extended the authority for two, rather than five, years and retained a $5 billion limit.⁷⁸ The amended version also subjected any loan to Treasury to the overall debt ceiling, thus limiting its usefulness to Treasury in avoiding a binding debt limit.⁷⁹ Uses of the loan authority during debt limit episodes were a central concern during the debate.⁸⁰ The enacted measure (P.L. 96-18) extended the loan authority until May 1981, when it lapsed.⁸¹ The loan authority was not used after the 1979 renewal.⁸²

House Explores Tying Debt Limit to Congressional Budget Process: the "Gephardt Rule"

In the winter following the 1977 debt limit lapse, the House Ways & Means Committee reported a measure to increase the debt limit (H.R. 11180, 95^th Congress) that included a provision to set the debt limit at the level established in the concurrent budget resolution.⁸³ That provision, however, raised constitutional concerns because the President plays no role in concurrent resolutions.⁸⁴ The full House considered the bill on March 7, 1978, and agreed to an amendment stripping the provision to link the debt limit to the budget resolution. The bill subsequently failed on final passage, 165-248, as some Members no longer supported the measure without this language.

In April and May 1978, a House Rules subcommittee held three hearings to consider how to tie the debt limit to revenue and spending decisions reflected in the budgetary framework as expressed in the concurrent budget resolution. The subcommittee chair acknowledged that "the concurrent budget resolution may not be an appropriate method to replace the present statutory system of setting the debt limit" due to procedural and constitutional obstacles.⁸⁵ Several legal experts argued that only a law could modify the debt limit because it had been established in law.⁸⁶

An alternate approach put forth was to have a joint resolution incorporating the debt limit level set in the concurrent budget resolution immediately follow agreement on that budget resolution.⁸⁷ Some Members of the House noted that the Senate could attach nongermane amendments to such a debt limit measure.⁸⁸ Some Members were also concerned how new debt limit approaches would interact with the congressional budget process, which was then only a few years old.

On September 26, 1979, the House took a more limited path as part of a measure (H.R. 5369; P.L. 96-78) to create another temporary increase in the debt limit.⁸⁹ The act established Rule XLIX of the Standing Rules of the House of Representatives, known as the "Gephardt rule," which instructed the House Clerk to send the Senate an engrossed joint resolution when the House approved a budget resolution. Over time, that rule has been modified, repealed, and reinstated.⁹⁰

Proponents of the rule have argued that as debt is the arithmetical result of spending and revenue trajectories, debt limit policy should be linked to the congressional budgetary process that sets levels of spending and revenues deemed appropriate.⁹¹ Opponents have argued that the rule allows Members to avoid a difficult vote and thus undermines fiscal accountability.⁹²

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

Some commentators have claimed that contentious debt limit episodes are a recent phenomenon or that "clean" debt limit increases were once the norm.⁹³ Debt policy, however, has been a divisive issue since the beginning of American government and has often been linked with other policy decisions.⁹⁴ 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.⁹⁵ 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 59 debt limit modifications were "clean"—meaning that a debt limit measure was not linked to other provisions.⁹⁶ 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 suspension (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.⁹⁷ 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, 76^th Congress) was withdrawn.⁹⁸ 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."⁹⁹

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.¹⁰⁰ After a June 1960 debt limit increase (P.L. 86-564) that included various tax provisions, however, unrelated matters were not attached to debt limit measures during Senate floor consideration for the rest of the 1960s.¹⁰¹

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.¹⁰² Senate amendments to debt limit measures increased Social Security benefits in 1971, 1972, and 1973. In 1973, proposed amendments to provide federal campaign financing, to cut off funding for bombing in Cambodia, and to limit presidential impoundment of funds were all rejected.¹⁰³

In the mid-1980s, a group of Senators attached a system of budget constraints and deficit targets, which became known as the Gramm-Rudman-Hollings framework, to a debt limit provision after "partisan and sometimes testy wrangling."¹⁰⁴

Debates over what provisions should accompany a debt limit increase in late 1995 and early 1996 also were contentious. In 1995, some Members called for spending reductions of about $245 billion over seven years as a condition for raising the debt limit.¹⁰⁵ After a related lapse in appropriations and a veto of one debt limit bill (H.R. 2586, 104^th Congress),¹⁰⁶ the debt limit was raised on March 29, 1996.¹⁰⁷ The debt limit episode of 1995-1996 was described by GAO as a "crisis."¹⁰⁸

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

Some commentators have pointed to a statutory provision¹⁰⁹ 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.¹¹⁰

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.¹¹¹ 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 2013.¹¹² 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 2015.¹¹³ In September 2021, Treasury Secretary Yellen, in response to a question regarding platinum coin proposals, stated "I believe that the only way to handle the debt ceiling is for Congress to raise it and show the world, the financial markets, and the public that we're a country that will pay your bills when we incur them."¹¹⁴

Although some contend that the Treasury Secretary could cajole or compel the Federal Reserve to accept a high-value platinum coin,¹¹⁵ no evidence exists that the current or any past Treasury Secretary would entertain such a fiscal strategy or that the Federal Reserve would accede to such demands.

