Alexander Hamilton, the 32-year-old wunderkind serving as secretary of the Treasury, proposed a bold plan to the first U.S. Congress on Jan. 9, 1790. The federal government should assume the wartime debts of the 13 states, about $25 million worth, and retire them with funds borrowed at a lower rate of interest, then pay the debt with tax revenue, Hamilton asserted.
Doing so would strengthen the role of the federal government, especially in the country’s financial system, and ensure that the fledgling nation enjoyed good credit with other countries of the world.
So began the first debate about the national debt.
“The necessity for borrowing in particular emergencies cannot be doubted, so on the other, it is equally evident that, to be able to borrow upon good terms, it is essential that the credit of the nation should be well-established,” Hamilton argued.
Others, notably Thomas Jefferson, then the secretary of state, disagreed. “I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared,” Jefferson wrote some years later.
Southern states, most of which had paid off their Revolutionary War debts, objected to the plan. Why should they be taxed to pay the debts of Massachusetts and New York?
Eventually, a compromise was reached. In exchange for their votes in favor of assuming the states’ debts, the government would locate its future capital city in the South. And with that, the national debt was established, making it older than the country itself as it comprised debts incurred even before the framing of the Constitution.
To be sure, the federal government and its debt have grown far beyond those imagined in the late 1700s. Hamilton would likely quail at the thought of a $31.4 trillion national debt. And the debt ceiling, a statutory limit on the size of the debt, was not created until 1917.
Even so, as President Joe Biden and House Speaker Kevin McCarthy (R-Calif.) negotiate over the amount of money the government can borrow and how it is to be spent, they carry on a debate as old as the country itself.
Hamilton won his round. But the game goes on.
The Blame Game
Assigning blame for the federal debt has become a political sport, especially in recent years as increases in the borrowing limit have been contested by the party controlling Congress.
This time around, McCarthy has blamed debt increases on Democrats, saying they are “addicted to spending.” Democrats have countered that the Donald Trump-era tax cuts are to blame for the ballooning debt. In fact, both increased spending and decreased revenue have driven the debt higher over much of America’s history.
Generally, wars have done the most financial damage. The national debt shot up by triple digits during the Civil War, World War I, and World War II. And the tax cuts of the 1980s produced double-digit annual increases in the debt for nearly a decade.
Other than in wartime, the national debt grew slowly for most of the nation’s history. During the 50 years between the Civil War and World War I, the debt rose just over 10 percent.
By contrast, the debt has increased more than $30 trillion over the past 50 years, an increase of over 6,700 percent. Neither political party finds the situation tolerable, but they disagree on how to attack the problem.
Republicans mostly favor keeping taxes low to encourage private investment in the economy while cutting federal spending to reduce the deficit.
Democrats generally favor increasing taxation on the wealthiest households and corporations while using targeted government spending to stimulate the economy.
In those competing philosophies, it’s possible to hear at least an echo of Hamilton and Jefferson.
“From the first day I sat with the president, there have been two criteria. I told him we’re not going to raise taxes because we bring in more money than we ever have. And we’re not going to pass a clean debt ceiling,” McCarthy said. “We have to spend less than we spent last year.”
“It is Congress’ constitutional obligation to act, not hold the full faith and credit of the United States hostage unless we allow them to make cuts to programs hardworking Americans rely upon,” White House Press Secretary Karine Jean-Pierre said, speaking on behalf of the president.
By assigning responsibility for the debt crisis to each other, Biden and McCarthy both hoped to win public opinion to their side.
The president, though, seemed to have an ace in the hole.
On Jan. 13, U.S. Treasury Secretary Janet Yellen informed Congress that the country was approaching the statutory debt limit. If the debt limit is reached, the government must stop borrowing money. Since the country operates at a deficit budget, ongoing borrowing is necessary to pay the bills. Without the ability to borrow, the government would have to begin delaying bill payments.
Yellen said that eventuality could be forestalled for at least four months, delaying the crisis until sometime in June. She urged Congress to act.
McCarthy immediately made it clear that Congress would not consider raising the debt ceiling unless Democrats agreed to cut spending. The two leaders met on Feb. 1 to discuss the matter, a meeting both described in positive terms.
However, the president insisted that he would not negotiate over lifting the debt limit, as that would endanger both the American economy and the full faith and credit of the United States. As for spending cuts, Biden said there was no point in meeting until Republicans produced a budget showing exactly which cuts they intended to make.
That began a three-month standoff during which McCarthy repeatedly called for negotiations, which Biden ignored.
The speaker wrote a letter to the president on March 28 asking for a meeting. He called Biden out in news conferences. He accused the president of bumbling his way into a default. He offered to meet the 80-year-old president for lunch and even bring him “soft food” if that would help, a joking reference to Biden’s age.
Through it all, Biden remained unmoved. Some analysts say that’s because he believed he held the upper hand.
McCarthy had been elected speaker on Jan. 7, just one week before Yellen warned Congress about the approaching debt limit. It took a record 15 votes for Republicans to unite behind McCarthy, seeming to show a rift within the party. Also, Republicans hold a razor-thin majority in the House. If even a few Republicans refused to support McCarthy’s initiatives, they would likely fail.
