The Borrowing Clause

The Congress shall have Power . . . To borrow Money on the credit of the United States. . . .

—James C. Phillips

Introduction

The Borrowing Clause gives Congress authority to borrow money on behalf of the United States. During the ratification debates, Federalists and Anti-Federalists alike viewed this power as a way to support the “national defense” during times of war. Early in the Republic, Secretary of the Treasury Alexander Hamilton invoked the Borrowing Clause to support the constitutionality of chartering a Bank of the United States. Jeffersonians disagreed with the bank’s constitutionality, and dismantled the national bank when they came to power, but it was reestablished during the War of 1812. In the twentieth century, federal spending increased and federal debt reached unprecedented levels. Litigation over the clause has involved intergovernmental tax immunity, the government’s power to make contracts, and Congress’s powers to alter debt obligations.

History Before 1787

The Articles of Confederation provided the power “to borrow money, or emit bills on the credit of the united states.”¹ However, as St. George Tucker observed, because the government did “not possess[] any revenue independent of the states,” these “loans were obtained with difficulty, and, very rarely in time to answer the purposes for which they were intended.”²

The Constitutional Convention

During the Constitutional Convention, the Committee of Detail included the same language from the Articles of Confederation in its report. Congress would have the power to “borrow money, and emit bills on the credit of the United States.” The delegates voted to strike the power to “emit bills.”³ This revision strongly suggests that Congress was not authorized to borrow by means of issuing paper money, although it appears that interest-bearing debt instruments were permissible. (See Essay No. 48.)

The Ratification Debates

In Federalist Nos. 15, 30, 34, and 41, Madison and Hamilton connected the power to borrow money to the “national defence” and to the raising of revenue through taxes. The Anti-Federalist Brutus linked the powers to borrow money and the power to raise and support armies to the power to lay and collect taxes. He considered the first two “together . . . because their extent, and the danger that will arise from the exercise of these powers, cannot be fully understood, unless they are viewed in relation to each other.”⁴ Federalists argued that the power to borrow money was necessary to handle the debts the nation had already undertaken.⁵

Federalists argued that borrowing money on the public credit was generally reserved for the emergencies of war. Still, Anti-Federalists lamented the lack of any limitation on the borrowing power provided to Congress. “The Congress, by the proposed system,” wrote A Farmer, has “the power of borrowing money to what amount they may judge proper, consequently to mortgage all our estates, and all our sources of revenue.”⁶ Brutus raised the concern that “Congress may mortgage any or all the revenues of the union, as a fund to loan money upon . . . the interest of which will be equal to the annual revenues of the country” and thereby “create a national debt, so large, as to exceed the ability of the country ever to sink.”⁷ But while there may not have been any constitutional check on Congress, one scholar observed, “[i]t was undisputed [that] the executive would have no prerogative power to tax, spend, or borrow.”⁸

Early Practice

During the nation’s early history, Congress was expected to keep expenditures equal to or less than revenues.⁹ Thus, the Treasury Department assiduously earmarked all revenues for specific government programs.¹⁰ The Borrowing Clause, however, had a practical corollary. The terms upon which a nation could borrow money depended on its credit standing. President George Washington’s Farewell Address captured the general sentiment of the times. He urged Americans to “cherish public credit,” which was a “very important source of strength [and] security.” Washington stressed that credit should be used “as sparingly as possible” and that the country should “avoid[] likewise the accumulation of debt.”¹¹

Although Federalists and Democratic-Republicans agreed on the need to maintain the public credit, they diverged considerably in their views on how the borrowing power should be implemented. Secretary of the Treasury Alexander Hamilton, for example, argued “that [because] loans in times of public danger, especially from foreign war, are found an indispensable resource . . . the necessity for borrowing in particular emergencies cannot be doubted.”¹² Others, such as Benjamin Rush, worried that the money borrowed would be used only to finance “unjust and offensive wars” since “just [and] necessary” wars in a republic could “always be [supported] by annual taxes from a free people.”¹³

