Yves here. Many economists and investors contend that the 14th Amendment prohibits the Federal Government from defaulting involuntarily. Below are some recent articles that take that view:
The Constitutional Case for Disarming the Debt Ceiling New Republic
Unconstitutional Debt Ceilings Georgetown Law Journal
The Debt Limit and the Constitution: How the Fourteenth Amendment Forbids Fiscal Obstructionism Duke Law Journal
MMT advocates use the 14th Amendment to argue that the Treasury must issue its $1 trillion platinum coin if the crunch comes to circumvent the restriction. And there’s a lot to be said for a fait accompli. However, Treasury Secretary Yellen does not support the idea.
Another idea is to challenge the debt ceiling in court. The problem is investors would not have standing until they were harmed, as in a default had actually occurred. But the Administration could, presumably before a default occurred.
But the feckless Biden Administration has been unwilling to consider this idea. A January Washington Post story said that all they were planning to do was stare Republicans down. The New York Times, two days ago, depicts the Administration as considering relying on the 14th Amendment. It does not appear that they would go to court to prefect their rights first, but would simply breach the debt ceiling and let Republicans try to stop them. From the New York Times:
Under the theory, the government would be required by the 14th Amendment to continue issuing new debt to pay bondholders, Social Security recipients, government employees and others, even if Congress fails to lift the limit before the so-called X-date….
Some legal scholars contend that language overrides the statutory borrowing limit, which currently caps federal debt at $31.4 trillion and requires congressional approval to raise or lift….
It is unclear whether President Biden would support such a move, which would have serious ramifications for the economy and almost undoubtedly elicit legal challenges from Republicans. Continuing to issue debt in that situation would avoid an immediate disruption in consumer demand by maintaining government payments, but borrowing costs are likely to soar, at least temporarily.
I’m not sure why interest rates would necessarily rise. Recall the near-universal predictions that the world would come to an end when S&P threatened to, and finally did, downgrade the US rating. Your humble blogger was virtually alone in saying it would prove to be a nothingburger, market-wise, which proved to be correct.
The post below provides historical background.
By run75441. Originally published at Angry Bear
14th Amendment to the U.S. Constitution: Civil Rights (1868) | National Archives, Section 4.
“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.“
There is history to this amendment written after the Civil War in 1866. New York Times has an article on the whys of Section 4 of the 14th Amendment. Then I will phase into the latest coming from Letters from an American for a history lesson.
Citizens preferred to be paid back in gold rather than in paper currency (which were used to buy the bonds) for the five-twenties bonds used to fund the Civil War. The reasoning for preferring gold was the Green-Back paper currency had deteriorated considerably in value. However, there was no rule stating the bonds would be paid back in gold. If such had occurred, it would result in an enormous and unearned windfall for banks and large investors who had purchased bonds with greenbacks to receive gold back from the government.
A Guest Essay on the Opinion page of the NYT. January 2023 explains the issues involved about the national debt when the 14th Amendment. “The Constitution Has a 155-Year-Old Answer to the Debt Ceiling,” author Lenny Holston explain the sections of the 14th Amendment and Section 5.
“The nation needed to be made “safe from the domination of traitors,” declared Representative James Ashley, Republican of Ohio, “safe from repudiation.” The 14th Amendment would help accomplish these goals. Whatever one thinks of Civil War-era fiscal policy, the amendment’s language is mandatory, not permissive — the validity of the public debt “shall not be questioned.” Today, over a century and a half after the amendment’s ratification, this promise is no longer considered an “extraordinary guarantee”; it is an essential attribute of a modern economy.
Our Constitution is not self-enforcing. The 14th Amendment concludes by empowering Congress to carry out its provisions. But if the current House of Representatives abdicates this responsibility, throwing the nation into default by refusing to raise the debt limit, President Biden should act on his own, taking steps to ensure that the federal government meets its financial obligations, as the Constitution requires.“
May 2, 2023, Letters from an American, Prof. Heather Cox-Richardson.
Prof. Heather explains the events leading up to the inclusion of Section 4 of the 14th Amendment
The debt ceiling crisis continues to dominate the news, with some speculation now that White House officials are wondering whether the Fourteenth Amendment to the Constitution might require the government to continue to pay its bills whether Congress actually raises the debt ceiling or not.
The fourth section of the Fourteenth Amendment reads: “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.”
This statement was a response to a very specific threat.
During the Civil War, the U.S. Treasury issued more than $2.5 billion in bonds to pay for the war effort. To make those bonds attractive to investors, Congress had made most of them payable in gold, along with their interest. That gold backing made them highly valuable in an economy plagued by inflation.
