Can Debt Ceiling Debates Be Useful? History Says Maybe.

Are threats to oppose a debt ceiling increase ever defensible? More specifically, can they ever be justified as a form of leverage--as a tool to force politicians to make difficult but necessary decisions?

Republicans seem to think so. On Monday, the Treasury predicted that the nation would hit the debt ceiling in October, and some Republicans are hoping to use the crisis as a bargaining chip. One aide to House Majority Leader Eric Cantor, R-Va., called the debt limit a "good leverage point" in the drive to defund Obamacare. Other GOP leaders have been threatening more traditional forms of fiscal extortion. "We're not going to raise the debt ceiling without real cuts in spending," declared House Speaker John Boehner, R-Ohio, in July. "It's as simple as that."

The idea of using the debt ceiling for leverage is not new. Indeed, the nation's first debt limit crisis hinged on it. In the summer of 1953, President Dwight Eisenhower asked Congress for a modest boost in the debt ceiling. When austerity-minded lawmakers refused, it prompted a crisis that brought the nation to the brink of default - or to its fiscal senses, depending on your point of view.

Fooling People?

Soon after President Dwight Eisenhower took office, his administration began signaling the need for additional borrowing authority. But conservatives were not convinced. "For the Administration, this would be the easy way out of hard decisions," warned the Wall Street Journal. "[T]o lift the debt ceiling for this 'emergency' need will make the whole idea of a debt ceiling meaningless. To impose a limit on the government's debt and then to change it the moment it begins to squeeze makes of the whole thing a trick for fooling people."

In fact, the Journal suggested that a debt ceiling crisis might be useful. "The government would not be able to carry out all of its spending plans," the editors predicted. "Some things would have to be cut back a little further. Up against the hard ceiling, government officials would be compelled to make hard decisions, to choose between this dollar and that one." Staying under the existing cap would be difficult, but that was the point. "Under such a compulsion," the paper suggested, "many needed economies would be made that would otherwise be thought impossible."

Eisenhower didn't believe that spending cuts would be sufficient to keep federal debt under the cap. "Despite our joint vigorous efforts to reduce expenditures," he told Congress, "it is inevitable that the public debt will undergo some further increase." On July 30, Eisenhower asked Congress for an increase in the debt ceiling from $275 billion to $290 billion.

Treasury Secretary George M. Humphrey stressed the urgency of the situation. "We will just run out of money and we can't pay our bills," he told lawmakers. "It's just that simple." Failing to raise the borrowing limit, he warned ominously, might produce "a near panic."

The House of Representatives swallowed hard and approved Eisenhower's request. But the Senate had other ideas.

Sen. Harry F. Byrd, D-Va., took the lead in fighting the increase. Raising the limit would be "an invitation to extravagance," he declared. Keeping the present cap, moreover, would encourage much-needed economy. "It may be that the administration would be forced to operate on a very prudent and conservative budget in order to avoid an increase in the debt limit," he predicted.

A host of senators joined Byrd's campaign to reject the increase. The New York Times reported that Democratic opposition was "almost solid," and many Republicans were also prepared to break with the president.

Editorial Support

But Eisenhower's request had considerable support outside the Capitol, and especially on newspaper editorial pages. "No one likes to contemplate a larger debt burden," observed the Washington Post in a typical editorial. "But the debt figure is the consequence rather than the cause of Government spending." Byrd and other opponents of the increase had an understandable point, the paper acknowledged, as least on "psychological grounds." But the possibility of a panic could not be ignored. "There is simply no point in needlessly courting this danger," the paper warned. "The compelling point, it seems to us, is that the debt limit does not enforce economy. The real savings are made by other means."

Ultimately, however, senators were unmoved by such arguments, and the debt limit increase died in the Finance Committee. The Los Angeles Times called it a "stunning" defeat for the president.

After the vote, Byrd was careful to explain his reasoning. "My main objective was to emphasize the fiscal crisis that now faces us with deficits over most of the past fifteen years and more deficits to come unless we cut down expenditures," he said. The debt limit debate, in other words, was a way of drawing attention to difficult problems - of forcing action from reluctant politicians. It was, in a word, leverage.

As a leverage goes, it was pretty effective. Almost immediately, Eisenhower told his department heads to cut their spending. "It is absolutely essential that you begin immediately to take every possible step progressively to reduce the expenditures of your department during the fiscal year 1954," he told them.

Even Humphrey tried to make the best of the situation, suggesting that the government might be able to scrape by. "If we get the breaks we'll make it, but if we don't we'll be in trouble," he told reporters. "It's going to be very close at several points."

It was close, but Humphrey did manage avoid disaster. (Though not without resort to some fancy footwork, or what we now call "extraordinary measures"; in the fall of 1953, for instance, the Treasury was forced to sell some of its gold bullion to retire $500 million in outstanding debt).

As winter approached, Humphrey began a new campaign to raise the debt ceiling. And once again, journalistic opinion was on his side. "It is hard to see how the Government is to function unless the limit is raised," wrote columnist Stewart Alsop. The Los Angeles Times also endorsed the move. "Some members [of Congress] feel it is necessary to keep the administration in fiscal trouble, with the danger of bumping its head, in order to induce extraordinary efforts at economy," the paper editorialized. "But there is some danger of getting the country into serious difficulties by pursuing such a course."

Such worries rang hollow to many fiscal conservatives, who felt vindicated by the Treasury's success in coping with the existing limit. "The lesson is clear," exulted one editorial writer. "The way to get government expenditures down is to cut taxes and deny the administration authority to increase the debt. At an early date Congress might well consider cutting the debt limit."

Humphrey continued his campaign, however, and took care to consult with skeptical senators ahead of time. And in July - a full year after the first request - he coaxed a $6 billion temporary ceiling increase from lawmakers. Which ended the debt limit debates for the time being.

In retrospect, the 1953 crisis over the debt limit seems to bolster the arguments of modern Republicans hoping to use the ceiling as a bargaining chip. Byrd's refusal to make life easy for the Eisenhower Administration did, in fact, coax some extra cost cutting out of the White House. Then, as now, the debt limit was a recognition, not a cause, of government spending. But the refusal to increase the limit did serve as leverage in pending fiscal battles.

Which is to say that today's debt limit debate has much in common with its 1953 counterpart. Sixty years ago, "making do" was a plausible fiscal strategy - budget shortfalls were small enough to be manageable. As a result, few of those involved in the 1953 debate ever believed that default was a real possibility. Certainly not Harry Byrd, who was a fiscal conservative of the old school - he would have been appalled by the prospect of national default. Byrd was gambling that the Treasury could make stay under the debt ceiling, but it was a pretty safe bet.

By contrast, the prospects for muddling through in 2013 are non-existent. Budget challenges are simply too large to cobble together a solution through discretionary spending cuts.

But the 1953 experience underscores the way in which debt limit debates have historically been used to focus the nation's political attention on fiscal policy. That leverage has always entailed certain risks. But it's also been successful - at least once.