Download Presentation: A History of U.S. Debt Limits

A History of U.S. Debt Limits
George J. Hall
Thomas J. Sargent
Brandeis 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
4000
200
180
3500
160
millions of dollars
old
millions of nominal dollars
← Civil War
1500
→
1000
nic
Pa
M
← Accumulating Unpaid Interest
→
57
18
of
500
an
← Consolidation of Revolutionary Debt
→
ar
W
20
ic
ex
40
0
1775
1785
1795
1805
1815
1825
0
1840
1835
1850
1860
1776-1835
20
50
18
45
trillions of nominal dollars
billions of nominal dollars
← Fourth Liberty Loan Act
20
10
1890
1900
1910
14
← Victory Loan Act
25
15
1880
16
40
30
1870
1840-1917
55
35
l→
na
Ca
a
m
na
Pa
→
ar
W
an
→
60
fG
so
se
ha
se
ha
rc
← War of 1812
← Assumption of
State Debts
2000
rc
Pu
Pu
80
ic
er
a
an
si
ui
100
2500
m
Lo
120
−A
i sh
an
Sp
g→
ci n
an
fin
Re
3000
140
← Third Liberty Loan Act
12
10
8
6
4
← Second Liberty Loan Act
2
5
← First Liberty Loan Act
0
1920
1925
1930
0
1935
1917-1939
1940
1950
1960
1970
1980
1990
2000
2010
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 constructed
by 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
250
specie value (in millions of dollars)
200
← Continental Dollars
150
100
←
ns
oa
rL
he
Ot
3 per cent
State Debts →
deferred 6 per cent
50
Domestic Principal
6 per cent
s
p Loan
← Tem
Domestic Interest
Foreign Loans + Interest
0
1775
1777
1780
1782
1785
1787
1790
1792
1795
1797
1800
1802
1805
Federal Debt by Type Loan
250
specie value (in millions of dollars)
200
150
← Continental Dollars
100
←
ns
oa
rL
he
Ot
3 per cent
State Debts →
deferred 6 per cent
50
Domestic Principal
6 per cent
s
p Loan
← Tem
Domestic Interest
Foreign Loans + Interest
0
1775
1777
1780
1782
1785
1787
1790
1792
1795
1797
1800
1802
1805
Federal Debt by Type of Loan from 1791 to 1830
200
180
← Aggregate Debt Limit
par value in millions of nominal dollars
160
140
120
100
Other Long−term Loans
80
ry →
pora
Tem
60
← Unfunded Debt
40
Louisiana Purchase →
← Treasury Notes
Act of August 4, 1790
20
Foreign Loans
0
1795
1800
1805
1810
1815
1820
1825
1830
Loan Office Certificates
Loan From Farmers−General of France
French Loan of Eighteen Million Livres
Loan from Spain in 1781
Certificates of Indebtedness
Domestic Interest in Arrears
French Loan of Ten Million Livres
Temporary Loans From Banks
Holland Loan of 1782
French Loan of Six Million Livres
Holland Loan of 1784
Debt Due Foreign Officers
Holland Loan of 1787
Holland Loan of 1788
Temporary Loan of 1789
Holland Loan of 1790
Temporary Loan of 1790
C <= 2
2 < C <= 4
4 < C <= 5
5 < C <= 6
C>6
1780
1790
Six Per Cent Stock of 1790
Defer Six Per Cent Stock of 1790
Three Per Cent Stock of 1790
Holland Loan of March, 1791
Holland Loan of September, 1791
Antwerp Loan of 1791
Holland Loan of December, 1791
Holland Loan of 1792
Subscription Loan of 1791
Temporary Loan of 1792
Temporary Loan From Bank of North America
Holland Loan of 1793
Temporary Loan of 1793
Temporary Loan of March, 1794
Holland Loan of 1794
Temporary Loan of June, 1794
Temporary Loan from Bank of New York
Temporary Loan of December, 1794
Temporary Loan of February, 1795
Temporary Loan of March, 1795, B.
