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A History of U.S. Debt Limits
George J. Hall Thomas J. SargentBrandeis University New York University
November 2015
Debt Design and Management
Constitution assigns Congress authority to issue and manage debt.
◮ Article 1
The Congress shall have 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; ...
To borrow money on the credit of the United States;
◮ Today Congress has delegated this authority almost entirely to the
Treasury.
◮ It has retained one tool – a debt ceiling.
Debt Limit a Sideshow?
In my brief time in Washington, I’ve found the worst
myth to be the belief that the debt ceiling imposes any
control on government spending. The plain truth is that
the debt limit does not affect the deficits or surpluses;
Assistant Secretary for Financial Markets, U.S. Treasury, Brian C. Roseboro, 2003
Questions
1. Has the debt limit usually increased over time?
2. Has the debt limit been an upper bound on total debt to be anticipated
over medium to long horizons during peace?
3. Has the debt limit actually constrained anyone?
4. Why did Congress delegate security design and management of the debt
to the Treasury during the 1920s and 30s?
5. Has the debt limit been unambiguous in terms of units of account?
6. How is the debt limit measured? Is it “marked to market” or is it in
terms of “face value”?
Limit or Limits?
◮ Congress has imposed an aggregate limit only since 1939
◮ Before WWI, Congress imposed limits on each bond
◮ We construct an implied limit before 1939
1775 1785 1795 1805 1815 1825 18350
20
40
60
80
100
120
140
160
180
200
milli
ons
of n
omin
al d
olla
rs
← Consolidation of Revolutionary Debt
← Assumption of State Debts
Louisiana Purchase →
← War of 1812
← Accumulating Unpaid Interest
1776-1835
1840 1850 1860 1870 1880 1890 1900 19100
500
1000
1500
2000
2500
3000
3500
4000
milli
ons
of d
olla
rs
← Civil War
Mexican War →
Panic of 1857 →
Refinancing →
Spanish−American War →
Panama Canal →
Purchases of Gold →
1840-1917
1920 1925 1930 19350
5
10
15
20
25
30
35
40
45
50
55
billio
ns o
f nom
inal
dol
lars
← First Liberty Loan Act
← Second Liberty Loan Act
← Third Liberty Loan Act
← Fourth Liberty Loan Act
← Victory Loan Act
1917-1939
1940 1950 1960 1970 1980 1990 2000 20100
2
4
6
8
10
12
14
16
18
20
trillio
ns o
f nom
inal
dol
lars
1939-2014
Figure 1: Nominal Federal Debt and the Aggregate Statutory Limit
Nominal debt is the dotted line. The statutory limit is the solid line. Prior to 1939, the limit is constructedby summing individual limits on securities. After 1939, the limit is the official debt ceiling.
4
U.S. Treasury Debt Prior to World War I
Between 1776 and 1916 Congress authorized and designed 200
securities
◮ maturity
◮ coupon rate
◮ call and exchange features
◮ projects on which proceeds could be spent
No standardization limited liquidity and thinned markets
Federal Debt by Type Loan
1775 1777 1780 1782 1785 1787 1790 1792 1795 1797 1800 1802 18050
50
100
150
200
250
spec
ie v
alue
(in
mill
ions
of d
olla
rs)
← Continental Dollars
Foreign Loans + InterestDomestic Interest
Domestic Principal
State Debts →
← Temp Loans6 per cent
deferred 6 per cent
3 per cent
← Other Loans
Federal Debt by Type Loan