In contrast, most working Americans used the nation’s first national currency, the greenbacks, introduced by Congress in 1862 and so called because they were printed with green ink on the back and black ink on the front—as our money still is; check out a dollar bill. Because greenbacks were backed only by the government’s ability to pay, their value tended to fluctuate. As Congress pumped more and more of them into the economy to pay expenses, inflation made their value decrease.
National taxes funded the bonds, which meant that workers whose salary was paid in the depreciating greenbacks paid taxes to the government, which in turn paid interest to bondholders in rock-solid gold. After the war, workers noted that inflation meant their real wages had fallen during the war, while war contracts had poured money into the pockets of industrialists.
Workers couldn’t do much about the war years and still faced years of paying off the wartime bonds. They began to call for repaying war bonds not in gold but in depreciated currency, insisting that taxpayers should not be bled dry for rich bondholders. Democrats, furious at wartime policies that had enriched industrialists and favored bankers, promised voters that if voters put them in control of Congress, they would put this policy into law.
Republican legislators who had created the bonds in the first place were horrified at the idea that Democrats were claiming the right to change the terms under which the debt had been sold. This, they said, was “repudiation” and would turn those who had invested in the United States against it.
Bonds were about far more than just money. When the war broke out, the Treasury had turned to bankers to underwrite the war. But the bankers were notably reluctant to bet against the cotton-rich South and refused to provide the amount of help necessary. To keep the government afloat, Treasury officers had been forced to turn to ordinary Americans, who for four years had shouldered the financial burden of supporting their government. Treasury Secretary William Pitt Fessenden wrote to the public in 1864 . . .
“It is your war. Much effort has been made to shake public faith in our national credit, both at home and abroad…yet we have asked no foreign aid. Calm and self-reliant, our own means thus far have proved adequate to our wants. They are yet ample to meet those of the present and the future.”
On April 3, 1865, the day the Confederate capital of Richmond, Virginia, fell, bond salesman Jay Cooke hung from his office window a sign that featured the nicknames of the two most popular bond issues, along with an even larger banner that read:
“The Bravery of our Army
The Valor of our Navy
Sustained by our Treasury
Upon the Faith and
A Patriotic People.”
The debt was a symbol of a newly powerful national government that represented ordinary Americans rather than the elite enslavers who had controlled it before the war.
“There has never been a national debt so generously distributed among and held by the masses of the people as all the obligations of the United States,” wrote an Indianapolis newspaper in 1865. “This shows at once the strength of popular institutions, and the confidence the people have in their perpetuity.”
Undermining the value of U.S. bonds was an attack not just on the value of investments, but on the nation itself. When Republican lawmakers wrote the Fourteenth Amendment in 1866, they recognized that a refusal to meet the nation’s financial obligations would dismantle the government, and they defended the sanctity of the commitments the government had made. When voters ratified that amendment in 1868, they added to the Constitution, our fundamental law, the principle that the obligations of the country “shall not be questioned.”
The problem with this argument is that it does no good in this situation unless you admit that a new debt was issued illegally, which is going to cause more problems. Here’s what I mean. Section 4 could be taken as a protection for debt issued, validly or not; a sort of procedural bar to challenging the validity of the debt in court. Bond issued? Lawsuit filed? So the government files a motion to dismiss on grounds of Section 4, case gone, bond validly issued or not. The problem is, if the bonds were legally issued anyway, then Section 4 doesn’t really add any value. If the bonds were not legally issued (say, in violation of the debt ceiling), then Section 4 might prevent a lawsuit in some way. But that assumes everybody in the government participated with issuing bonds illegally. People in the government generally don’t want to be the ones responsible for breaking the law and running to a shield; and we really shouldn’t be in favor of these kinds of tactics. Seeing that, courts are going to be mighty skeptical of the whole theory. They would see a problem with a limiting principle; maybe most of us would like to see the debt ceiling go away, but doesn’t this mean the Treasury could ignore basically any requirement of debt issuance? Or, if the debt has to be eligible in some way to qualify for Section 4, does that get us back to where the debt ceiling applies? It’s a can of worms, just like when Phillip II had me out collecting taxes from recalcitrant Andalusian towns.
In the case of Federal gov’t default, my understanding is that bonds issued prior to default will still be paid as the bonds mature. Is this correct? The question is whether or not new debt (bonds) can be issued after default.
While gaming out scenarios is fun and educational, is there any indication that the Biden government would want to get rid of being forced to deal with the republicans? Maybe they can make bi-partisan cuts (Biden whisper: to Social security and Medicare) and blame each other?
As a bonus they could also blame Russia for forcing the US to spend so much in Ukraine.
There’s a geopolitical background to this, isn’t there?
1) The ‘Debt Ceiling’ is purely a political ploy used by the GOP to stymie Democratic expenditure and cripple Democrat governance; it has no real-world validity.