Five and One−Half Per Cent. Stock of 1795
Four and One−Half Per Cent. Stock of 1795
Temporary Loan of March, 1795, C.
Temporary Loan of March, 1795, A.
Temporary Loan from Bank of New York
Six Per Cent. Stock of 1796
Navy Six Per Cent. Stock
Temporary Loan of 1798
Eight Per Cent. Loan of 1798
Eight Per Cent. Loan of 1800
Louisiana Six Per Cent. Stock
Exchanged Six Per Cent. Stock of 1807
Converted Six Per Cent. Stock of 1807
Six Per Cent. Loan of 1810
Six Per Cent. Loan of 1812
Temporary Loan of 1812
Treasury Notes of 1812
Exchanged Six Per Cent. Stock of 1812
Sixteen Million Loan of 1813
Treasury Notes of 1813
Seven and One−Half Million Loan of 1813
Treasury Notes of March, 1814
Ten Million Loan of 1814
Six Million Loan of 1814
Undesignated Loan of 1814
Temporary Loan of 1814
Treasury Notes of December, 1814
Small Treasury Notes of 1815
Temporary Loan of February 1815
Seven Per Cent. Stock of 1815
Temporary Loan of March, 1815
Six Per Cent. Loan of 1815
Mississippi Stock
Treasury Notes of 1815
Treasury Note Stock of 1815
Five Per Cent. Loan of 1816
Five Per Cent. Loan of 1820
Six Per Cent. Loan of 1820
Five Per Cent. Loan of 1821
Exchanged 5 % Stock of 1822
4.5 % Loan of 1824
Exchanged 4.5 % Stock of 1824
4.5 % Loan of 1824
Exchanged 4.5 % Stock of 1825
Treasury Notes Prior to 1846
1800
1810
1820
1830
1840
Figure 24: Debt Issues Outstanding: 1775 to 1840
40
Treasury Notes Prior to 1846
Loan of 1841
Loan of 1842
Loan of 1843
Treasury Notes of 1846
Mexican Indemnity Stock
Loan of 1846
Treasury Notes of 1847
Loan of 1847
Bounty Land Script
Loan of 1848
Texas Indemnity Stock
Texas Debt
Treasury Notes of 1857
Loan of 1858
Loan of 1860
Treasury Notes of 1860
Loan of February 1861
Treasury Notes of 1861
Oregon War Debt
Seven−Thirties of 1861
Old Demand Notes
Loan of July and August 1861
Temporary Loan
Certificates of Indebtedness
Five−Twenties of 1862
Legal Tender Notes
Fractional Currency
Two Year Notes of 1863
One Year Notes of 1863
Loan of 1863
Compound Interest Notes
Ten−Forties of 1864
Seven−Thirties of 1864 and 1865
Five−Twenties of June 1864
Navy Pension Fund
Five−Twenties of 1865
Coin Certificates
Five−Twenties of March 1864
Consols of 1865
Consols of 1867
Three Percent Certificates
Consols of 1868
Certificates of Indebtedness of 1870
Five Percent Loan of 1881
Certificates of Deposit
Four and One−Half Percent Loan of 1891
Four Percent Loan of 1907
Silver Certificates
Refunding Certificates
Funded Loan of 1881 con’t 3.5% (Loan of July and August 1861)
Funded Loan of 1881 con’t 3.5% (Loan of 1863)
Funded Loan of 1881 con’t 3.5% (Five Percent Loan of 1881)
Loan of July 12, 1882
Bonds issued to Pacific Railroad
National Bank Notes
Treasury Notes of 1890
Funded Loan of 1891, con’t at 2%
Loan of 1904
Loan of 1925
Ten−Twenty Loan of 1898
Gold Reserve Fund
Consols of 1930
Panama Canal Loan (Series 1906)
Certificates of Indebtedness (6/13/1898)
Panama Canal Loan (Series 1908)
Panama Canal Loan (Series 1911)
Postal Savings Bonds (1−15th Series)
Conversion Bonds
One Year Treasury Notes
Certificates of Indebtedness (3/3/1917)
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 (9/24/1917)
2nd Liberty Loan of 1917 (4%)
War Savings and Thrift Stamps
Certificates of Indebtedness (9/24/1917)