In 1791, Hamilton sought to assure a strong central government through the chartering of the First Bank of the United States.¹⁴ Relying on a broad interpretation of the Borrowing Clause, he contended that the bank could maintain federal control over the federal monetary reserves and issue debt instruments that circulated like money. Hamilton viewed the issuing of federal debt instruments as an essential stimulant to commerce. This debt would provide a source of capital to a capital-poor society and was equally important for purposes of revenue collection. The Constitution, however, did not expressly authorize Congress to charter corporations, and the constitutionality of the bank was widely debated. Representative James Madison opposed his old Federalist co-author on the House floor during debate over the bank bill. Madison questioned the constitutional authority for a national bank by asking and answering: “Is this a bill to borrow money? It does not borrow a shilling.”15 The bill to charter the bank went far beyond the scope of the Borrowing Clause. President Washington ultimately approved the national bank.

A decade later, President Thomas Jefferson and his Democratic-Republican party dismantled much of Hamilton’s program.¹⁵ To the Jeffersonians, a balanced budget reflected a popular desire to limit the size and power of the federal government and protect states’ rights. Congress repealed Hamilton’s internal taxes, which provided security for the federal debt. Jefferson appointed Albert Gallatin as Secretary of the Treasury with a mandate to pay down the federal debt.

Wartime exigencies and economic crises inclined the country toward the modern interpretation of the Borrowing Clause. During the War of 1812, a financial emergency threatened national security. A bipartisan consensus formed around the need for the federal government to control its reserves through the Second Bank of the United States. Chief Justice John Marshall’s opinion in McCulloch v. Maryland (1819) upheld the constitutionality of the bank.¹⁶ Marshall specifically found that the bank could be supported based on Congress’s enumerated powers, such as borrowing money, that had been entrusted to the federal government. He also cited the need for “ample means” to exercise these “ample powers.”¹⁷

With a few exceptions, subsequent administrations prioritized balancing the federal budget. In 1835, President Andrew Jackson successfully paid down the federal debt, making the last two years of his presidency the only time our nation has been debt-free.¹⁸ The early Presidents followed the advice of George Washington in his Farewell Address.

Modern Practice

From 1789 until 1917, the federal government’s policy of incurring and repaying debt remained relatively consistent.¹⁹ Congress borrowed money to pay for wars and to sustain the economy during a recession, but it began to pay down those debts upon the return to peace and financial stability. In 1917, Congress granted the Department of the Treasury standing borrowing authority without the need for particular federal laws authorizing the borrowing.²⁰ Nevertheless, for many years, Congress continued to manage the incurrence and repayment of debt in substantially the same manner as before.

That policy would change after World War II. Attitudes were changed based partly on the influence of economic thinkers such as John Maynard Keynes. Also, during the New Deal, there was an expansion of government-funded entitlements as well as a large standing military force. These expenditures produced sustained peacetime deficits and very few periods of debt reduction. Since the 1990s, there have been periodic but failed attempts to implement spending and debt limits, as federal debt has reached unprecedented levels. Congress attempted to give the President more control over spending through the Line-Item Veto Act, but the Supreme Court declared it unconstitutional in Clinton v. New York (1998).²¹ (See Essay No. 36.)

Judicial Precedent

Legal disputes dealing with the Borrowing Clause involve three issues. The most litigated issue involves the principle of immunity from intergovernmental taxation: When is the federal government immune from the taxes imposed by state and local governments? The U.S. Supreme Court has held that the Supremacy Clause prohibits state and municipal governments from directly or indirectly taxing the interest income on federal government debt and thereby interfering with the federal government’s power under the Borrowing Clause.²² (See Essay No. 154.)

The Borrowing Clause also implicitly requires Congress to maintain the public credit. The Supreme Court has invoked the clause to treat the government like a private party in its contractual dealings. In addition, the clause vests Congress with the power to contract against subsequent repudiation or impairment of its obligations by future Congresses. Perry v. United States (1935) cautioned that the power to borrow money is vital and one upon which the government’s very life may depend.²³ By making the promise to repay binding, the United States is able to maintain sufficient credit to borrow.

