Edward J. McCaffery
This nation, conceived in debt, could hardly exist without the government's ability to borrow. Wars, beginning with the American Revolution, have until recent years been the main culprit in our national addiction to credit. The Founders, cognizant of the war debt after the revolution, gave Congress the express power in Article I, Section 8 of the Constitution "to borrow Money on the credit of the United States." This power was confirmed after the Civil War, in Section 4 of the Fourteenth Amendment: "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." The constitutional power to issue debt requires specific congressional authorization to make it operative.
The First and Second Liberty Loan Acts were each enacted in 1917 during World War I. These acts established different public debt limits for bonds, bills, certificates, and notes, and provided for full federal tax exemption for the interest on U.S. government obligationsn issue made important by the recently enacted federal income tax. The Liberty Loan Acts remained the basic public debt provisions until well into the Great Depression, after the advent of Keynesian economics (John Maynard Keynes, a celebrated British economist, argued that it was good for the government to borrow and spend under certain circumstances, giving intellectual support to New Deal spending programs), and right on the cusp of World War II. The initial Public Debt Act was passed in 1939, but it was the Public Debt Act of 1941 that fully set the modern stage for government debt finance. This 1941 Act not only raised the debt limit, it also eliminated the federal income tax exemption for future issues of U.S. debt, and consolidated virtually all federal borrowing into a unitary system run through the Department of the Treasury. The 1941 Act established the formree of technical restrictions on the type of borrowing that might tie the Treasury's handsor all subsequent public debt acts.
The Public Debt Act of 1941 raised the aggregate limit on all obligations to $65 billion. Subsequent Public Debt Acts continued to amend the aggregate limit. The 1942, 1943, 1944, and 1945 acts raised the limit to $125 billion, $210 billion, $260 billion, and $300 billion respectively. In 1946, the Public Debt Act was amended, mirabile dictu, to reduce the debt limit to $275 billion.
Until the Public Debt Act of 1941 the federal government treated all interest and gain on its own obligations as taxexempt. The 1941 act changed this by making the difference between the purchase and redemption price for savings bonds taxable income. Section 4 of the act further provided: "Interest upon, and gain from the sale or other disposition of, obligations issued on or after the effective date of this Act by the United Sates or any agency or instrumentality thereof shall not have any exemption, as such, and loss from the sale or other disposition of such obligations shall not have any special treatment, as such, under Federal Tax Acts now or hereafter enacted."
The Treasury Department lobbied hard for this stephe only mildly controversial aspect of the bill at the timen the interest of tax equity and possibly (and futilely) to effect the end of tax-exemption for state and local obligations. This change was not made retroactive. In addition, the Public Debt Act of 1941 consolidated virtually all federal borrowing under the Treasury's aegis. Any combination of notes, bills, and bonds up to the ceiling could be issued.
Neither the Public Debt Act in particular nor the more general congressional authority to borrow money has ever been seriously challenged in court. After some modest reductions in the debt limit following World War II, the federal debt stayed relatively constant, in real dollar terms, until the mid-1970s. Since then it has exploded. In the spring of 2003 Congress authorized an increase in the debt ceiling to $7.4 trillion, making a vote later in the same year on a further increase inevitable. The Public Debt Act of 1941 remains the essential venue for authorizing government debt and structuring debt ceiling increases.
See also: BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL ACT; CONGRESSIONAL BUDGET AND IMPOUNDMENT CONTROL ACT.
Cooke, H.J., and M. Katzen. "The Public Debt Limit," In Journal of Finance vol. 9, no. 3 (September 1954): 29803.
Lent, George E. "Major Trends in the Market for Tax-Exempt Securities," In Journal of Finance vol. 9, no. 2 (May 1954): 17887.
Department of Treasury. Public Debt. <www.publicdebt.treas.gov>.
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