3rd Liberty Loan
Certificates of Indebtedness (9/24/1917)
4th Liberty Loan
1st Liberty Loan Converted to 4%
1st Liberty Loan Converted to 4.25%
2nd Liberty Loan Converted to 4.25%
C <= 2
2 < C <= 4
4 < C <= 5
5 < C <= 6
C>6
1840
1850
1860
1870
1880
1890
1900
1910
1920
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
0.9
0.9
0.8
ed
a
es
u
s
l is
statutory
balance
tota
millions of dollars
0.6
← cumulative sum of issues
0.5
0.4
← quantity outstanding
0.3
0.5
0.3
0.2
0.1
0.1
1793:Q2
1793:Q3
1793:Q4
1794:Q1
1794:Q2
1794:Q3
← implied debt limit
statutory
balance
0.4
0.2
0
↑
0.7
↓
0.6
millions of dollars
0.8
↑
→
oriz
uth
0.7
1794:Q4
0
↓
quantity outstanding →
1793:Q2
1793:Q3
1793:Q4
1794:Q1
1794:Q2
1794:Q3
1794:Q4
Authorization, Issuance
Quantity Outstanding and
and Quantity Outstanding
Implied Limit
Treasury Notes of 1812 to 1815: Quantities Outstanding,
the Cumulative Sum of Issues, and Authorizations
60
←M
← Ac
ar. 1
t of F
eb. 2
4, 18
50
15 a
llowe
d for
817
all au
thori
zatio
ns re
peale
reiss
ues
d
millions of dollars
40
← cumulative sum of issues
30
sum of authorized issues→
← Act of February 24, 1815, small notes
20
← Act of February 24, 1815, large notes
Act of December 26, 1814
10
←
s
issue
15, re
4, 18
eb. 2
fF
Act o
Act of March 4, 1814
Act of June 30, 1812
0
1813
1814
Act of February 25, 1813
1815
1816
1817
1818
1819
Project Finance vs. General Finance
◮
Project finance: before WWI
◮
Undifferentiated finance: after 1917
Before WWI: Project Finance
140
3000
120
2500
80
millions of nominal dollars
millions of nominal dollars
100
Civil
60
Military
2000
Gold & Silver Certificates
1500
1000
Buy Gold/Silver
40
Military
500
Refinanced Debt
20
Refinance Debt
Civ
il →
0
1780
1790
1800
1810
1776-1840
1820
1830
0
1840
1850
Non−Interest Bearing Notes
1860
1870
1880
1890
1840 - 1915
Debt Decomposed by Statutory Purpose
1900
1910
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
◮
t
qt+j
=
1
(1+ρjt )j
◮
t
qt+j−1
t−1
qt+j−1
j
= (1 + rt−1,t
) is the one-period gross nominal return
on a j-period zero coupon bond
◮
j
rt−1,t
is the net nominal rate of return
Quantities
◮
t
Gt+j
∼ federal government expenditures
◮
t
Tt+j
∼ federal tax revenues
◮
t
σt+j
∼ federal surplus
Fiscal Policy
t
t
∞
{{Gt+j
, Tt+j
}∞
j=0 }t=0
Budget Constraints
P.V. of surplus = value of government debt
∞
X
j=0
t
t
qt+j
σt+j
=
∞
X
j=0
t
t
qt+j
st+j
Quantities
◮
t
ct+j
∼ coupon
◮
t
bt+j
∼ par or principal (occasionally a strike price)
◮
t
t
t
st+j
≡ ct+j
+ bt+j
Two measures of government debt
U.S. government accounts:
nt
X
t
bt+j
j=1
Macroeconomics:
nt
X
j=1
t
t
qt+j
st+j
=
nt
X
j=1
t
t
t
qt+j
(bt+j
+ ct+j
)
Two measures of “interest payments”
US government accounts:
before 1929:
ctt−1
after 1929:
1
t−1
ctt−1 + rt−1,t
b1,t
Macroeconomics:
nt−1
X
j=1
j
t−1
t−1
st+j−1
rt−1,t
qt+j−1
Promised Principal and Coupon Payments
150
promised principal payments
promised principal + coupon payments
125
percent of GDP
100
75
50
25
0
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
Conceptual Differences
Pnt
t
j=1 bt+j
◮
differs from
Pnt
t
t
j=1 qt+j (bt+j
t ) because
+ ct+j
It neglects the government’s outstanding promises to pay
coupons
nt
X
t
ct+j
;
j=1
and
◮
The book value doesn’t discount future payments of principal
t
t .
