It’s hardly news that Congress sets a statutory limit on aggregate Treasury indebtedness. Since Congress controls the appropriations and tax code that largely determine deficits, some commentators have questioned the need for limiting indebtedness as well. Interestingly, the current regime was not put in place “on purpose,” to solve a problem that stemmed from a regime of no limits, but rather evolved out of a system of very different, and much more stringent, limits on individual categories of debt. This post describes the nature of the earlier limits and how they evolved to the current regime of a single limit on aggregate indebtedness.
Before World War I
In the decades immediately preceding the First World War, Congress tightly controlled the character and amount of long-term U.S. Treasury debt. Bonds were authorized to finance specific projects, and the Secretary of the Treasury had little or no discretionary authority to choose the terms of a new issue. For example, the War Revenue Act of 1898 authorized the sale of up to $400 million of bonds for the sole purpose of funding the Spanish-American War. The act provided that the bonds should pay interest at a rate of 3 percent per annum, mature in twenty years, and be “offered at par [in a fixed-price subscription offering] as a popular loan.” Similarly, the Spooner Act of 1902 authorized the sale of 2 percent thirty-year bonds to fund some of the costs of building the Panama Canal.
Congress allowed greater administrative discretion in the issuance of short-term debt. For example, the War Revenue Act of 1898 authorized the Secretary of the Treasury to borrow “such sum or sums as, in his judgment, may be necessary to meet public expenditures” by issuing interest-bearing certificates of indebtedness maturing in not more than one year, subject to the limitations that the interest rate should not exceed 3 percent per annum and that not more than $100 million of certificates should be outstanding at any one time. There was no restriction on the use of the proceeds and no restriction on the amount that could be issued, only on the amount outstanding, so maturing certificates could be refinanced with new issues. This practice reflected the understanding that certificates of indebtedness were tactical instruments of Treasury cash management, rather than strategic instruments of project finance.
World War I
World War I was financed in much the same way as the Spanish-American War: with specific statutory authorities to sell intermediate-term notes and long-term bonds and more permissive authority to issue certificates of indebtedness up to a prescribed ceiling on outstanding certificates. However, there were also some important differences, including broad authorization for the Secretary of the Treasury to issue bonds “to meet expenditures authorized for the national security and defense and other public purposes authorized by law,” and to choose the tenor of an issue and other redemption provisions.
Post-War Debt Management
One of the important legacies of World War I was a vast expansion in Treasury debt, from less than $1 billion before the war to about $25 billion in mid-1919. As a result of that expansion, during the 1920s the Treasury was called upon to issue unprecedented quantities of debt simply to refinance maturing debt.
Post-war refinancing operations initially relied on the Treasury Department’s ability to refinance maturing certificates with new certificates. However, when Andrew Mellon became Secretary of the Treasury in 1921, he decided it would be desirable to “term out” some of the short-term debt with intermediate-term notes and longer-term bonds. Issuances quickly exhausted the remaining note authority, and Treasury and Congressional officials were led to reconsider whether note issuance, as distinct from notes outstanding, should continue to be limited. In particular, Mellon did not want to issue notes to fund new projects. To the contrary, he was quite anxious to retire the war debt expeditiously and wanted to sell notes only to refinance maturing debt that could not be readily retired with available surpluses. In 1921, Congress amended the limit on the Treasury’s authority to issue notes, from $7 billion on cumulative issuance to $7.5 billion on outstandings.
By mid-1930, Treasury indebtedness was subject to three separate statutory limits:
- not more than $10 billion of certificates and bills outstanding (actual outstandings amounted to $1.4 billion, Congress authorized the issuance of Treasury bills in 1929),
- not more than $7.5 billion of notes outstanding (actual outstandings amounted to $1.6 billion), and
- a limit of $20 billion on cumulative bond issuance ($1.9 billion of that authority remained unused; bond outstandings amounted to $12.1 billion).
Although Congress had moved away from a project finance construction of notes, it continued to assert some control over the maturity structure of Treasury debt, and U.S. law continued to reflect a project finance construction of bond issuance.
The Great Depression
As a result of the limited prospect of quickly paying down the budget deficits incurred during the Great Contraction and the New Deal, the Secretaries of the Treasury during both the Hoover (Mellon and Ogden Mills) and Roosevelt administrations (Henry Morgenthau) focused on extending the maturity structure of Treasury debt. To accommodate that policy, Congress raised the limit on bond issuance to $28 billion in 1931 and raised the limit on notes outstanding to $10 billion in 1934.
In 1935, Secretary Morgenthau urged Congress to amend the limit on his authority to issue bonds from a $28 billion limit on issuance to a $25 billion ceiling on outstandings. The proposed change was important because it would remove the last vestige of the pre-war notion that the Treasury issued intermediate- and long-term debt to finance specific projects. Morgenthau further asked that the $10 billion ceilings on short-term debt and on notes be combined into a single $20 billion ceiling on the total outstanding amount of bills, certificates, and notes. Testifying before the Senate Finance Committee, Morgenthau expressed his belief that “the Government may be saved substantial amounts and may work toward lengthening the maturities of a larger portion of its public debt if more flexibility is granted in the issuance of the notes, certificates, and bills.” Congress acceded to both requests.
The last steps in the evolution of statutory limitations on Treasury indebtedness came in the late 1930s. In 1938, Congress raised the ceiling on outstanding bonds from $25 billion to $30 billion (at a time when there was $23.3 billion of bonds outstanding) and also imposed a composite limit of $45 billion on total outstanding bills, certificates, notes, and bonds. The new limits did not allow more than the $45 billion of total indebtedness allowed previously, but it did introduce some fungibility of bonds with shorter-term debt (the only reason the four classes of securities were not fully fungible was the $30 billion sub-ceiling on bonds.) In requesting the new limits, Morgenthau expressed his view that restrictions on different categories of Treasury debt should be relaxed “to give the Treasury more latitude as to the kind of securities it can issue.”
Finally, in mid-1939, Congress removed the $30 billion sub-ceiling on outstanding bonds, leaving Treasury officials free to exercise their professional judgment on the appropriate maturities of new issues. A House Ways and Means Committee report took note of Secretary Morgenthau’s assertions that the “limitation of the face amount of bonds which may be outstanding at any one time may seriously interfere with the efficient and economical financing of Government requirements.” The report concluded that removing the sub-ceiling would “permit the Secretary of the Treasury to issue securities best suited at the time to meet the conditions of the market and the needs of the Government . . .”
Between 1917 and 1939, statutory limitations on Treasury debt evolved from a tight “project-control” basis to a more permissive structure that accommodated the Treasury’s greatly enlarged refinancing operations and a change from legislative to administrative control of the term structure of the debt. However, Treasury debt management did not emerge free of Congressional oversight, because Congress continues to limit indebtedness to this day.
The views expressed in this blog are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).