The debt ceiling debate is attracting growing attention and a greater sense of urgency. American history underscores why.
While many reasons exist to pay our debts, our history punctuates why American leaders dating back to the Revolution have thought it essential. In my book, “The Price of Liberty: Paying for America’s Wars” (2007), I described how, despite the debt incurred in every period of American history, in periods of war and political chaos, the U.S. faithfully and with enormous displays of national political unity met its financial commitments to creditors here and globally. Now, for the first time, we run the risk of defaulting on such commitments.
In 1865, reaffirming the validity of the public debt and its repayment, by inserting it in the Constitution, was deemed necessary. The Union’s financial obligations had grown to an unprecedented level — far above what Americans would have thought manageable a few years earlier. Doubts had arisen about the government’s ability and willingness to repay it. The government’s interest payments alone were twice the size of the entire federal budget the year before the war.
Foreign investors were a major source of credit to the U.S. during the first half of the 19th century. Their capital was needed to build our railways and large banks and corporations, as well as to fund our government. Their confidence was inspired, in part, because the U.S. government faithfully paid its debts following the Revolution and the War of 1812.
After the Revolution, in fact, largely due to principles advocated by Alexander Hamilton, Article 6 of the Constitution asserted that “all debts contracted and engagements entered into before the adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.” In other words, the government established by the Constitution would pay off the debts of the former government established under the Articles of Confederation — the governing law of the country before the Constitution. In addition, it assumed responsibility for paying debts that the 13 original states incurred while fighting the British during the Revolution.
This display of fiscal responsibility was largely responsible for the capital flows from abroad that helped build America in the first half of the 19th century.
But anti-repayment sentiments grew in the country after the Civil War, as the difficulty of repaying the debt became more widely understood. So, in the debate over the Fourteenth Amendment — which focused largely on such new and vitally fundamental additions to the Constitution as the due process clause, the equal protection clause and a clause providing full citizenship to former slaves — the amendment’s drafters also included a provision of a very different type. President Lincoln’s administration and others that followed deemed this unusual phrase as urgent from a financial perspective.
This financial portion of the amendment stipulated that “the validity of the public debt of the United States, authorized in law, including debts incurred for payment of pensions and bonuses for services in suppressing insurrection or rebellion (i.e, the Civil War) shall not be questioned.”
That the Congress and the president should raise the emphasis of honoring the full faith and credit of the United States to the level of a constitutional amendment (and that two-thirds of both houses of Congress and three-fourths of the states ratified it) not only reinforced market confidence but also underscored the unity of the U.S. behind its financial commitments and as a growing factor in international diplomacy.
That, in turn, projected to other nations the financial reliability of the U.S., which attracted still more foreign funds for America’s development. The U.S., which many foreigners had concluded would split in two in 1861 and 1862, was now seen as a credible, responsible nation with a commitment to strong institutional principles that had been honored in the past — and all this in spite of the Civil War’s turmoil and the division.
To have failed to honor these principles would have been widely considered, abroad and at home, as a sign that internal divisions and lack of cohesion remained threats to American credibility in the world. Such an impression would have deterred the inflow of funds upon which America’s future growth would rely. Other nations would not have taken the U.S. seriously as a nation, or at least as a reliable financial entity, for decades to come.
That brings us, fast-forward, to today. Failure of the U.S. to honor its current commitments would have much the same impact as failure to honor the nation’s debts in the 1860s; it would be regarded as a disunited nation that has lost its financial credibility.
This glimpse into history should reinforce the imperative of honoring U.S. debts in full — and, in the words of the Fourteenth Amendment, “not questioning them.” For more than two centuries, often in circumstances in which divisions have been even greater than today, there has been a remarkable unity on this issue.
All past congresses and presidents have understood that failure to remain true to the nation’s commitments to its “full faith and credit” would not only undermine America’s financial credibility with its own citizens and the world but would cast into doubt the underlying credibility of the U.S. government as a reliable global partner. It would raise serious doubts abroad about the U.S. remaining a reliable force and partner in the world in other areas — and, for domestic political reasons, engaging in an abrupt, reckless departure from time-honored principles upon which America’s global financial credibility has rested since the Revolution.
Robert Hormats is a former undersecretary of State for Economic, Growth, Energy and the Environment, and the author of “The Price of Liberty: Paying for America’s Wars.” Follow him on Twitter @BobHormats.