bt+j
by multiplying them by the market prices qt+j
Discrepancies have been positive and negative
Ratio of Market Value to Par Value of Debt
120
110
100
100 × market value/par value
90
80
70
60
50
40
30
20
1775
1800
1825
1850
1875
1900
1925
1950
1975
2000
2025
Debt to GDP Ratio, Market and Par Value, 1776-2014
140
market value
par value
120
World War II →
percent of GDP
100
G.W.Bush/Obama →
80
60
40
← Reagan
← 1790
Civil War →
20
World War I →
← War of 1812
← Revolutionary War
0
1775
1800
1825
1850
1875
1900
1925
1950
1975
2000
2025
Debt Limit is on Face Values
The debt ceiling is an upper bound on
Pnt t
t
t
j=1 qt+j (bt+j + ct+j )
◮
Pn
t
j=1 bt+j
not on
Promises labeled “principal” are recorded as debt and count
against the limit
◮
Promises labeled “coupons” or “interest” do not.
Government budget constraint
nt
X
j=1
nt−1
t
t
qt+j
st+j
=
X
t
t−1
− σtt
qt+j−1
st+j−1
j=1
σtt = Ttt − Gtt
Government budget constraint
nt
X
nt−1
t
t
qt+j
st+j
=
j=1
X
j=1
nt−1
=
X
j=1
t
qt+j−1
t−1
qt+j−1
!
t−1
t−1
− σtt
st+j−1
qt+j−1
nt−1
t−1
t−1
st+j−1
qt+j−1
+
X
j=1
j
t−1
t−1
− σtt
st+j−1
rt−1,t
qt+j−1
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
X
j=1
|{z}
sum over
maturities
j
rt−1,t
| {z }
net
returns
t−1
t−1
st+j−1
qt+j−1
{z
}
|
values
Interest reported by government
1. Before 1929:
ctt−1
2. After 1929:
t−1
1
ctt−1 + rt−1,t
b1,t
t−1
where b1,t
is the par value of pure discount one-period
treasury bills issued at t − 1.
Government Budget Constraint Again
nt
X
nt−1
t
t
st+j
qt+j
=
j=1

nt−1
X j

r
j=2
t−1
ct
|
X
1
t−1
t−1
t−1
− σtt + [ctt−1 + rt−1,t
b1,t
]+
st+j−1
qt+j−1
j=2

t−1 
t−1
t−1,t qt+j−1 st+j−1
1
t−1
+ rt−1,t b1,t
{z
}
official
interest
t−1
t−1
1
+ [(1 − rt−1,t
)b1,t
+ b−1,t
]
nt−1
+
X j
t−1
t−1
rt−1,t qt+j −1 st+j −1
j =2
|
{z
capital gains
}
+
1
t−1
t−1
(1 − rt−1,t )b1,t + b−1,t
|
{z
}
pay or
roll over
Two “interest payments” series
The nominal one-period holding period return paid by the
government debt (in black)
Pnt−1
j
t−1
t−1
j=1 rt−1,t qt+j−1 st+j−1
Pnt−1 t−1 t−1
j=1 qt+j−1 st+j−1
Official net interest payments as a percentage of the debt (in
blue): before 1929
and after 1929:
c t−1
Pnt−1t t−1
j=1 bt+j−1
t−1
1
ctt−1 + rt−1,t
b1,t
.
