Can Debt Ceiling Debates Be Useful?
by Joseph J. Thorndike
Date: Aug. 22, 2013

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Are threats to oppose a debt ceiling increase ever defensible? More specifically, can they ever be justified as a form of leverage -- as a tool to force politicians to make difficult but necessary decisions?

Republicans seem to think so. Last week, Reuters reported that some GOP leaders are hoping to use the debt limit debate as leverage in their drive to delay Obamacare. One aide to House Majority Leader Eric Cantor, R-Va., called the looming debt limit crisis a "good leverage point" in the quest to unravel the president's signature achievement.

Other Republicans, meanwhile, are making noise about a more traditional form of fiscal extortion: Cut spending or live with the current borrowing cap and the threat of default. "We're not going to raise the debt ceiling without real cuts in spending," declared House Speaker John A. Boehner, R-Ohio, in July. "It's as simple as that."

The idea of using the debt ceiling for leverage is not new. Indeed, the nation's first debt limit crisis hinged on it. In the summer of 1953, President Eisenhower asked Congress for a modest boost in the debt ceiling. When austerity-minded lawmakers refused, it prompted a crisis that brought the nation to the brink of default -- or to its fiscal senses, depending on your point of view.

Democratic Debts

Soon after Eisenhower took office in early 1953, his administration began signaling the need for additional borrowing authority. Treasury Secretary George M. Humphrey took the lead, highlighting in numerous public remarks the steady increase in federal debt. In July he reported to Congress that borrowing had reached its highest point since World War II.

But Humphrey was careful to blame Democratic predecessors for creating the debt problem in the first place. The nation's current borrowing was merely a reflection of "the situation which the spending programs of the past few years have produced," he contended.1

Conservatives were not convinced by Humphrey's subtle campaign to soften resistance to a debt limit increase. "For the Administration, this would be the easy way out of hard decisions," warned The Wall Street Journal in May. "To lift the debt ceiling for this 'emergency' need will make the whole idea of a debt ceiling meaningless. To impose a limit on the government's debt and then to change it the moment it begins to squeeze makes of the whole thing a trick for fooling people."2

In fact, the Journal believed that failing to increase the debt limit would be highly useful. "The government would not be able to carry out all of its spending plans," the editors predicted. "Some things would have to be cut back a little further. Up against the hard ceiling, government officials would be compelled to make hard decisions, to choose between this dollar and that one." Staying under the existing cap would be difficult, of course. But that was the point. "Under such a compulsion many needed economies would be made that would otherwise be thought impossible," the paper said.3

The Journal was not alone in hoping to use the debt limit for leverage. Many members of Congress wanted to stick with the current borrowing cap. "If the Administration comes up with this proposal we ought to proceed at length to give this Administration a long seminar on fiscal policy," warned Sen. Wayne Morse, an Oregon independent. This was no idle threat because it came from a lawmaker sometimes described as the Senate's "filibuster champion."4

Ultimately, however, the Eisenhower administration felt compelled by fiscal realities to seek an increase in the ceiling. The treasury faced a serious but predictable short-term problem. Tax receipts were certain to fall in the second half of the year, thanks to a provision of the Revenue Act of 1950 that required corporations to make most of their annual tax payments during the first half. Kenneth Garbade, a senior vice president in the Federal Reserve Bank of New York's Research and Statistics Group, has explained the situation in his fascinating history of the 1953 debt ceiling fight:


Bowing to this reality, Eisenhower sent a message to Congress on July 30 asking for an increase in the debt ceiling from $275 billion to $290 billion. "Despite our joint vigorous efforts to reduce expenditures it is inevitable that the public debt will undergo some further increase," he said.6 Humphrey amplified the urgency of Eisenhower's request. "We will just run out of money and we can't pay our bills," he told Congress. "It's just that simple." Failing to raise the borrowing limit might produce "a near panic," he added ominously.7

Eisenhower's request came just before Congress was planning to adjourn for the year, and lawmakers were none too pleased to be handed such a contentious request at the last minute. Still, the House of Representatives swallowed hard and approved the increase on July 31 by a vote of 239 to 158.

The Senate, on the other hand, was less accommodating.

Sen. Harry F. Byrd took the lead in fighting Eisenhower's request. A well-known fiscal conservative, Byrd was considered something of an Eisenhower Democrat. In the early days of the new administration, he had proven himself a willing ally and he was often happy to work with the Republicans' new Senate majority.