What’s more, a single member of the House can file a motion to vacate the chair, potentially ending McCarthy’s speakership.
So Biden stood pat, repeating his mantra that it is the responsibility of Congress to raise the debt ceiling and protect the full faith and credit of the United States.
“I think the Biden administration thought the Republicans would fail in the House,” Former House Speaker Newt Gingrich told The Epoch Times. “They thought that the ‘Don’t let us default’ argument would work, and they wouldn’t have to do anything.”
All of that changed in 24 hours.
On the afternoon of April 25, Republicans introduced the Limit, Save, Grow Act into the House of Representatives. The bill, which had been informally announced by McCarthy six days earlier, was quickly assigned to the House Committee on Rules for its immediate consideration.
Republicans, who hold a 9-4 majority on the committee, met that evening to consider the bill. Over loud objections by Democrats about a departure from “regular order” and after a slew of late-night alterations, apparently made to mollify a few Republican holdouts, the committee passed the bill on a party-line vote just after 2 a.m. on April 26.
The measure proposed to raise the debt ceiling just enough to reach into early 2024 while limiting federal spending to the 2022 level, capping spending growth at 1 percent annually for a decade, clawing back unspent COVID-19 money, increasing work requirements for some Medicaid and the Supplemental Nutrition Assistance Program (SNAP), and loosening permitting requirements for oil and gas drilling.
The next afternoon, while President Biden prepared to host South Korean President Yoon Suk Yeol for a state dinner, McCarthy brought the Limit, Save, Grow Act to a vote. It passed by one vote.
Just like that, McCarthy had achieved a major victory, confounding naysayers by passing a bill that both increased the debt limit and staked out Republican budget demands for 2024 and beyond.
Five days later, Biden invited McCarthy to the White House to discuss the debt limit.
At the Table
On May 1, the same day that Biden issued his invitation to McCarthy, Yellen again notified Congress of the impending x-date when the government would no longer be able to meet its obligations in full. The date would likely come in June, Yellen said, possibly as early as June 1. She again urged Congress to take action.
Biden and McCarthy met on May 9, along with Senate Majority Leader Chuck Schumer (D-N.Y.), Senate Minority Leader Mitch McConnell (R-Ky.), and House Minority Leader Hakeem Jeffries (D-N.Y.).
Though Democrats hold a slim majority in the Senate, Schumer had made no move to raise the debt ceiling. Experts have universally agreed that Schumer could not muster the 60 votes needed for a “clean” increase unencumbered by spending cuts, which Biden had wanted.
McConnell, himself a veteran debt limit negotiator, deferred entirely to McCarthy. “The solution is between the one person in America who can sign a bill into law and the speaker of the House. And the sooner they get together, the better,” McConnell said after the meeting, adding that he would support any deal brokered by McCarthy and Biden.
Though the initiative seemed to have shifted to McCarthy, negotiations carried out by subordinates made little progress in the days that followed.
The leaders met again on May 16, this time including Vice President Kamala Harris. Biden appointed veteran White House aides Steve Ricchetti and Shalanda Young to negotiate on his behalf. McCarthy named Rep. Garret Graves (R-La.) as his lead negotiator, later joined by Rep. Patrick McHenry (R-N.C.).
Biden expressed hope that a deal could be struck, though McCarthy declined to say he felt optimistic about the situation.
“We’re a long way apart. But what changed in this meeting was the president has now selected two people from his administration to directly negotiate with us,” McCarthy said.
Negotiations again came to a standstill while Biden was out of the country attending the G7 Summit in Hiroshima, Japan.
During his absence, hardliners on both sides called for no compromise on their respective views, a potential complication for both leaders.
Eleven senators, led by Sen. Bernie Sanders (I-Vt.), signed a letter to the president on May 18 urging him to invoke the 14th Amendment to continue paying the nation’s bills rather than to either default on the debt or acquiesce to what they see as unacceptable spending cuts.
The House Freedom Caucus, led by Rep. Scott Perry (R-Pa.), released a statement the same day urging McCarthy and Senate Republicans to break off talks with Biden and pass the Limit, Save, Grow Act into law with no changes.
When Biden boarded Air Force One to return home, talks were at a standstill.
One on One
During the flight, Biden and McCarthy spoke by phone and agreed to meet again on May 22. This time, the meeting would be between the president and the speaker only. During the meeting, both staked out their non-negotiables, paving the way for negotiators from both sides to iron out a deal.
Emerging from a 90-minute conversation at the White House, McCarthy said he believed an agreement could be passed through Congress before the country defaults on its debt.
“We still will have some philosophical differences, but I felt it was productive,” McCarthy said. “And I think we were able to really focus on the areas of difference.”
The president likewise characterized the meeting in positive terms.
“I just concluded a productive meeting with Speaker McCarthy about the need to prevent default and avoid a catastrophe for our economy,” the president wrote. “We reiterated once again that default is off the table and the only way to move forward is in good faith toward a bipartisan agreement.”
As in 1790, it appeared that compromise would once again provide a solution. The debt ceiling would be settled, at least for a time.
However, before the ink dries on any agreement and the Treasury secretary once again counts the days until the country again reaches the debt limit, two things remain the same: The United States is a nation in debt and its leaders disagree on what to do about it.