Pnt−1 t−1
j=1 bt+j−1
Nominal Holding Period Return and Official Net Interest
Payments as Percent of the Debt, Annual by Fiscal Year
40
35
30
25
percent
20
15
10
5
0
−5
−10
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
2020
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
5
ln of GDP price deflator (2009 = ln(100))
4.5
4
3.5
3
2.5
2
1.5
1
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
2020
Total Debt and the Limit: Nominal, 1776-1835
200
180
160
Lo
120
a
an
si
ui
Pu
100
se
ha
rc
→
millions of nominal dollars
140
80
← War of 1812
← Assumption of
State Debts
60
40
← Accumulating Unpaid Interest
← Consolidation of Revolutionary Debt
20
0
1775
1785
1795
1805
1815
1825
1835
Debt and Debt Limit Divided by the Price Level:
1790-1835
3000
millions of real (2009) dollars
2500
2000
1500
1000
500
0
1775
1785
1795
1805
1815
1825
1835
Total Debt and the Limit: Nominal, 1840-1916
4000
80
60
3500
40
20
0
1840
1845
1850
1855
1860
m
Ca
old
fG
l→
so
na
se
→
a
ar
W
ha
rc
← Civil War
1500
na
n
Pa
ica
er
2000
Pu
millions of dollars
→
2500
m
−A
ish
an
Sp
g
cin
an
fin
Re
3000
→
1000
Pa
of
ica
ex
nic
M
→
→
ar
57
W
18
n
500
0
1840
1850
1860
1870
1880
1890
1900
1910
Debt and Debt Limit Divided by the Price Level:
1840-1916
55
50
45
billions of real (2009) dollars
40
35
30
25
20
15
10
5
0
1840
1850
1860
1870
1880
1890
1900
1910
Total Debt and the Limit: Nominal, 1917-1939
55
May 26, 1938 →
50
45
February 4, 1935 →
billions of nominal dollars
40
← Victory Loan Act
35
← March 3, 1931
30
← Fourth Liberty Loan Act
25
20
← Third Liberty Loan Act
15
10
← Second Liberty Loan Act
5
← First Liberty Loan Act
0
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
Debt and Debt Limit Divided by the Price Level:
1917-1939
700
600
billions of real (2009) dollars
500
400
300
200
100
0
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
Total Debt and the Limit: Nominal, 1939-2014
20
18
16
trillions of nominal dollars
14
12
10
8
6
4
2
0
1940
1950
1960
1970
1980
1990
2000
2010
Statutory Debt Limit and Debt Subject to it Divided by
Price Level
1.6
real debt and limit (trillions of 2009 dollars)
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
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
40
par value
market value (lawful money)
market value (gold)
market value (silver)
35
30
percent of GDP
25
20
15
10
5
0
1860
1862
1865
1867
1870
1872
1875
1877
1880
1882
1885
Par and Market Value of the Debt By Unit of Account:
1885 - 1900
20
18
16
percent of GDP
14
12
10
8
6
4
2
0
1884
par value
market value (gold)
market value (silver)
1886
1888
1890
1892
1894
1896
1898
1900
1902
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
60
par value
market value (lawful money)
market value (gold)
market value (silver)
50
percent of GDP
40
30
20
10
0
1860
1862
1865
1867
1870
1872
1875
1877
1880
1882
1885
Par and Market Value of the Debt By Unit of Account:
1885 - 1900
20
par value
market value (gold)