But when it came to federal borrowing, Byrd was unwilling to toe the White House line. Indeed, he insisted that raising the debt limit would be "an invitation to extravagance."8 Keeping the present cap would force much-needed economy, he asserted. "It may be that the administration would be forced to operate on a very prudent and conservative budget in order to avoid an increase in the debt limit," he predicted hopefully.9

"This Administration is pledged to a balanced budget and to an efficient government. An increase in the debt limit at this time would be misunderstood and it should be undertaken only as a last and final resort and after the President has used his own powers," Byrd said.10

A host of senators joined Byrd's campaign to reject the increase. Opponents included many of the chamber's leading Democrats, including Minority Leader Lyndon B. Johnson of Texas and Finance Committee ranking minority member Walter F. George of Georgia. Indeed, The New York Times suggested that Democratic opposition in the chamber was "almost solid."11 Many Republicans also declared their intention to break with the president, including Sens. William E. Jenner of Indiana, John J. Williams of Delaware, and George W. Malone of Nevada.12

Senate debate over the debt increase was heated. Sen. Homer Capehart complained that many opponents of the president's request were hypocrites. "I am getting a little tired of hearing Senators talk about the debt limit who have been the same people who voted and voted to spend," Capehart declared. "I am not falling for that baloney myself -- I know who voted for spending money and who voted against it."13

Capehart took particular aim at Morse, the former Republican from Oregon who had bolted the party in 1952 to campaign for Democrat Adlai Stevenson in the presidential election. If Morse was looking for people to blame for rising debt, Capehart charged, he would do well to "go home and take a look in the mirror."14

Morse responded by accusing Capehart of being conceited, egotistical, hypocritical, and opportunistic. He called him a liar, insisting that Capehart had made false statements about Morse's voting record. "I'll wrap that record around your political neck," he shouted in floor debate. Capehart invited Morse to come to Indiana and "try to wrap anything around my neck."15

Such theatrics notwithstanding, Eisenhower's request had considerable support outside Congress. Many editorial writers insisted that it was simply a recognition of reality. "No one likes to contemplate a larger debt burden," observed The Washington Post. "But the debt figure is the consequence rather than the cause of Government spending."16 Byrd and other opponents of the increase had an understandable point, at least on "psychological grounds," the paper continued. But the possibility of a panic could not be ignored. "There is simply no point in needlessly courting this danger," the paper wrote. "The compelling point, it seems to us, is that the debt limit does not enforce economy. The real savings are made by other means."17

Faced with a bipartisan Senate rebellion, Eisenhower called for a parley, inviting both Republican and Democratic leaders to the White House. The group included leaders of the Senate Finance and House Ways and Means committees, as well as representatives of Treasury.18 But the talks produced no headway, and on August 1 the Finance Committee tabled the increase by a decisive vote of 11 to 4, ignoring the entreaties of Chair Eugene D. Millikin and a few other administration loyalists. The Los Angeles Times called it a "stunning" defeat, and some lawmakers suggested that it was tantamount to a no-confidence vote for the president.19

Byrd's Victory

After the debt increase failed, Byrd was careful to explain his reasons for opposing the measure. "My main objective was to emphasize the fiscal crisis that now faces us with deficits over most of the past 15 years and more deficits to come unless we cut down expenditures," he said.20 The debt limit debate, in other words, was a way of drawing attention to difficult problems -- of forcing action from reluctant politicians. It was, in a word, leverage.

And it seemed to work. Almost immediately, Eisenhower told his department heads to start slashing their spending during the current fiscal year. "It is absolutely essential that you begin immediately to take every possible step progressively to reduce the expenditures of your department during the fiscal year 1954," he told them.21

Even Humphrey tried to make the best of the situation, suggesting that the government might be able to scrape by. "If we get the breaks we'll make it, but if we don't we'll be in trouble," he told reporters. "It's going to be very close at several points." He was not, however, entirely gracious in defeat. "I would never run a business with that close a margin, and I don't think the Government should either," he said.22

As it turned out, Humphrey did manage to avoid disaster over the next several months, despite the seasonal slowdown in tax collections. But he couldn't do it without resorting to some fancy footwork (or what we now call "extraordinary measures"). In November Treasury was forced to sell half of its $1 billion hoard of "free gold" -- extra bullion not being used to back the issuance of paper money. Humphrey used the gold to retire $500 million in federal debt held by the Federal Reserve, thereby avoiding an otherwise imminent breach of the debt ceiling.23

But as winter approached, Humphrey again began to signal the need for a debt limit increase. And once again, many observers took his warnings seriously. "It is hard to see how the Government is to function unless the limit is raised," wrote columnist Stewart Alsop.24 The Los Angeles Times agreed. "Some members [of Congress] feel it is necessary to keep the administration in fiscal trouble, with the danger of bumping its head, in order to induce extraordinary efforts at economy," the paper editorialized. "But there is some danger of getting the country into serious difficulties by pursuing such a course."25

But those worries rang hollow to many fiscal conservatives, who felt vindicated by Treasury's success coping with the existing debt limit. "The lesson is clear," exulted one editorial writer. "The way to get government expenditures down is to cut taxes and deny the administration authority to increase the debt. At an early date Congress might well consider cutting the debt limit."26

Humphrey fought back against such suggestions, and in the new year, began a subtle campaign for raising the debt limit. This time, he and his administration colleagues worked closely with senators to find a workable compromise ahead of time, and in July they managed to coax a $6 billion temporary increase from lawmakers. That brought an end to debt limit debates -- for a few years.