1775 1777 1780 1782 1785 1787 1790 1792 1795 1797 1800 1802 18050
50
100
150
200
250
spec
ie v
alue
(in
mill
ions
of d
olla
rs)
← Continental Dollars
Foreign Loans + InterestDomestic Interest
Domestic Principal
State Debts →
← Temp Loans6 per cent
deferred 6 per cent
3 per cent
← Other Loans
Federal Debt by Type of Loan from 1791 to 1830
1795 1800 1805 1810 1815 1820 1825 18300
20
40
60
80
100
120
140
160
180
200
par
valu
e in
mill
ions
of n
omin
al d
olla
rs
← Aggregate Debt Limit
Act of August 4, 1790
Louisiana Purchase →Temporary →
← Treasury Notes
Other Long−term Loans
← Unfunded Debt
Foreign Loans
1780 1790 1800 1810 1820 1830 1840 Treasury Notes Prior to 1846
Exchanged 4.5 % Stock of 1825 4.5 % Loan of 1824
Exchanged 4.5 % Stock of 1824 4.5 % Loan of 1824
Exchanged 5 % Stock of 1822 Five Per Cent. Loan of 1821
Six Per Cent. Loan of 1820 Five Per Cent. Loan of 1820
Five Per Cent. Loan of 1816 Treasury Note Stock of 1815
Treasury Notes of 1815 Mississippi Stock
Six Per Cent. Loan of 1815 Temporary Loan of March, 1815
Seven Per Cent. Stock of 1815 Temporary Loan of February 1815
Small Treasury Notes of 1815 Treasury Notes of December, 1814
Temporary Loan of 1814 Undesignated Loan of 1814
Six Million Loan of 1814 Ten Million Loan of 1814
Treasury Notes of March, 1814 Seven and One−Half Million Loan of 1813
Treasury Notes of 1813 Sixteen Million Loan of 1813
Exchanged Six Per Cent. Stock of 1812 Treasury Notes of 1812 Temporary Loan of 1812
Six Per Cent. Loan of 1812 Six Per Cent. Loan of 1810
Converted Six Per Cent. Stock of 1807 Exchanged Six Per Cent. Stock of 1807
Louisiana Six Per Cent. Stock Eight Per Cent. Loan of 1800
Eight Per Cent. Loan of 1798 Temporary Loan of 1798
Navy Six Per Cent. Stock Six Per Cent. Stock of 1796
Temporary Loan from Bank of New York Temporary Loan of March, 1795, A.
Temporary Loan of March, 1795, C. Four and One−Half Per Cent. Stock of 1795
Five and One−Half Per Cent. Stock of 1795 Temporary Loan of March, 1795, B.
Temporary Loan of February, 1795 Temporary Loan of December, 1794
Temporary Loan from Bank of New York Temporary Loan of June, 1794
Holland Loan of 1794 Temporary Loan of March, 1794
Temporary Loan of 1793 Holland Loan of 1793
Temporary Loan From Bank of North America Temporary Loan of 1792
Subscription Loan of 1791 Holland Loan of 1792 Holland Loan of December, 1791
Antwerp Loan of 1791 Holland Loan of September, 1791 Holland Loan of March, 1791
Three Per Cent Stock of 1790 Defer Six Per Cent Stock of 1790 Six Per Cent Stock of 1790
Temporary Loan of 1790 Holland Loan of 1790
Temporary Loan of 1789 Holland Loan of 1788
Holland Loan of 1787 Debt Due Foreign Officers
Holland Loan of 1784 French Loan of Six Million Livres
Holland Loan of 1782 Temporary Loans From Banks
French Loan of Ten Million Livres Domestic Interest in Arrears Certificates of Indebtedness
Loan from Spain in 1781 French Loan of Eighteen Million Livres
Loan From Farmers−General of France Loan Office Certificates
C <= 22 < C <= 44 < C <= 55 < C <= 6C > 6
Figure 24: Debt Issues Outstanding: 1775 to 1840
40
1840 1850 1860 1870 1880 1890 1900 1910 1920 2nd Liberty Loan Converted to 4.25% 1st Liberty Loan Converted to 4.25% 1st Liberty Loan Converted to 4% 4th Liberty Loan Certificates of Indebtedness (9/24/1917) 3rd Liberty Loan
