presentation: a history of u.s. debt limits · certificates of indebtedness loan from spain in 1781...

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 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



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


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


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


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 →


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


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)


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?


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)


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?


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 .

presentation: a history of u.s. debt limits · certificates of indebtedness loan from spain in 1781...

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