Tuesday, July 5, 2011

The Debt Ceiling: Is Refusing to Raise it Unconstitutional?

In an earlier post about the Debt Ceiling, we examined what the Debt Ceiling is and why it has become a big deal all of a sudden.  The import of our earlier discussion is that if Congress refuses to raise the bar on the Debt Ceiling by a certain date, the United States will be forced to default on its obligations to repay money that it borrowed on the "Full Faith and Credit" of the United States.  Once that happens, the credit rating of the United States will be on par with Bernie Madoff, world markets would lose confidence in U.S. treasuries thereby negatively impacting America's ability to raise money around the globe, interest rates will rise, the stock market will fall, and the U.S. economy would likely find itself in an economic depression that makes this latest recession seem like a nice walk in the park.  With the August 2 deadline for the debt ceiling quickly approaching and with apparently no end to the political brinkmanship in sight, some members of Congress, Constitutional scholars, and others have begun to ask a new question that would supersede the current political games:  all this talk about raising or not raising the debt ceiling might make for great political theater, but Constitutionally speaking, do we even have a choice here?

Section 4 of the 14th Amendment states:

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.

If, after reading this text, you're scratching your head about the all the "insurrection" and "rebellion" language, then perhaps some brief historical context is in order.  This Amendment (along with the 13th and 15th Amendments) was proposed by the Republican-controlled Congress after the United States defeated the South in the Civil War.  The new Congress wanted to make it clear that any public debt of the United States incurred either before or after the Civil War was and continued to remain valid, but that any public debt of the South was, from that day forward, null and void.  So that's how this section of the 14th Amendment came to be added to our Constitution back in 1868.  So what does it have to do with the debt ceiling issue before us today?

The answer to that question can be found in the first sentence of Section 4, which states in relevant part:
The validity of the public debt of the United States, authorized by law...shall not be questioned.
Now we can sit here all day and talk about what I think that clause means, what you think that clause means, what your neighbor Bob thinks that clause means, but at the end the day, with all due respect to all of us (and your neighbor Bob), there's only one opinion that officially matters when it comes to interpreting the Constitution, and that is the opinion of the Supreme Court of the United States.   For better or worse, the Constitution gives that power to the Court.

The Supreme Court ruled on Section 4 of the 14th Amendment in the 1935 case Perry v. United States.  In that case, a U.S. bond holder, John Perry, sued the Federal Government because it had refused to honor its obligation to pay its debt to him pursuant to the terms of the bond.  The reason why the Feds refused to pay the debt is because after Mr. Perry purchased his gold bonds in 1917, Congress passed a law in 1933 which invalidated the terms of all gold bonds.  Mr. Perry, who owned $10,000 worth of gold bonds at the time, could not really appreciate Congress' decision not to pay its debt to him.  Thus, like most reasonable people in his position, he sued the federal government and argued that it had a Constitutional obligation to pay its debt to him. The Supreme Court agreed.  Chief Justice Charles Evans Hughes, writing for the Majority, said the following:

The bond now before us is an obligation of the United States...The question is necessarily presented whether the [1933 Act of Congress which invalidated gold bonds] is a valid enactment so far as it applies to the obligations of the United States...[stated differently], the question is whether the Congress can use [its] power so as to invalidate the terms of the obligations which the Government has theretofore issued in the exercise of the power to borrow money on the credit of the United States...the Government seems to deduce the proposition that when, with adequate authority, the Government borrows money and pledges the credit of the United States, it is free to ignore that pledge and alter the terms of its obligations in case a later Congress finds their fulfillment inconvenient. The Government's contention thus raises a question of far greater importance than the particular claim of the plaintiff. On that reasoning, if the terms of the Government's bond as to the standard of payment can be repudiated, it inevitably follows that the obligation as to the amount to be paid may also be repudiated. The contention necessarily imports that the Congress can disregard the obligations of the Government at its discretion and that, when the Government borrows money, the credit of the United States is an illusory pledge. We do not so read the Constitution...By virtue of the power to borrow money "on the credit of the United States," the Congress is authorized to pledge that credit as an assurance of payment as stipulated, — as the highest assurance the Government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge, is to assume that the Constitution contemplates a vain promise, a pledge having no other sanction than the pleasure and convenience of the pledgor. This Court has given no sanction to such a conception of the obligations of our Government...The Constitution gives to the Congress the power to borrow money on the credit of the United States, an unqualified power, a power vital to the Government, — upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations...
The Fourteenth Amendment, in its fourth section, explicitly declares: "The validity of the public debt of the United States, authorized by law, . . . shall not be questioned." While this provision was undoubtedly inspired by the desire to put beyond question the obligations of the Government issued during the Civil War, its language indicates a broader connotation. We regard it as confirmatory of a fundamental principle, which applies as well to the government bonds in question, and to others duly authorized by the Congress, as to those issued before the Amendment was adopted. Nor can we perceive any reason for not considering the expression "the validity of the public debt" as embracing whatever concerns the integrity of the public obligations. We conclude that the [1933 Act of Congress which invalidated gold bonds], in so far as it attempted to override the obligation created by the bond in suit, went beyond the congressional power. - Perry v. United States, 294 US 330, 348-354 (1935).

Again, keep in mind that if Congress does not raise the debt ceiling, then that will cause the United States to default on its obligations to pay back money that was borrowed on the full faith and credit of the United States.  The Court in Perry made it clear that "Congress has not been vested with authority to alter or destroy those obligations."  So in the event that Republicans continue to walk out of budget meetings and Congress can't get its act together by August 2, there's a fairly strong Constitutional argument that could be made here by the Obama Administration that the U.S. Treasury Department has every right to continue to pay all of the obligations of the United States with or without Congress' blessing to raise the debt ceiling.

However, Constitutional arguments aside, there is a very real practical concern associated with such a maneuver: the world markets may still lack confidence.  As Sen. Chris Coons (D-Del.) stated recently:

"from every professional -- either an economist or a currently practicing professional in the bond markets or financial services -- unanimously their input to me has been, 'You don't even want to have this debate, you don't want to terrify the markets by arguing over the interpretation of a previously irrelevant or not often applied provision of the Constitution. Don't spook the markets, don't scare the average American, just do your jobs.'"
Thus, we may have a situation on our hands where even if the Executive Branch is Constitutionally justified in jumping over Congress' head on the debt ceiling issue, the markets still may lack the confidence to invest money in the United States.  But then again, if the United States is able to keep its credit rating up around the globe by continuing to pay all of its bills on time, then foreign investors may not care what the branches of the United States government do internally.

1. When the United States borrows money on its full faith and credit, is it ok for us not to pay it back on the exact date that we agreed to pay it back so long as it is paid back eventually at some point in the future?  In other words, is it more important that we pay back our debts, or that we pay back our debts on time?  Or are they one in the same?
2. Does the 14th Amendment force the U.S. to pay back its debts after August 2 whether Congress agrees to raise the debt ceiling or not?
3. Will the Obama Administration likely use this argument?  Why or why not?
4. If the 14th Amendment approach is used by the Obama Administration, how will the Republicans spin it?
5. Does Senator Coons have a point?
6. Would it send a red flag to the rest of the world if we did not raise our debt ceiling?
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