Certificates of Indebtedness (9/24/1917) War Savings and Thrift Stamps 2nd Liberty Loan of 1917 (4%) Certificates of Indebtedness (9/24/1917)
Certificates of Indebtedness (4/24/1917) Certificates of Indebtedness (4/24/1917)
1st Liberty Loan of 1917 (3.5%) Certificates of Indebtedness (4/24/1917) Certificates of Indebtedness (4/24/1917) Certificates of Indebtedness (3/3/1917)
One Year Treasury Notes Conversion Bonds Postal Savings Bonds (1−15th Series) Panama Canal Loan (Series 1911) Panama Canal Loan (Series 1908)
Certificates of Indebtedness (6/13/1898) Panama Canal Loan (Series 1906) Consols of 1930 Gold Reserve Fund
Ten−Twenty Loan of 1898 Loan of 1925
Loan of 1904 Funded Loan of 1891, con’t at 2%
Treasury Notes of 1890 National Bank Notes
Bonds issued to Pacific Railroad Loan of July 12, 1882
Funded Loan of 1881 con’t 3.5% (Five Percent Loan of 1881) Funded Loan of 1881 con’t 3.5% (Loan of 1863)
Funded Loan of 1881 con’t 3.5% (Loan of July and August 1861) Refunding Certificates
Silver Certificates Four Percent Loan of 1907
Four and One−Half Percent Loan of 1891 Certificates of Deposit
Five Percent Loan of 1881 Certificates of Indebtedness of 1870
Consols of 1868 Three Percent Certificates
Consols of 1867 Consols of 1865
Five−Twenties of March 1864 Coin Certificates
Five−Twenties of 1865 Navy Pension Fund
Five−Twenties of June 1864 Seven−Thirties of 1864 and 1865
Ten−Forties of 1864 Compound Interest Notes
Loan of 1863 One Year Notes of 1863 Two Year Notes of 1863
Fractional Currency Legal Tender Notes
Five−Twenties of 1862 Certificates of Indebtedness
Temporary Loan Loan of July and August 1861
Seven−Thirties of 1861 Old Demand Notes
Oregon War Debt Treasury Notes of 1861
Loan of February 1861 Treasury Notes of 1860
Loan of 1860 Loan of 1858
Treasury Notes of 1857 Texas Debt
Texas Indemnity Stock Loan of 1848
Bounty Land Script Loan of 1847
Treasury Notes of 1847 Loan of 1846
Mexican Indemnity Stock Treasury Notes of 1846
Loan of 1843 Loan of 1842
Loan of 1841 Treasury Notes Prior to 1846
C <= 22 < C <= 44 < C <= 55 < C <= 6C > 6
Figure 25: Debt Issues Outstanding: 1840 to 1918
41
Sources of Statutory Debt limits
◮ Before World War I, Congress imposed limits on individual
securities
◮ For most securities, Congress limited quantities to be issued
◮ Limits were not on quantities outstanding
◮ After a security was redeemed, it could not be re-issued
◮ We construct implied limits on aggregate limit by keeping
track of unexpired limits on each individual security
Details
For each security and date, keep track of
◮ amount originally authorized
◮ amount issued up to now
◮ amount redeemed
Deduce implied limit on additional amounts that can still be issued
Example: The Temporary Loan of 1793
1793:Q2 1793:Q3 1793:Q4 1794:Q1 1794:Q2 1794:Q3 1794:Q40
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
mill
ions
of d
olla
rs
← cumulative sum of issues
← quantity outstanding
total issues authorized → ↑
↓
statutorybalance
Authorization, Issuance
and Quantity Outstanding
1793:Q2 1793:Q3 1793:Q4 1794:Q1 1794:Q2 1794:Q3 1794:Q40
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
mill
ions
of d
olla
rs
← implied debt limit
quantity outstanding →
↑
↓
statutorybalance
Quantity Outstanding and