It's Different Now

In retrospect, the 1953 crisis over the debt limit did seem to achieve what Byrd and other fiscal conservatives were after. Their refusal to make life easy for Treasury did in fact coax some extra cost cutting out of the Eisenhower administration. Then, as now, the debt limit was a recognition, not a cause, of government spending. But the refusal to increase the limit served as leverage in pending fiscal battles.

None of which is to say that the debt limit debate of 2013 has anything in common with its 1953 counterpart. Sixty years ago, "making do" was a plausible fiscal strategy -- budget shortfalls were small enough to be manageable. As a result, few of those involved in the 1953 debate ever believed that default was a real possibility. Certainly not Byrd, who was a fiscal conservative of the old school -- he would have been appalled by the prospect of national default.

In 2013 the prospects for muddling through without a debt limit increase are nonexistent. Budget challenges are simply too large to cobble together a solution through discretionary spending cuts.

Still, the 1953 experience underscores the way in which debt limit debates have historically been used to focus the nation's political attention on fiscal policy. That leverage has always entailed certain risks. But they are much more serious today than they were in Ike's day.


FOOTNOTES

1 "U.S. Likely to Ask for Higher Debt Limit," The New York Times, July 18, 1953, at 17.

2 "The Last Restraint," The Wall Street Journal, May 27, 1953, at 8.

3 Id.

4 "Morse Will Fight Hike in Debt Limit," The Washington Post, July 21, 1953, at 2.

5 Kenneth Garbade, "How the Nation Resolved Its First Debt Ceiling Crisis," Federal Reserve Bank of New York, Mar. 4, 2013, available at http://libertystreeteconomics.newyorkfed.org/2013/03/how-the-nation-resolved-its-first-debt-ceiling-crisis-html.

6 Dwight D. Eisenhower, "Special Message to the Congress Requesting Legislation Raising the Debt Limit," July 30, 1953, available from the American Presidency Project at http://www.presidency.ucsb.edu/ws/index.php?pid=9659.

7 Edward F. Ryan, "$290 Billion Ceiling Needed to Keep U.S. Meeting Payrolls, Humphrey Declares," The Washington Post, July 31, 1953, at 1.

8 Robert Young, "Byrd Hits Treasury Plan to Boost U.S. Debt Limit," Chicago Daily Tribune, July 30, 1953, at 4.

9 Id.

10 "Eisenhower Calls Debt Limit Parley," The New York Times, July 30, 1953, at 1.

11 Id.

12 Supra note 8.

13 Id.

14 Id.

15 Id.

16 "Raising the Debt Ceiling," The Washington Post, July 31, 1953, at 20.

17 Id.

18 Supra note 10.

19 "Eisenhower Defeated on Debt Limit," Los Angeles Times, Aug. 2, 1953, at 1; "President Calls Senate Chiefs to Breakfast Talks in Last-Ditch Attempt to Save Debt Limit Rise Plan," The Wall Street Journal, Aug. 3, 1953, at 2.

20 John D. Morriss, "Senate Committee Shelves Bill to Increase Debt Limit," The New York Times, Aug. 2, 1953, at 1.

21 Eisenhower, "Letter to Heads of Departments and Agencies Concerning Further Economies in Government," Aug. 11, 1953, available from the American Presidency Project at http://www.presidency.ucsb.edu/ws/?pid=9673.

22 "Humphrey Calls Debt Limit Sufficient for 1953, but Adds Some 'Ifs'," The Wall Street Journal, Aug. 28 1953, at 14.

23 "'Free Gold' Used to Stay in Debt Limit," Los Angeles Times, Nov. 10, 1953, at A8; "Debt Ceiling Saved by '34 Gold' Profit," The New York Times, Nov. 10, 1953, at 24.

24 Stewart Alsop, "Trouble Awaits Ike on Capitol Hill," The Washington Post, Dec. 30, 1953, at 18.

25 "Federal Debt Ceiling Question Up," Los Angeles Times, Dec. 24, 1953, at A4.

26 "Wrong Guesses About the Debt Limit," Chicago Daily Tribune, Oct. 3, 1953, at 12.


END OF FOOTNOTES