Clearing the Air on the Debt Limit Page: 5 of 15
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Clearing the Air on the Debt Limit
terms offered to investors.9 At times, Congress designated loan proceeds for specific purposes
such as rolling over existing federal debt, helping construct an intercontinental railroad in the
1860s, or financing the Panama Canal after the turn of the 20th century. At other times, bonds
were authorized simply to "meet the current expenses of the Government."0
Enactment of the Second Liberty Bond Act of 1917 (P.L. 65-43, 40 Stat. 288) on September 24,
1917, marked a turning point in federal debt policy, but maintained substantial constraints on
Treasury debt operations. The act imposed the first aggregate limit on federal borrowing, but
retained individual limits on separate bond issues as well.
During 1920s and 1930s, Congress allowed the U.S. Treasury more leeway to manage federal
debt in order to roll over World War I-era debt." In July 1939, Congress set an aggregate limit
(PL. 76-201) on federal debt, allowing Treasury officials to decide how to manage that debt.12
Thus, the modern debt limit meaning an overall limit on federal debt without sublimits-might
more properly be said to have been established in 1939.
Point of Clarification 2: Did the Federal
Government Default in the 1970s?
Some contend that the federal government suffered technical defaults in the late 1970s. An
examination of the historical record suggests otherwise. While the meanings of the terms
"default" or "technical default" are clear in private contracts, they are less clear when applied to
the federal government. Private-sector contracts normally spell out "events of default," such as
failure to pay on time as well as other lapses. Technical defaults refer to violations of a legal
agreement-such as a loan or securities contract not involving failure to pay. "1 The issuance of
Treasury securities, however, is governed by the Universal Offering Circular, which does not
address failure to pay or other types of default events.1
Moreover, a breach of the debt limit-that is, a situation in which total federal debt subject to
limit exceeded that limit-does not necessarily imply delayed or missed payments or other
failures to uphold the federal obligations. In certain past episodes, breaches caused by lapsed
temporary debt limit increases resulted in no payment delays, and thus were not defaults in the
ordinary sense of that term. In the present context, however, a fully binding debt limit or breach
could quickly lead to systematic payment delays and damage to the federal government's fiscal
reputation, its credit rating, and its ability to borrow at advantageous rates.
9 For details, see CRS Report RL31967, The Debt Limit: History and Recent Increases, by D. Andrew Austin.
10 Act of March 2, 1839, 5 Stat. 323.
" Revenue Act of November 23, 1921 (42 Stat. 227; P.L. 67-98). See also Paul Studenski and Herman E. Kroos,
Financial History of the United States, 2nd ed. (New York: McGraw-Hill, 1963), p. 316.
12 "President Urges Ending of Limit on Bonded Debt; Asks Congress to Facilitate Borrowing by Eliminating
$30,000,000,000, 'Ceiling' Stands By Total Debt Top $45 Billion All Right for Now, Message Says-Yielding to
Economizers is Seen," New York Times, March 21, 1939. While a separate $4 billion limit for "National Defense"
series securities was introduced in 1940, in the next year federal debt was consolidated under an increased aggregate
limit of $65 billion.
"3 "Lexicon: Definition of Technical Default," Financial Times, n.d., at http://lexicon.ft.com/Term?term=technical-
'4 U.S. Treasury, Universal Offering Circular, Fiscal Service Series No. 1-93, https://www.treasurydirect.gov/instit/
Congressional Research Servicee
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Austin, D. Andrew & Thomas, Kenneth R. Clearing the Air on the Debt Limit, report, November 2, 2017; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc1043199/m1/5/: accessed March 26, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.