Implied Limit
Treasury Notes of 1812 to 1815: Quantities Outstanding,
the Cumulative Sum of Issues, and Authorizations
1813 1814 1815 1816 1817 1818 18190
10
20
30
40
50
60
mill
ions
of d
olla
rs
Act of June 30, 1812 Act of February 25, 1813
Act of March 4, 1814
Act of December 26, 1814
← Act of February 24, 1815, small notes
← Act of February 24, 1815, large notes
← Act of Feb. 24, 1815, reissues
← cumulative sum of issues
sum of authorized issues→
← Act of Feb. 24, 1815 allowed for reissues
← Mar. 1817 all authorizations repealed
Project Finance vs. General Finance
◮ Project finance: before WWI
◮ Undifferentiated finance: after 1917
Before WWI: Project Finance
1780 1790 1800 1810 1820 18300
20
40
60
80
100
120
140
mill
ions
of n
omin
al d
olla
rs
Refinanced Debt
Military
Civil
1776-1840
1840 1850 1860 1870 1880 1890 1900 19100
500
1000
1500
2000
2500
3000
mill
ions
of n
omin
al d
olla
rs
Refinance DebtMilitary
Civil →
Buy Gold/Silver
Non−Interest Bearing Notes
Gold & Silver Certificates
1840 - 1915
Debt Decomposed by Statutory Purpose
Second Liberty Bond Act
The Second Liberty Bond Act of 1917 granted the Secretary of the
Treasury
to borrow from time to time, on the credit of the United
States for the purposes of this Act, and to meet
expenditures authorized for the national security and
defense and other public purposes authorized by law not
to exceed $7,538,945,460
End of Project Finance
◮ Second Liberty Bond Act differed from all previous statues by
including the phrase “and other public purposes authorized by
law.”
◮ That broad language broke the tight connection between
borrowing and spending for specific purposes that had
characterized Congress’s policy since 1776.
Objects being limited
◮ Limits cast in terms of par values
◮ Time limits?
◮ Units of account?
Official accounts versus macroeconomists’
◮ Issues apply to recent discussions of threat to Fed’s solvency
Prices
◮ qtt+j =1
(1+ρjt )j
◮
(qtt+j−1
qt−1t+j−1
)
= (1+ rjt−1,t) is the one-period gross nominal return
on a j-period zero coupon bond
◮ rjt−1,t is the net nominal rate of return
Quantities
◮ G tt+j ∼ federal government expenditures
◮ T tt+j ∼ federal tax revenues
◮ σtt+j ∼ federal surplus
Fiscal Policy
{{G tt+j ,T
tt+j}
∞
j=0}∞
t=0
Budget Constraints
P.V. of surplus = value of government debt
∞∑
j=0
qtt+jσtt+j =
∞∑
j=0
qtt+j stt+j
Quantities
◮ c tt+j ∼ coupon
◮ btt+j ∼ par or principal (occasionally a strike price)
◮ stt+j ≡ c tt+j + btt+j
Two measures of government debt
U.S. government accounts:
nt∑
j=1
btt+j
Macroeconomics:
nt∑
j=1
qtt+j stt+j =
nt∑
j=1
qtt+j(btt+j + c tt+j)
Two measures of “interest payments”
US government accounts:
before 1929:
c t−1t
after 1929:
c t−1t + r1t−1,tb
t−11,t
Macroeconomics:nt−1∑
j=1
rjt−1,tq
t−1t+j−1s
t−1t+j−1
Promised Principal and Coupon Payments
1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 20000
25
50
75
100
125
150
perc
ent o
f GD
P
promised principal paymentspromised principal + coupon payments
Conceptual Differences
∑ntj=1 b
tt+j differs from
∑ntj=1 q
tt+j (b
tt+j + c tt+j ) because
◮ It neglects the government’s outstanding promises to pay
couponsnt∑
j=1
c tt+j ;
and
◮ The book value doesn’t discount future payments of principal
btt+j by multiplying them by the market prices qtt+j .
