Republicans in Congress are hewing to the best traditions of the founders of the nation, and the founders of their own party, in their effort to keep a lid on federal borrowing. The idea that there is some constitutional bar to their refusal to raise the debt limit betrays Democratic desperation.
The Constitution was established so that a stronger Union would be able to pay its debts. The Confederation government had already defaulted on its Revolutionary War obligations. Thus the new government assured its creditors in the new Constitution, which provided that “All debts contracted and engagements entered into, before the adoption of this Constitution, shall be valid against the United States under this Constitution, as under the Confederation.” The Federalists and their successors paid off the entire national debt by the 1830s.
After the Civil War, the American people settled permanently the possibility of repudiating the national debt. Section four of the Fourteenth Amendment simply says, “The validity of the public debt of the United States, authorized by law… shall not be questioned.” Thus the Republicans foreclosed the possibility that, should the Democratic party return to power, it would repudiate the war debt–or pay the Confederate debt.
While other provisions of the Fourteenth Amendment provoked intense debate, section four did not. “I need say nothing of the fourth section,” said Representative Thaddeus Stevens, “for none dare object to it who is not himself a rebel.”
Until recently, nobody imagined that this provision gave the President the power to borrow money–to add to the public debt–without Congress’ permission. The Constitution is explicit in giving Congress the power “to borrow money on the credit of the United States,” as well as stating that “No money shall be drawn from the Treasury, but in consequence of appropriations made by law.” And note that the Fourteenth Amendment guarantees “the public debt… authorized by law.”
(This novel argument appears to be the brainchild of Law Professor Garrett Epps. Professor Epps is such a devotee of New Deal liberalism that he writes “My children and I recite a family formula–something like, ‘If I forget thee, O Works Progress Administration, may my right hand lose its cunning’–but I begin to despair that my children ever will see Jerusalem.”)
The Civil War cost roughly four billion dollars, and the Republicans displayed an admirable fiscal integrity in paying for it. They raised taxes–mostly via the tariff, but also in a host of excise taxes and the first-ever income tax. They also inflated the currency through the country’s first issue of paper money, a half-billion dollars of “greenbacks.” But mostly they borrowed to pay for the war–about two billion dollars overall. This required them to maintain America’s credit in world markets, and the Union government promised to pay the national debt in gold, not depreciated paper money.
Once the war was over, most of the taxes were repealed as the debt was paid off. Even the income tax proved temporary, being repealed in 1872. “An income tax is a war tax,” Senator Charles Sumner said. “It ought not to be made a peace tax. The medicine of the Constitution should not become its daily bread.”
Even more impressive was their handling of the greenback issue. They produced an inflation of about 80% in the war years, which compared favorably to the 4000% Confederate inflation. After falling to over two and half greenback dollars per gold dollar during the war, the greenback approached parity by 1870 and was legally as good as gold by 1879.
Moreover, private creditors could guard against future inflation by writing “gold clauses” into private contracts, which promised to pay debts payable “in United States gold coin of the present standard of value.” The courts sustained these inflation-hedge contracts until the New Deal Congress outlawed them in 1934.
The Republican party was the “sound money” party. They defended the gold standard in the pivotal election of 1896 against the silver inflationist platform of William Jennings Bryan’s Populist-Democrats. As Calvin Coolidge put it in 1922, “Inflation is repudiation.”
In the depths of the Great Depression, Congress gave President Franklin D. Roosevelt the power to inflate the currency by various means. F.D.R. chose to take the U.S. off the gold standard. He confiscated all privately-held gold and paid for it at twenty-one dollars an ounce, and then raised the price of gold to thirty-five dollars an ounce. This “refinancing” saved the Treasury some three billion dollars, and the devaluation cost individual creditors some four hundred billions–that would be almost six and a half trillion dollars today. It was the greatest transfer of wealth since the uncompensated emancipation of four billion dollars (in 1865) of slaves (about 56 trillion dollars today).
American citizens could no longer redeem their dollars in gold. Their value now depended entirely on the “faith and credit” of their government. But F.D.R. maintained the gold dollar for foreign trade. The convertibility of the dollar at $35 per ounce became the lynchpin of the post-World War II international trading system.
The inflationary pressure of federal programs, especially the Vietnam War, led to a severe gold drain in the late 1960s. The last vestige of precious metals left our coins, and President Nixon ended international gold convertibility in 1971. Since then, the dollar has “floated,” rising and falling in value compared to other currencies, depending on the fiscal and monetary policies of their governments.
The Chinese have complained that the U.S. is defaulting on its debt de facto via inflationary dollar manipulation. That this is a case of the wok calling the kettle black does not detract from the basic truth of the charge. As Calvin Coolidge said, “Inflation is repudiation.”
To continue borrowing to the point of outright default would be the final step in our decline from the financial morals of the founders. One of the greatest accomplishments of Ronald Reagan’s presidency was ending the great inflation of the 1970s. Republicans today ought curb borrowing to prevent default, and then take steps to repudiate repudiation-by-inflation.