Congress also has the power to authorize the issuance of definite obligations for the payment of money borrowed, but it has not been vested with authority to alter or destroy those obligations. United States v. Winstar Corp. (1996) held that the government’s contractual obligations would be enforced unless doing so blocked the exercise of one of the government’s essential sovereign powers.²⁴

The Debt Ceiling

Starting with the Obama Administration, there have been intense political debates about the possibility of the federal government reaching its debt limit or ceiling—the congressionally authorized limit on how much the federal government can borrow. Today, the nation’s debt is bigger than its gross domestic product.²⁵ In 2011, given the text of the Borrowing Clause, President Barack Obama determined that he could not unilaterally raise the debt ceiling.²⁶ Eventually, Congress acquiesced and raised the ceiling, enabling the government to borrow more money. In 2023, when the debt ceiling was reached without congressional action, the Department of the Treasury decided to “take well-established ‘extraordinary measures’ to borrow additional funds without breaching the debt ceiling.”²⁷

Because the Constitution imposes no express limits on the borrowing power, when and how much to borrow are political questions left to Congress with public opinion and elections remaining the only check on this power. As in the Founding era, the question of the extent to which the government should run deficits and maintain a large federal debt are at the heart of the debate about the proper scope of the federal government.

1. Articles of Confederation, art. IX, § 5. ↩︎
2. St. George Tucker, 1 Blackstone’s Commentaries: With Notes of Reference to the Constitution and Laws of the Federal Government of the United States and of the Commonwealth of Virginia 247 (1803). ↩︎
3. 2 Farrand’s 168, 303. ↩︎
4. Storing 2.9.93–.95. ↩︎
5. William Rawle, A View of the Constitution of the United States 81 (2d ed., 1829). ↩︎
6. Storing 3.14.12. ↩︎
7. Storing 2.9.93–.95. ↩︎
8. Michael W. McConnell, The President Who Would Not Be King: Executive Power Under the Constitution 101 (2020). ↩︎
9. Kate Stith, Rewriting the Fiscal Constitution: The Case of Gramm–Rudman–Hollings, 76 Calif. L. Rev. 595, 601 (1988). ↩︎
10. Id. at 603. ↩︎
11. George Washington, Farewell Address (Sept. 19, 1796), https://perma.cc/Y7XS-U5FG. ↩︎
12. Alexander Hamilton, Report Relative to a Provision for the Support of Public Credit (Jan. 9, 1790), https://perma.cc/NV8R-JUJQ. ↩︎
13. To James Madison from Benjamin Rush (Mar. 10 1790), https://perma.cc/T2CR-STMQ; Tucker, at 246–47. ↩︎
14. Robert J. Reinstein, The Limits of Congressional Power, 89 Temp. L. Rev. 1, 7 (2016). ↩︎
15. Gergory May, Jefferson’s Treasure: How Albert Gallatin Saved the New Nation from Debt 87–140 (2018). ↩︎
16. 17 U.S. 316 (1819). ↩︎
17. Id. at 408. ↩︎
18. Chris Edwards, Federal Debt in Historical Perspective, in A Fiscal Cliff 24–26 (John Merrifield & Barry W. Poulson eds. 2020). ↩︎
19. Edwards, at 24–26. ↩︎
20. Second Liberty Bond Act, Pub. L. 65-43, 40 Stat. at 288. ↩︎
21. 524 U.S. 417 (1998). ↩︎
22. State of Missouri ex rel. Missouri Insurance Co. v. Gehner, 281 U.S. 313 (1930). ↩︎
23. 204 U.S. 330 (1935). ↩︎
24. 518 U.S. 839 (1996). ↩︎
25. Drew DeSilver, 5 Facts About the U.S. National Debt, Pew Research Center (Feb. 14, 2023), https://perma.cc/LV2V-VRGN. ↩︎
26. David Jackson, Obama Says He Can’t Raise Debt Ceiling on His Own, USA Today (July 22, 2011), https://perma.cc/Q2PB-MU3A. ↩︎
27. Cong. Budget Office, Federal Debt and the Statutory Limit (Feb. 2023), https://perma.cc/D4CG-7L73. ↩︎