market value (silver)
18
16
percent of GDP
14
12
10
8
6
4
2
0
1884
1886
1888
1890
1892
1894
1896
1898
1900
1902
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
8
10
9
7
← 7−30s of 1864 and 1865
8
← Victory Liberty Loan
6
← Fourth Liberty Loan
5
← 5−20s of 1862 & Loan of 1863
6
percent of GDP
percent of GDP
7
5
4
Loan of July−Aug 1861 →
← Third Liberty
Loan
4
← Second Liberty Loan
3
3
← 5−20s of 1865 & Consols of 1865
2
2
10−40s of 1864 →
←−−−− 5−20s of March & June 1864
← First Liberty Loan
1
1
0
0
5
10
15
20
maturity (years)
1866
25
30
35
40
0
0
5
10
15
20
maturity (years)
1920
25
30
35
40
Limits on Notes Outstanding: 1917 to 1939
20
on C
T
es +
es →
Not
icat
ertif
it
Lim
16
billions of nominal dollars
ls +
−Bil
18
14
Certificates + T−Bills + Notes Outstanding →
Lim
12
it o
nN
Lim
10
ote
sO
it o
nN
uts
ote
sI
8
tan
din
ssu
ed
g→
→
6
← Notes Issued
Notes Outstanding →
4
2
0
1917
1920
1922
1925
1927
1930
1932
1935
1937
1940
Limits on Certificates of Indebtedness, Treasury Bills, and
Treasury Notes Outstanding: 1917 to 1939
20
it on
16
billions of nominal dollars
ls +
−Bil
18
es →
Not
at
tific
Cer
T
es +
Lim
14
Certificates + T−Bills + Notes Outstanding →
Lim
it on
12
Cer
tific
ates
10
→
ates
8
it on
ls →
−Bil
+T
tific
Cer
Lim
6
Cer
tific
← Certificates Outstanding
4
ates
+T
−Bil
ls →
2
0
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
Limits on Bond Issuance and Outstanding: 1917 to 1939
30
Limit on Outstanding →
Limit on Issues →
billions of nominal dollars
25
20
←B
ond
15
s Is
sue
d
Bonds Outstanding →
10
5
0
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
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
40
18
35
16
14
30
12
percent of GDP
percent of GDP
25
20
10
8
15
6
10
4
5
0
2
0
5
10
15
20
maturity (years)
1946
25
30
35
40
0
0
5
10
15
20
maturity (years)
1974
25
30
35
40
Causes and Coincidents
◮
Keynesian economics?
◮
Reagonomics gone awry?
Total Debt and the Limit: Nominal, 1939-2014
20
18
16
trillions of nominal dollars
14
12
10
8
6
4
2
0
1940
1950
1960
1970
1980
1990
2000
2010
Statutory Debt Limit and Debt Subject to it Divided by
Price Level
1.6
real debt and limit (trillions of 2009 dollars)
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
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
co
nt
ro
l
s
25
tio
fla
s
in
of
70
n:
1.
44
%
←
10
19
←
en
d
← War of 1812
m
ea
5
←
annual inflation rate (percent)
n
← World War I
W
W
← Civil War
15
II
pr
ic
e
20
0
−5
← Great Depression
−10
−15
−20
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
2020
Growth Rate of Real GDP
20
15
annual growth rate (percent)
10
5
0
−5
−10
−15
1780
1800
1820
1840
1860
1880
1900
1920
1940
1960
1980
2000
2020
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
X
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
X
i (ℓ)t−j ,
j=1
◮
Implied limit on the quantity outstanding:
¯ t − r˜(ℓ)t .
b̄(ℓ)t = b(ℓ)t−1 + i(ℓ)
◮
The aggregate debt limit B̄t :
B̄t =
Nt
X
ℓ=1
b̄(ℓ)t .