Others have argued that using a high-value platinum coin to evade the debt limit, even if that were feasible, would impair basic constitutional structures and undermine the legitimacy of federal governance.¹¹⁶

Apart from various legal, accounting, and practical uncertainties,¹¹⁷ 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.¹¹⁸ 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.¹¹⁹

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.¹²⁰ Such disruptions could raise federal borrowing costs.¹²¹

Senator Lee introduced S. 185 (117^th Congress) on February 2, 2021, which would limit the face value of platinum coins issued by the Treasury to $200. Representative Tlaib introduced H.R. 1030 (117^th Congress) on February 11, 2021, which would direct the U.S. Treasury to mint and issue two $1 trillion platinum coins and direct the Federal Reserve to purchase the coins. Proceeds would fund payments to individuals.

Point of Clarification 5: The Public Debt Clause's Effect on the Statutory Debt Limit

Some commentators have also argued that if the statutory debt limit were to prevent the federal government from paying obligations, the resulting default would violate a provision of the Fourteenth Amendment commonly referred to as the "Public Debt Clause."¹²² Ratified in 1868,¹²³ the Public Debt Clause states

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.¹²⁴

The legislative history of this provision, as well as its interpretation by the federal courts, shed some light on its potential application to the statutory debt limit. However, many questions remain about the types of actions that would constitute "question[ing]" the "validity of the public debt of the United States."

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."¹²⁵ After the Confederate surrender, the assassination of President Lincoln, the attempted assassination of the Secretary of State, 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.¹²⁶ 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.¹²⁷ Representative James Garfield estimated that those states would gain at least 15 seats and others estimated gains of some 40 to 60 seats.¹²⁸ Such potential shifts in political power raised alarms that a future coalition could emerge that would repudiate federal debts.¹²⁹ 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.¹³⁰

The Public Debt Clause: Judicial Interpretation and Open Questions

Though the Public Debt Clause was ratified in 1868, the Supreme Court has interpreted it in a controlling opinion only once, in relation to a key aspect of early New Deal reforms.¹³¹ This single decision, Perry v. United States,¹³² leaves unanswered many questions concerning the limitations imposed by the Public Debt Clause.¹³³ The Clause's potential application to a failure to service debt on account of the debt limit statute is therefore unclear. This report first examines Perry and then notes the questions that remain concerning the Public Debt Clause's effect.

Perry v. United States

Executive and legislative actions affecting the country's gold supply figured prominently in the opening months of President Franklin D. Roosevelt's New Deal.¹³⁴ In his second fireside chat, broadcast on May 5, 1933, the President outlined his view of the challenges posed to that gold supply by the practice of public and private debtors—including the federal government—agreeing to redeem their debts in gold.¹³⁵ The President stated that these promises affected up to $100 billion in public and private debt, roughly 25 times the domestic gold supply.¹³⁶ The President described a potential consequence of this disparity:

If the holders of these promises to pay started in to demand gold the first comers would get gold for a few days and they would amount to about one-twenty-fifth of the holders of the securities and the currency. The other twenty-four people out of twenty-five, who did not happen to be at the top of the line, would be told politely that there was no more gold left.¹³⁷

The President stated that rather than allow such events to unfold, the federal government had "decided to treat all twenty-five in the same way in the interest of justice and the exercise of the constitutional powers of this Government."¹³⁸

Accordingly, in June 1933, the President signed into law a joint resolution declaring that provisions requiring an obligee to pay in gold or in an amount of money measured in gold (gold clauses) obstructed Congress's power to regulate the value of money.¹³⁹ Congress declared gold clauses to be against public policy and repealed those provisions of federal law authorizing issuance of federal obligations with a gold clause.¹⁴⁰ Existing obligations that carried a gold clause were to be "discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts."¹⁴¹

