Legislative Politics

Why do we have a debt ceiling?

Sarah Binder Jul 13 '11

I wanted to follow up on Scott Adler and John Wilkerson’s interesting post that asks “Why would Congress want a debt limit?” Scott and John largely discuss why Congress should want a debt limit.  I think the more narrow empirical question– why do we have a debt limit?– is also interesting.

The most commonly cited treatment of why we have a debt limit is a Congressional Research Service report that identifies 1917 and 1939 as critical turning points in how Congress authorized debt management by the Treasury Department. Before 1917, Congress authorized loans for specific purposes; with enactment of the Second Liberty Bond Act* in 1917, Congress moved to authorize separate limits for different types of securities (as explored in this 1950s treatment of the transition).  In 1939, Congress again altered how it delegated authority to Treasury, creating the first ceiling on most types of borrowing instruments.

Judging from the NY Times coverage of the 1917 episode, legislators paid little attention to the implications of mandating a ceiling.  They focused instead on Treasury Secretary McAdoo’s request for a higher borrowing limit so as to fund an expensive war effort.  The ceiling was created to empower, not rein in, Treasury (prompting a failed effort to create a congressional  committee to oversee Treasury’s actions).  Similarly, the creation of the aggregate ceiling in 1939 reflected congressional deference to Treasury, granting the department flexibility in refinancing short term notes with longer term bonds.  As the Senate floor debate makes clear, senators viewed the move as removing a partition in the law that hampered Treasury’s ability to manage the debt.

As Scott and John aptly note (and as argued by Kowalcky andLeLoup here), the debt ceiling today provides a valuable political opportunity– and potentially a potent procedural tool– for forcing Congress and the president to confront and address the future of federal fiscal policy.   The statutory debt limit clearly has such an effect.  But it is striking that its origins lie elsewhere.  This seems to be a case of the often unintended consequences of institutional design.   That is, we can’t always understand why we have a particular institution or practice by looking only at its contemporary usage.  Moreover, institutions crafted in a specific context to solve a particular problem often prove sticky, taking on new significance once politicians discover new ways to exploit them.  The often unintended consequences of institutional design will likely be central to any broader explanation of the evolving politics of the debt limit.

*Of course, Treasury also had to convince citizens to buy the bonds.  Mrs. Eleanor McAdoo did her part (lighting the Liberty Bond bonfire).  Charlie Chaplin played his part too.