Guest Column

Debt Ceiling Déjà Vu

A brief history of debt crises


Today, we are facing another terrifying debt ceiling crisis. You can be forgiven if you feel you have seen this story before. You have. The United States is rapidly approaching a self-imposed debt ceiling of a little over $31 trillion. That may sound like a lot of money. It is. If the U.S. cannot borrow more than that amount, we will go into default with potentially disastrous effects.

The national debt has always been a political issue. Andrew Jackson, our seventh president, was so appalled by the debt that he made it a campaign promise to pay it off. Through a variety of austere measures, he accomplished that goal in January of 1835. It is the only time in our history we have been debt-free. The results were disastrous. Immediately after Jackson left office the country plunged into one of the worst recessions ever, the Panic of 1837.

The first debt ceiling was implemented in 1917. It was part of the Second Liberty Bond Act and set a limit on all U.S. debt at $15 billion. Liberty Bonds were issued to pay for our involvement in World War I.  There were four issues and eventually, we paid off the first three and then defaulted on the fourth during the Great Depression.

That debt ceiling remained soft until the Public Debt Act of 1939. At that time the debt ceiling was increased to $49 billion. Today we spend almost $10 billion per day. The debt ceiling was increased in 1941, 1942, 1943, 1944 and 1945 to a new limit of $300 billion. In a rare move the ceiling was decreased in 1946.

The debt ceiling has been increased approximately 90 times since 1940. In the late 1970s, Congressmen Dick Gephardt proposed the “Gephardt Rule” that automatically increased the debt ceiling to avoid a government default. That remained the standard until a hard ceiling was implemented again in 1995.

Since then, every year or so, we are faced as a nation with a new debt crisis. Currently, our government is gridlocked as we hurtle towards a possible default. One side argues that if we do not curtail spending, our growing debt will ruin us. The other side warns that if we do not increase the debt ceiling we will go into default and lose our international monetary primacy. So far, neither of those consequences have materialized.

In 2011, failure to increase the debt ceiling led to a downgrade of U.S. debt and a stock market crash of about 15%. Since then, we have gotten used to the idea that these regular brawls over the national debt are a non-event. This seems like a crazy way to run a country. The reality is that the national debt has increased steadily since 1835 and will continue to do so into the future. We cannot authorize spending and then not deliver payment. Sooner or later, that kind of nonsense will catch up to us.

Scott A. Grant is a local historian and investment advisor. He uses his knowledge of the past to prepare and protect for the future.