Discrepancies have been positive and negative
Ratio of Market Value to Par Value of Debt
1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 202520
30
40
50
60
70
80
90
100
110
120
100
× m
arke
t val
ue/p
ar v
alue
Debt to GDP Ratio, Market and Par Value, 1776-2014
1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 20250
20
40
60
80
100
120
140
perc
ent o
f GD
P
← Revolutionary War
← 1790
← War of 1812
Civil War →World War I →
World War II →
← Reagan
G.W.Bush/Obama →
market valuepar value
Debt Limit is on Face Values
The debt ceiling is an upper bound on∑n
j=1 btt+j not on
∑ntj=1 q
tt+j(b
tt+j + c tt+j )
◮ Promises labeled “principal” are recorded as debt and count
against the limit
◮ Promises labeled “coupons” or “interest” do not.
Government budget constraint
nt∑
j=1
qtt+jstt+j =
nt−1∑
j=1
qtt+j−1st−1t+j−1 − σt
t
σtt = T t
t − G tt
Government budget constraint
nt∑
j=1
qtt+j stt+j =
nt−1∑
j=1
(
qtt+j−1
qt−1t+j−1
)
qt−1t+j−1s
t−1t+j−1 − σt
t
=
nt−1∑
j=1
qt−1t+j−1s
t−1t+j−1 +
nt−1∑
j=1
rjt−1,tq
t−1t+j−1s
t−1t+j−1 − σt
t
Economic interest on government debt
The second term on the right side of the second line measures time
t nominal interest payments on the time t − 1 nominal government
debt:
nt∑
j=1︸︷︷︸
rjt−1,t︸ ︷︷ ︸
(
qt−1t+j−1s
t−1t+j−1
)
︸ ︷︷ ︸
sum over net values
maturities returns
Interest reported by government
1. Before 1929:
c t−1t
2. After 1929:
c t−1t + r1t−1,tb
t−11,t
where bt−11,t is the par value of pure discount one-period
treasury bills issued at t − 1.
Government Budget Constraint Again
nt∑
j=1
qtt+jstt+j =
nt−1∑
j=2
qt−1t+j−1s
t−1t+j−1 − σt
t + [c t−1t + r1t−1,tb
t−11,t ]+
nt−1∑
j=2
rjt−1,tq
t−1t+j−1s
t−1t+j−1
+ [(1− r1t−1,t)bt−11,t + bt−1
−1,t ]
ct−1t + r
1t−1,tb
t−11,t
︸ ︷︷ ︸
+
nt−1∑
j=2
rjt−1,tq
t−1t+j−1s
t−1t+j−1
︸ ︷︷ ︸
+ (1 − r1t−1,t )b
t−11,t + b
t−1−1,t
︸ ︷︷ ︸
official capital gains pay or
interest roll over
Two “interest payments” series
The nominal one-period holding period return paid by the
government debt (in black)
∑nt−1
j=1 rjt−1,tq
t−1t+j−1s
t−1t+j−1
∑nt−1
j=1 qt−1t+j−1s
t−1t+j−1
Official net interest payments as a percentage of the debt (in
blue): before 1929c t−1t
∑nt−1
j=1 bt−1t+j−1
and after 1929:c t−1t + r1t−1,tb
t−11,t
∑nt−1
j=1 bt−1t+j−1
.
Nominal Holding Period Return and Official Net Interest
Payments as Percent of the Debt, Annual by Fiscal Year
1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020−10
−5
0
5
10
15
20
25
30
35
40
perc
ent
Congressional Control of the Debt Prior to WW-I
◮ Except during the War of 1812 and the Civil War, Congress
retained tight control on the debt.
◮ Limits increase and decrease
◮ On multiple occasions, Treasury Secretaries asked for more
freedom to manage the debt. They were denied.
◮ Question: Has the debt limit constrained anyone?
◮ Prior to WW-I, Yes.