2) The writers of the 14th Amendment looked at federal indebtedness purely from a national point of view; it may have been impossible for them to imagine the current global dominance of the $ and the importance of the US economy on a global basis. Otherwise this would have been written differently.
3) The $ is the global reserve currency and the US cannot, repeat cannot, go bankrupt – trying to treat the $ as an ordinary currency subject to the idiotic nostrums of neoliberal let’s-make-it-all-up theory makes no sense at all, except to go back to 1), it’s just being used as a political ploy.
4) Shall not be questioned is definitive, not open to discussion by daytime TV idiots on MSNBC
5) There, fixed it! Gissajob, CNN?
Somewhere in the Jefferson papers…in a few separate letters … Jefferson was against holding one generation debts for the next to pay in that the first generation had used the money for their own and that the next generation did not have a say about that debt acquisition and should not be held, therefore, to account for it. I think it is logical and avoided the problems that the idiots of Europe had with these debts.
Now if we could hold our pre-chosen ‘elected officers’ to account instead of them, having to sell themselves to moneyed interests to get into office because of the hugely distorting campaign financing set up … one that in my view is a huge bribery scheme. If it be viewed as a huge bribery scheme to put the banks and financiers in usurping the Constitution and Democracy – then maybe indeed those debts should end as they threaten a rebellion or domination by Traitors
Beyond whether or not one defaults, I have a question about what is default in this case? Nixon going off the gold standard could be and often is argued to be a default? Is printing / creating currency without compensation to the former holders/or flowing the new currency through them a form of default?
The only banknotes redeemable for gold coins from the 1860’s to 1933 were Gold Certificate banknotes, kind of similar to the restricted gold standard of Nixon’s era where the only way to redeem $’s for gold was by a foreign national bank, not individuals.
The biggest role played by money during the ‘gold standard’ is what were called National Banknotes, of which some nearly 14,000 banks across the land had Federal banknotes printed for each bank from 1863 to 1933, none of which had any Au backing.
Do you have an answer for definition of default? Also, is Nixon going off the gold standard a default (to other countries) or not?
I’d mentioned in the past, one of the oddities to emanate out of the ex-USSR was many hundreds of 1882 and 1922 series $100 Gold Certificate large sized banknotes, and the backing of gold went away in 1933, but not the monetary value, you could still use them for money.
The same sort of applies to Nixon closing the gold window, you can still use $’s for money, and shockingly 60 odd years later the almighty buck is worth about 1/60th of it’s pre 1971 value when measured against gold, and countries are as beholden to it, if not more.
you can still use $’s for $?
IIRC in order to circulate National Banknotes banks had to buy and keep on deposit with the Comptroller of the Currency certain Treasury bonds, which they found inconvenient so the Banknotes were never particularly popular. I suppose they also competed with US Notes/”legal tenders” until the Specie Resumption Act and the Treasury began withdrawing them.
The post makes note of Jay Cooke as a “bond salesman”. I think he was a bit more than that; in some ways maybe Chase’s right-hand-man.
Defaulting on government debt is a drastic way to devalue the dollar, leaving no control of the consequences. It’s pretty ironic that the arch conservatives (who are currently hysterically demanding we fund the war in Ukraine) threaten to destroy the currency to prevent government from spending us into low level inflation paying entitlements, etc. Because long term inflation is the only civil way to pay debt down. But debt payment can’t exceed revenue. But for the looney right wing to say “If it can’t be paid it won’t be paid” is the opposite of debt forgiveness – it’s austerity and it cripples the economy. It’s beyond stupid. If the long term value of the currency goes down it’s because the money was misspent. Money well spent makes civilization richer and (drumroll) it also makes money more valuable. This nonsense about the value of the currency is also what is screwing up the Fed and the banks because the bank must balance and the Fed must maintain the exchange value of the dollar and that can’t happen without spending it. and etc. We need a better way to maintain and balance the value of the dollar.
This staring game is repeated in every budget cycle with mixed government (Congress, White House), while clearly, one way or another, Congress and White House have to agree on a budget or “continuing resolution”. Division of powers is a design that Americans are not ready to change.
I am not sure that this concept is wrong. OTOH, when I read that new members of Congress have workshops how to apply biblical principles to the budget, or are fascinated by Ayn Rand, or follow budget-wrecking advise from lobbyists (say, preservation of tax heavens)… surely there are real problems out there…
“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.”
This seems like pretty plain English. Debt, once issued, can’t be questioned. It doesn’t mean debt has to be issued.
The Congress has already passed the budget with the anticipation of more debt being needed to pay for much of has already been promised such as the gasoline in the military’s engines and the bills sent to Medicare. The United States already has bills that it will not be able to pay for if the debt ceiling is not raise. It could be thought of as the rent or the mortgage, the utilities, or credit.