John Perry was one federal bondholder affected by the joint resolution. He held a $10,000 Liberty Bond, issued in 1918 pursuant to authorization granted by Congress.¹⁴² Its principal and interest were "payable in United States gold coin of the present standard of value."¹⁴³ In May 1934, Perry presented the bond for payment.¹⁴⁴ The United States refused to pay in gold.¹⁴⁵ Instead, as required by the June 1933 joint resolution, it offered $10,000 in legal tender.¹⁴⁶ Perry asserted that this offer breached the government's bond obligations.¹⁴⁷ Perry argued he was entitled to payment either in gold of a specified weight or $16,931 in U.S. currency,¹⁴⁸ with the latter figure reflecting that in January 1934 the President had fixed the weight of the gold dollar at roughly 59% of its former weight.¹⁴⁹

Perry sued in the Court of Claims, claiming breach of contract and arguing that the joint resolution unconstitutionally deprived him of property without due process.¹⁵⁰ The Court of Claims certified a question to the Supreme Court, asking whether Perry was "entitled to receive from the United States an amount in legal tender currency in excess of the face amount of the bond."¹⁵¹ In Perry v. United States, the Supreme Court answered "no" to the certified question, but not before considering the extent of the government's obligation under the bond and the joint resolution's constitutionality.¹⁵² Along the way, it construed the Public Debt Clause.

Writing for the Court,¹⁵³ Chief Justice Charles Evans Hughes first described the obligation that the federal government undertook when it issued the bond with a gold clause. By stipulating that the bond would be payable in gold coin "of the present standard of value," the United States assured those lending it funds they would not suffer loss through depreciation in the payment medium.¹⁵⁴

Chief Justice Hughes then considered the joint resolution in light of this obligation, asking whether Congress could use its power to regulate the value of money to invalidate the terms of existing obligations issued under its separate power to borrow money on the credit of the United States.¹⁵⁵ If Congress had the power under the Coinage Clause to modify contract terms, then it would "inevitably follow[]" that Congress could repudiate its obligation to repay any sums at all.¹⁵⁶ Chief Justice Hughes refused to construe the Constitution as granting Congress such power.¹⁵⁷ "When the United States, with constitutional authority, makes contracts," he explained, "it has rights and incurs responsibilities similar to those of individuals who are parties to such instruments," except that federal government may be sued only with its consent.¹⁵⁸

Chief Justice Hughes rejected the contention that the government could not contract away the exercise of its sovereign powers—by, for example, irrevocably committing to repay debt in gold coin.¹⁵⁹ The right to make a binding obligation was an incident of sovereignty, and Congress acts as an instrumentality of that sovereignty when its exercise its legislative powers.¹⁶⁰ But by authorizing Congress to make "definite obligations for the payment of money borrowed," the Constitution did not also confer "authority to alter or destroy those obligations."¹⁶¹

Chief Justice Hughes then referenced the Public Debt Clause, providing the only interpretation of the Clause that has appeared in a controlling opinion:

The Fourteenth Amendment, in its fourth section, explicitly declares: "The validity of the public debt of the United States, authorized by law, ... shall not be questioned." While this provision was undoubtedly inspired by the desire to put beyond question the obligations of the government issued during the Civil War, its language indicates a broader connotation. We regard it as confirmatory of a fundamental principle which applies as well to the government bonds in question, and to others duly authorized by the Congress, as to those issued before the amendment was adopted. Nor can we perceive any reason for not considering the expression "the validity of the public debt" as embracing whatever concerns the integrity of the public obligations.¹⁶²

On the basis of this discussion—with its references to the Borrowing Clause, the Coinage Clause, prior Supreme Court precedent affirming the inviolability of federal obligations, and the Public Debt Clause—Chief Justice Hughes concluded that the joint resolution exceeded Congress's authority.¹⁶³

Having agreed with Perry that the joint resolution exceeded Congress's authority, the Court nonetheless answered the certified question "no," an answer that denied Perry any relief.¹⁶⁴ The Court explained that to prevail on his breach-of-contract claim, Perry had to demonstrate actual damages resulting from the government's breach of the gold clause.¹⁶⁵ Damages "could not be assessed without regard to the internal economy of the country at the time the alleged breach occurred."¹⁶⁶