Natural Log of the GDP Deflator
1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 20201
1.5
2
2.5
3
3.5
4
4.5
5
ln o
f GD
P p
rice
defla
tor
(200
9 =
ln(1
00))
Total Debt and the Limit: Nominal, 1776-1835
1775 1785 1795 1805 1815 1825 18350
20
40
60
80
100
120
140
160
180
200
mill
ions
of n
omin
al d
olla
rs
← Consolidation of Revolutionary Debt
← Assumption of State Debts
Louisiana Purchase →
← War of 1812
← Accumulating Unpaid Interest
Debt and Debt Limit Divided by the Price Level:
1790-1835
1775 1785 1795 1805 1815 1825 18350
500
1000
1500
2000
2500
3000
mill
ions
of r
eal (
2009
) do
llars
Total Debt and the Limit: Nominal, 1840-1916
1840 1850 1860 1870 1880 1890 1900 19100
500
1000
1500
2000
2500
3000
3500
4000
mill
ions
of d
olla
rs
← Civil War
Mexican W
ar →
Panic of 1857 →
Refinancing →
Spanish−American W
ar →
Panama Canal →
Purchases of Gold →
1840 1845 1850 1855 18600
20
40
60
80
Debt and Debt Limit Divided by the Price Level:
1840-1916
1840 1850 1860 1870 1880 1890 1900 19100
5
10
15
20
25
30
35
40
45
50
55
billi
ons
of r
eal (
2009
) do
llars
Total Debt and the Limit: Nominal, 1917-1939
1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 19380
5
10
15
20
25
30
35
40
45
50
55
billi
ons
of n
omin
al d
olla
rs
← First Liberty Loan Act
← Second Liberty Loan Act
← Third Liberty Loan Act
← Fourth Liberty Loan Act
← Victory Loan Act
← March 3, 1931
February 4, 1935 →
May 26, 1938 →
Debt and Debt Limit Divided by the Price Level:
1917-1939
1916 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 19400
100
200
300
400
500
600
700
billi
ons
of r
eal (
2009
) do
llars
Total Debt and the Limit: Nominal, 1939-2014
1940 1950 1960 1970 1980 1990 2000 20100
2
4
6
8
10
12
14
16
18
20
trill
ions
of n
omin
al d
olla
rs
Statutory Debt Limit and Debt Subject to it Divided by
Price Level
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
real
deb
t and
lim
it (t
rillio
ns o
f 200
9 do
llars
)
US monetary units
◮ 1790-1834: gold/silver gold and silver mint ratio of 15 to 1.
Free coinage (sale) of both gold and silver.
◮ 1834-1873: gold/silver mint ratio of 16 to 1.
◮ 1862-1868: green backs inconvertible legal tender.
◮ 1873-1900: free coinage of gold only. Limited silver coinage.
◮ 1792-1900: “coin” means gold or silver.
◮ 1900-1933: free coinage of gold. “Coin” now means gold.
◮ 1933- : Federal Reserve notes.
Has the debt limit been unambiguous in terms of units of
account?
Usually
Important exceptions:
◮ War of 1812
◮ Civil War
◮ Silver agitation of the 1890s?
◮ Gold abandoned in 1933?
Units of account graphs, I
How much of currency X , if purchased at market prices, would it
have taken to purchase the entire stock of debt? (X being gold,
silver, greenbacks)
Par and Market Value of the Debt By Unit of Account:
1860 - 1885
1860 1862 1865 1867 1870 1872 1875 1877 1880 1882 18850
5
10
15
20
25
30
35
40
perc
ent o
f GD
P
par valuemarket value (lawful money)market value (gold)market value (silver)
Par and Market Value of the Debt By Unit of Account:
1885 - 1900
1884 1886 1888 1890 1892 1894 1896 1898 1900 19020
2
4
6
8
10
12
14
16
18
20
perc
ent o
f GD
P
par valuemarket value (gold)market value (silver)
Units of account graphs, II
How much in gold would the debt have been worth if it had been
paid back in silver dollars?
