How The Debt Ceiling Came About

Mar 04, 2013 | by Franck Cushner, CFP®

Formally known as the statutory debt limit, the United States debt ceiling or debt limit is a legislative restriction on the amount of national debt that can be issued by the Treasury.

 

The debt limit has been raised 79 times since its creation in 1917, with 17 of these increases occurring over the past 20 years, and the most recent increase passed in August 2011.

 

The United States has had some sort of legislative restriction on debt since 1917. To control the amount of total debt outstanding, Congress has placed restrictions on Federal debt issuance since the passing of the Second Liberty Bond Act of 1917, which eventually evolved into a general debt limit in 1939. The Second Liberty Bond Act of 1917 helped finance the United States’ entry into World War I, which allowed the Treasury to issue long-term Liberty Bonds.

 

Periodically, a political dispute arises over legislation to raise the debt ceiling. Until the debt ceiling is raised, the Treasury undertakes what is termed as "extraordinary measures", which essentially buys more time for the ceiling to be raised.

 

The United States has never reached the point of default, where the Treasury is unable to pay its obligations. In 2011 the United States reached a point of near default, which in turn triggered the first downgrade of U.S. debt by credit rating agencies. Congress raised the debt limit with the Budget Control Act of 2011, which led to the fiscal cliff and set a new debt ceiling that was reached on December 31, 2012.

 

A decision on raising the current debt limit of $16.394 trillion will not be voted on by the House of Representatives until May 19th.  In January, the Treasury announced that it had adopted extraordinary measures in order to avoid a default on its obligations until a resolution is reached.

Internationally, the United States and Denmark are the only democratic countries to have legislative restrictions on issuing debt. Most emerging market countries issue debt freely with little or no restrictions.

Total federal debt can increase in two ways, first by selling debt (such as Treasury bonds) to the public and other countries, and the second by actually buying debt back itself for the purpose of funding government accounts such as Social Security, Medicare, and Transportation.

Another political showdown may emerge in early March, when Congress must decide whether to replace $110 billion in automatic cuts in federal defense and discretionary spending.

Source:           Congressional Research Service

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