Since its founding, the United States has viewed paying its bills as a matter of economic and national security. Alexander Hamilton, the first secretary of the U.S. Treasury, pushed for the federal government to assume all the debt incurred by the states during the Revolutionary War. In a report Hamilton presented to Congress in 1790, he described the “punctual performance of contracts”—that is, meeting all financial commitments on time—as a matter of national honor. It was also critical, Hamilton argued, to building confidence in a financial system and a national currency that could underwrite his fledgling country’s industrial development and provide “security against foreign attack” by competing empires in Europe.
More than a century later, during World War I, Congress created the debt ceiling—a legislative limit on how much debt the Treasury can take on. Given the controversy surrounding the debt ceiling today, it may be surprising to learn that its original purpose was to make it easier, not harder, for the Treasury to manage the country’s finances during a time of global conflict. Beforehand, Congress had to approve each instance of the Treasury’s borrowing, because only the legislature has the constitutional authority to tax, spend, and borrow. With the debt ceiling, the department could borrow as much as it wanted, up to the limit set by Congress. Leaving aside how unusual it was—no other developed country except Denmark has a debt limit—the measure was seen as a patriotic concession by Congress to share its fiscal authority with the executive branch in service of shared geopolitical purpose. As a direct result of this congressional action, the Treasury was able to issue massive amounts of war bonds, which mobilized the American industrial base and helped turn the tide of World War I in favor of the Allies. After the war, the U.S. dollar overtook the British pound as the world’s dominant currency.