Par and Market Value of the Debt By Unit of Account:
1860 - 1885
1860 1862 1865 1867 1870 1872 1875 1877 1880 1882 18850
10
20
30
40
50
60
perc
ent o
f GD
P
par valuemarket value (lawful money)market value (gold)market value (silver)
Par and Market Value of the Debt By Unit of Account:
1885 - 1900
1884 1886 1888 1890 1892 1894 1896 1898 1900 19020
2
4
6
8
10
12
14
16
18
20
perc
ent o
f GD
P
par valuemarket value (gold)market value (silver)
Have debt limits constrained subsequent authorities?
Classic example
J.P. Morgan and Grover Cleveland
We start with some background ...
An Act to Authorize the Purchase of Coin, and for other
Purposes
◮ March 17, 1862
the Secretary of the Treasury may purchase coin
with any of the bonds or notes of the United States,
authorized by law, at such rates and upon such
terms as he may deem most advantageous to the
public interest;
1870 Refinancing of the Civil War Debt
Two quotes from the legislation
The Secretary of the Treasury is hereby authorized to issue ... in the
aggregate two hundred million dollars, coupon or registered, in such
form as he may prescribe ...
◮ placed limits on each of three types of bonds
◮ In 1871, the limit on the 5% bond was increased
But nothing in this act, or in any law now in force, shall be
construed to authorize any increase whatever of the bonded debt of
the United States.
◮ Ultimately issued
◮ 5%: $518 million
◮ 4.5%: $250 million
◮ 4%: $740 million
◮ So about $500 million in unused authority
Resumption Act of 1875
Section 3: And to enable the Secretary of the Treasury to prepare and
provide for the redemption in this act authorized or required, he is
authorized to use any surplus revenues, from time to time, in the Treasury
not otherwise appropriated, and to issue, sell, and dispose of, at not less
than par, in coin, either of the descriptions of bonds of the United States
described in the [ Refunding Act of 1870 ].
J.P. Morgan and the Gold Standard
◮ In 1894-1895, there was a run on U.S. gold reserves
◮ U.S. gold reserves fell from $100 million to $60 million
◮ Treasury sought Congressional authority to borrow to buy gold
◮ Congress refused
◮ Battle between advocates and opponents of free coinage of silver
◮ J.P. Morgan proposed using the 1862 statue that gave the Treasury
authority to purchase gold with bonds.
◮ The Cleveland Administration carried out this recommendation
◮ sold 30 year, 4% bonds
◮ current interest rates were 3%
The Legality of the 1895 Bond Sales
◮ Did the Adminstration have the authority to sell bonds to buy
gold?
◮ 1862 Act – can sell bonds for gold
◮ 1870 Act – can not increase the bonded debt of the U.S.
◮ 1875 Act – can borrow to prepare and provide for the
redemption
◮ Cleveland Adminstration issued the debt
◮ argued that bond sales were only for buying gold
◮ not for ordinary expenditures
From Project to Aggregated Finance
With a tight connection between spending and borrowing
◮ Treasury constrained to issue debt sequentially
◮ Echo effects
◮ lumpy debt service events
◮ confront future Treasury Secretaries with liquidity and roll-over
risks
◮ Modest efforts to match security design with investor
preferences
Debt Service Profiles, 1866 and 1920
0 5 10 15 20 25 30 35 400
1
2
3
4
5
6
7
8
9
10
perc
ent o
f GD
P
maturity (years)
← 7−30s of 1864 and 1865
Loan of July−Aug 1861 →
← 5−20s of 1862 & Loan of 1863
← 5−20s of 1865 & Consols of 1865
10−40s of 1864 →←−−−− 5−20s of March & June 1864
1866
0 5 10 15 20 25 30 35 400
1
2
3
4
5
