Yves here. Many economists and investors contend that the 14th Amendment prohibits the Federal Government from defaulting involuntarily. Below are some recent articles that take that view:
The Constitutional Case for Disarming the Debt Ceiling New Republic
Unconstitutional Debt Ceilings Georgetown Law Journal
The Debt Limit and the Constitution: How the Fourteenth Amendment Forbids Fiscal Obstructionism Duke Law Journal
MMT advocates use the 14th Amendment to argue that the Treasury must issue its $1 trillion platinum coin if the crunch comes to circumvent the restriction. And there’s a lot to be said for a fait accompli. However, Treasury Secretary Yellen does not support the idea.
Another idea is to challenge the debt ceiling in court. The problem is investors would not have standing until they were harmed, as in a default had actually occurred. But the Administration could, presumably before a default occurred.
But the feckless Biden Administration has been unwilling to consider this idea. A January Washington Post story said that all they were planning to do was stare Republicans down. The New York Times, two days ago, depicts the Administration as considering relying on the 14th Amendment. It does not appear that they would go to court to prefect their rights first, but would simply breach the debt ceiling and let Republicans try to stop them. From the New York Times:
Under the theory, the government would be required by the 14th Amendment to continue issuing new debt to pay bondholders, Social Security recipients, government employees and others, even if Congress fails to lift the limit before the so-called X-date….
Some legal scholars contend that language overrides the statutory borrowing limit, which currently caps federal debt at $31.4 trillion and requires congressional approval to raise or lift….
It is unclear whether President Biden would support such a move, which would have serious ramifications for the economy and almost undoubtedly elicit legal challenges from Republicans. Continuing to issue debt in that situation would avoid an immediate disruption in consumer demand by maintaining government payments, but borrowing costs are likely to soar, at least temporarily.
I’m not sure why interest rates would necessarily rise. Recall the near-universal predictions that the world would come to an end when S&P threatened to, and finally did, downgrade the US rating. Your humble blogger was virtually alone in saying it would prove to be a nothingburger, market-wise, which proved to be correct.
The post below provides historical background.
By run75441. Originally published at Angry Bear
14th Amendment to the U.S. Constitution: Civil Rights (1868) | National Archives, Section 4.
“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.“
There is history to this amendment written after the Civil War in 1866. New York Times has an article on the whys of Section 4 of the 14th Amendment. Then I will phase into the latest coming from Letters from an American for a history lesson.
Citizens preferred to be paid back in gold rather than in paper currency (which were used to buy the bonds) for the five-twenties bonds used to fund the Civil War. The reasoning for preferring gold was the Green-Back paper currency had deteriorated considerably in value. However, there was no rule stating the bonds would be paid back in gold. If such had occurred, it would result in an enormous and unearned windfall for banks and large investors who had purchased bonds with greenbacks to receive gold back from the government.
A Guest Essay on the Opinion page of the NYT. January 2023 explains the issues involved about the national debt when the 14th Amendment. “The Constitution Has a 155-Year-Old Answer to the Debt Ceiling,” author Lenny Holston explain the sections of the 14th Amendment and Section 5.
“The nation needed to be made “safe from the domination of traitors,” declared Representative James Ashley, Republican of Ohio, “safe from repudiation.” The 14th Amendment would help accomplish these goals. Whatever one thinks of Civil War-era fiscal policy, the amendment’s language is mandatory, not permissive — the validity of the public debt “shall not be questioned.” Today, over a century and a half after the amendment’s ratification, this promise is no longer considered an “extraordinary guarantee”; it is an essential attribute of a modern economy.
Our Constitution is not self-enforcing. The 14th Amendment concludes by empowering Congress to carry out its provisions. But if the current House of Representatives abdicates this responsibility, throwing the nation into default by refusing to raise the debt limit, President Biden should act on his own, taking steps to ensure that the federal government meets its financial obligations, as the Constitution requires.“
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May 2, 2023, Letters from an American, Prof. Heather Cox-Richardson.
Prof. Heather explains the events leading up to the inclusion of Section 4 of the 14th Amendment
The debt ceiling crisis continues to dominate the news, with some speculation now that White House officials are wondering whether the Fourteenth Amendment to the Constitution might require the government to continue to pay its bills whether Congress actually raises the debt ceiling or not.
The fourth section of the Fourteenth Amendment reads: “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.”
This statement was a response to a very specific threat.
During the Civil War, the U.S. Treasury issued more than $2.5 billion in bonds to pay for the war effort. To make those bonds attractive to investors, Congress had made most of them payable in gold, along with their interest. That gold backing made them highly valuable in an economy plagued by inflation.
In contrast, most working Americans used the nation’s first national currency, the greenbacks, introduced by Congress in 1862 and so called because they were printed with green ink on the back and black ink on the front—as our money still is; check out a dollar bill. Because greenbacks were backed only by the government’s ability to pay, their value tended to fluctuate. As Congress pumped more and more of them into the economy to pay expenses, inflation made their value decrease.
National taxes funded the bonds, which meant that workers whose salary was paid in the depreciating greenbacks paid taxes to the government, which in turn paid interest to bondholders in rock-solid gold. After the war, workers noted that inflation meant their real wages had fallen during the war, while war contracts had poured money into the pockets of industrialists.
Workers couldn’t do much about the war years and still faced years of paying off the wartime bonds. They began to call for repaying war bonds not in gold but in depreciated currency, insisting that taxpayers should not be bled dry for rich bondholders. Democrats, furious at wartime policies that had enriched industrialists and favored bankers, promised voters that if voters put them in control of Congress, they would put this policy into law.
Republican legislators who had created the bonds in the first place were horrified at the idea that Democrats were claiming the right to change the terms under which the debt had been sold. This, they said, was “repudiation” and would turn those who had invested in the United States against it.
Bonds were about far more than just money. When the war broke out, the Treasury had turned to bankers to underwrite the war. But the bankers were notably reluctant to bet against the cotton-rich South and refused to provide the amount of help necessary. To keep the government afloat, Treasury officers had been forced to turn to ordinary Americans, who for four years had shouldered the financial burden of supporting their government. Treasury Secretary William Pitt Fessenden wrote to the public in 1864 . . .
“It is your war. Much effort has been made to shake public faith in our national credit, both at home and abroad…yet we have asked no foreign aid. Calm and self-reliant, our own means thus far have proved adequate to our wants. They are yet ample to meet those of the present and the future.”
On April 3, 1865, the day the Confederate capital of Richmond, Virginia, fell, bond salesman Jay Cooke hung from his office window a sign that featured the nicknames of the two most popular bond issues, along with an even larger banner that read:
“The Bravery of our Army
The Valor of our Navy
Sustained by our Treasury
Upon the Faith and
Substance of
A Patriotic People.”
The debt was a symbol of a newly powerful national government that represented ordinary Americans rather than the elite enslavers who had controlled it before the war.
“There has never been a national debt so generously distributed among and held by the masses of the people as all the obligations of the United States,” wrote an Indianapolis newspaper in 1865. “This shows at once the strength of popular institutions, and the confidence the people have in their perpetuity.”
Undermining the value of U.S. bonds was an attack not just on the value of investments, but on the nation itself. When Republican lawmakers wrote the Fourteenth Amendment in 1866, they recognized that a refusal to meet the nation’s financial obligations would dismantle the government, and they defended the sanctity of the commitments the government had made. When voters ratified that amendment in 1868, they added to the Constitution, our fundamental law, the principle that the obligations of the country “shall not be questioned.”