Features of this "internal economy" prevented Perry's theory from showing harm suffered on account of breach of the gold clause. By May 1934, a "free domestic market for gold was nonexistent."¹⁶⁷ While Perry alternatively demanded the "equivalent" in currency of the gold coin promised in 1918, the Court wrote that "'equivalent' cannot mean more than the amount of money which the promised gold coin would be worth to the bondholder for the purposes for which it could legally be used."¹⁶⁸ Congress had lawfully established a "restricted market" in gold,¹⁶⁹ which impacted the purchasing power of the dollars Perry could have received but for the breach.¹⁷⁰ However, Perry's theory of damages did not account for these changes.¹⁷¹ His theory assumed he was entitled to receive payment in legal tender according to the weight of the dollar that existed before the January 1934 devaluation.¹⁷² The Court concluded that payment of this amount "would appear to constitute, not a recoupment of loss in any proper sense, but an unjustified enrichment."¹⁷³

Questions Concerning the Public Debt Clause

Several questions remain concerning the effect of the Public Debt Clause on the federal government's debts. First, the Court has repeatedly affirmed the generally binding nature of the federal government's contractual obligations.¹⁷⁴ However, except in Perry, the Court has not rooted such conclusions in the text of the Public Debt Clause or otherwise interpreted the clause.¹⁷⁵ Lynch v. United States,¹⁷⁶ decided eight months before Perry, exemplifies a more common basis for describing the binding nature of the federal government's contractual obligations. There, the Court examined a statute that purported to repeal laws granting war risk insurance.¹⁷⁷ The Court characterized this repeal as abrogating "outstanding contracts and reliev[ing] the United States from all liability on the contracts without making compensation to the beneficiaries."¹⁷⁸ It unanimously held this abrogation violated the Fifth Amendment's Due Process Clause.¹⁷⁹ The Court has occasionally cited Lynch and Perry in tandem, without distinguishing between limitations imposed by the Fifth versus the Fourteenth Amendment.¹⁸⁰ As a result, the Court has not further examined the Public Debt Clause or the broad construction given the clause in Perry, as "embracing whatever concerns the integrity of the public obligations."¹⁸¹

Second, commentators continue to debate at least two aspects of the Public Debt Clause's application to federal commitments. Commentators have argued that the Public Debt Clause may require a distinction in the types of commitments that constitute the "public debt."¹⁸² Commentators have also advanced a range of views concerning the set of facts under which the federal government would be deemed to have "questioned" the validity of the public debt. For example, one commentator has argued that the most likely explanation for the Public Debt Clause's language is that it was intended to "simply declare[] that all public debt that was valid (i.e., 'authorized by law') would remain valid."¹⁸³ A second commentator has cast the Public Debt Clause as prohibiting not only the "total repudiation" of federal debt, but also those defaults on debts that persist for a substantial time period or for which bondholders are not made whole.¹⁸⁴ A third commentator has advanced a "broad construction" of the clause under which "governmental actions short of direct repudiation may trigger the Public Debt Clause if they endanger the validity of debts."¹⁸⁵

Given these uncertainties surrounding the Public Debt Clause generally, it is unclear how the provision might apply to the statutory debt limit in particular. Depending on one's construction of the clause, some nonpayments occasioned by the statutory debt limit might not be circumstances "question[ing]" the validity of the public debt.¹⁸⁶ Such nonpayment would not resemble the congressional action that confronted the Court in Perry, an express abrogation of the government's gold clause obligations.¹⁸⁷ If obligees are made whole after Congress permits resumed debt service and other payments (i.e., raising or suspending the debt limit, cutting spending, or increasing taxes), Public Debt Clause concerns would be further ameliorated.¹⁸⁸ Separately, even if temporary nonpayment could constitute a Public Debt Clause violation with respect to certain debts (e.g., bond debt), the government's failure to make other payments (e.g., to fund certain grant awards) might not concern the "public debt" within the meaning of the clause.¹⁸⁹

Concluding Question: Is the Debt Limit Obsolete?

Various policymakers, former Treasury officials,¹⁹⁰ and commentators have called for eliminating the debt limit on grounds that it is "obsolete,"¹⁹¹ simply gives a venue to "stir up debate about debt,"¹⁹² or is redundant because the need to issue debt results from the excess of spending over revenues. If Congress were to choose to delegate more of its Article I Section 8 powers of the purse to the U.S. Treasury and the executive branch, some financial risks and contentious debates might conceivably be side-stepped.

While many have called for eliminating the debt limit or making it more automatic, those who have examined how that might be accomplished found themselves facing constitutional, legal, and procedural barriers, as noted in the discussion of events leading to the 1979 Gephardt Amendment.¹⁹³

Others argue that control over debt is a critical third leg of the congressional power of the purse.¹⁹⁴ 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.