Further, ever since the Secretary of the Treasury, Alexander Hamilton, the United States of America has always paid its bills, if for no other reason then to avoid the saying “not worth a Continental” being used again, although much of the problems with that currency was overprinting.
The country has maintained such a record for over two centuries, and to risk destroying it because of not liking what is being paid for after the budget has been voted on and approved is foolish.
More important is the avoidance of responsibility for anything and the distortion of all the laws. That such an extremely clear dictate of section 4 is open to deliberate misinterpretation or of just being ignored is not so surprising when compared to how the entire Bill of Rights has been distorted and reinterpreted to strip the weak and the vulnerable of their rights and protections from the powerful and the government. One can argue with the details of all this, but the process of stripping protections, rights, wealth, and power from a growing number of Americans and giving exclusive access to it to an increasingly small number of people in the elites aided by the deliberate erosion of governmental competency is very clear.
“In contrast, most working Americans used the nation’s first national currency, the greenbacks, introduced by Congress in 1862 and so called because they were printed with green ink on the back and black ink on the front—as our money still is; check out a dollar bill.”
I just pulled out a twenty from my wallet to check this. It is embarrassing to know that even after decades as a cashier I did not noticed something so obvious.
To paraphrase the Bill Clinton bimbo quote, if you drag a $1,000 bill through a trailer park called Washington, you can always find a lawyer willing to write a brief justifying anything.
Correct me if I’m wrong, but it is my understanding that under the present “continuing resolution” system, without a new budget authorization, the old budget plus a bit of extra money continues to be spent. That’s not a crisis. But that budget doesn’t include any new programs or have a full inflation adjustment. So that either things like routine bills can’t be paid for now and Social Security and Medicare increases can’t be fully funded or the national debt coming due can’t be paid. The President is threatening to fully fund SS and Medicare and not pay the national debt. QED = Crisis.
Article I, Section 9, Clause 7 of the Constitution says “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law…” and Article I, Section 7, Clause 2 says “All Bills for raising Revenue shall originate in the House of Representatives…”
Under the Constitution, the Treasury pays the bills. The Federal Reserve can probably print an unlimited supply of bills and maybe even hand them to the Treasury but it can’t pay the Government’s bills. The Treasury’s job is limited by the need for a Congressional appropriation.
If there is one thing the House will definitely fight for it is to keep its Constitutionally-mandated control of the purse strings. So if the administration claims the right to spend the Federal Reserve money given to the Treasury, the House can simply revoke the continuing resolution, pass the existing appropriations in a new 60 day continuing resolution and say “Take it or leave it.”
And the unrestrained growth of the national debt is a true crisis that will be addressed either by budget limits or inflation, there are no other choices I can see.
A debt default may be bad, but the proposal to use the Federal Reserve to get around the Constitution is infinitely worse.
It’s my understanding that the Printing Office actually prints the notes which at the moment consist of 1s 2s(?), 5s, 10s, 20s 50s and 100s. The Federal Reserve buys these notes from the Printing Office and pays for them from its Reserves. How much is paid over the monetary value of the notes is nown as Seigniorage, though there is a more accurate definition.
The Federal Reserve thus holds the notes and distributes them in various ways among its member banks and authorizes the Treasury to pay some expenses. No actual transfer occurs, only numbers are entered into computer accounts, except to replace old notes turned in by member banks for destruction.
Now, once again, who owes whom how much and how does it get paid and from what pot?
Given that the House approves expenditures, if it can’t increase the taxes necessary to pay for expenses, (and it is my understanding that taxes are the only way to pay for these expenses) then the House members should be held accountable, right? Make the bums pay.
The thing about the debt ceiling is that the national security state has a magic credit card. The Justice Dept. gets to write the memos about which functions are untouchable. The debt ceiling standoffs have been used over the years as an excuse to defund/hallow out whatever govt. functions the White House does not like.
It is possible, for example, for Justice to write memos saying “everyone is magic except judges”, then use this as an excuse to starve a lot of Federal judges back into private practice. Then, appoint whoever you want.
Just an idea.
There is no chance the government will default on its debts. Both parties are performing political theater and before the deadline there will be an agreement.
Many programs come up for renewal and if the republicans are serious about cutting spending they can do at that time.
The Dems get to stand up in support for Social Security and Medicare so that they won’t to be challenged about expanding them.
Economist Mark Blyth has often said that the US does not have a spending problem, it has a revenue problem. Unfortunately, raising taxes or merely reversing the Trump tax cuts is not possible.
There will be plenty of huffing and puffing in the next weeks driving home the message that programs for the general population are spending while programs for the wealthy are subsidies to create jobs and promote innovation.