6
7
8
perc
ent o
f GD
Pmaturity (years)
← First Liberty Loan
← Second Liberty Loan
← Fourth Liberty Loan
← Third LibertyLoan
← Victory Liberty Loan
1920
Limits on Notes Outstanding: 1917 to 1939
1917 1920 1922 1925 1927 1930 1932 1935 1937 19400
2
4
6
8
10
12
14
16
18
20
billi
ons
of n
omin
al d
olla
rs
Limit on Notes Issued →
Limit on Notes Outstanding →
Certificates + T−Bills + Notes Outstanding →
Notes Outstanding →
Limit on Certificates + T−Bills + Notes →
← Notes Issued
Limits on Certificates of Indebtedness, Treasury Bills, and
Treasury Notes Outstanding: 1917 to 1939
1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 19400
2
4
6
8
10
12
14
16
18
20
billi
ons
of n
omin
al d
olla
rs
Limit on Certificates →
Limit on Certificates + T−Bills →
← Certificates Outstanding
Certificates + T−Bills →
Certificates + T−Bills + Notes Outstanding →
Limit on Certificates + T−Bills + Notes →
Limits on Bond Issuance and Outstanding: 1917 to 1939
1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 19400
5
10
15
20
25
30
billi
ons
of n
omin
al d
olla
rs
Limit on Issues →
Limit on Outstanding →
Bonds Outstanding →
← Bonds Issued
Post WW-I Evolution of the Debt Ceiling
◮ In 1929, Secretary Mellon wanted to issue $8 billion in new bonds
◮ to refinance existing debt
◮ but threatened to put the Treasury over the limit on issues
◮ He wrote to Congress
[I]t is obvious that the orderly and economical management of the
public debt requires that the Treasury Department have complete
freedom in determining the character of securities to be issued and
should not be confronted with any arbitrary limitation which was
not intended to apply to these circumstances.
◮ Congress raised the limit on bonds to $25 billion.
◮ By 1939, the Congress moves to an aggregate debt limit
Debt Service Profiles, 1946 and 1974
0 5 10 15 20 25 30 35 400
5
10
15
20
25
30
35
40
perc
ent o
f GD
P
maturity (years)
1946
0 5 10 15 20 25 30 35 400
2
4
6
8
10
12
14
16
18
perc
ent o
f GD
Pmaturity (years)
1974
Causes and Coincidents
◮ Keynesian economics?
◮ Reagonomics gone awry?
Total Debt and the Limit: Nominal, 1939-2014
1940 1950 1960 1970 1980 1990 2000 20100
2
4
6
8
10
12
14
16
18
20
trill
ions
of n
omin
al d
olla
rs
Statutory Debt Limit and Debt Subject to it Divided by
Price Level
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
real
deb
t and
lim
it (t
rillio
ns o
f 200
9 do
llars
)
Slides In Reserve
1. Inflation and GDP Growth Rates
2. Details on Computing the Pre-1939 Aggregate Debt Limit
3. Real Debt and Debt Limits
Annual Inflation
1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020−20
−15
−10
−5
0
5
10
15
20
25
annu
al in
flatio
n ra
te (
perc
ent)
← War of 1812
← Civil War ← World War I
← e
nd o
f WW
II p
rice
cont
rols
← 1
970s
infla
tion
← Great Depression
← m
ean:
1.4
4%
Growth Rate of Real GDP
1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020−15
−10
−5
0
5
10
15
20
annu
al g
row
th r
ate
(per
cent
)
Constructing the Pre-1939 Aggregate Limit
◮ b(ℓ)t denotes the par value of security ℓ outstanding at t.
◮ The law of motion
b(ℓ)t = b(ℓ)t−1 + i(ℓ)t − r(ℓ)t
where
◮ i(ℓ)t new issues
◮ r(ℓ)t redemptions
◮ Often Congress placed constraints on total issues
∑
t
i(ℓ)t ≤ i(ℓ)∗.
Constructing the Pre-1939 Aggregate Limit (con’t)
◮ i t denote the statutory balance that could be issued.
i t = i(ℓ)∗ −
n∑
j=1
i(ℓ)t−j ,
◮ Implied limit on the quantity outstanding:
b(ℓ)t = b(ℓ)t−1 + i(ℓ)t − r(ℓ)t .
◮ The aggregate debt limit Bt :
Bt =
Nt∑
ℓ=1
b(ℓ)t .