On Thursday, the Financial Times reported that Michael Bradfield, former General Counsel to the Federal Reserve Board and the FDIC, had sent a memorandum to Congress supporting the constitutional option to the debt limit, in which the president would invoke section 4 of the 14th Amendment to override the debt limit and raise the cash necessary to avoid default and the violation of laws requiring spending for various purposes. I have managed to obtain a copy of this memo through a congressional source. Because of its importance to the debate taking place right this moment, I am pasting the memo below. I have not asked Mr. Bradfield's permission because I do not know where to reach him. I hope he doesn't mind.
July 25, 2011
Subject: The Debt Limit is Unconstitutional and Void
Now that we are so close to the August 2, 2011, deadline when the Secretary of the Treasury has stated that the United States Government will be unable to service the public debt of this country, it is worth taking another look at the idea that section 4 of the 14th Amendment would make the public debt limit statute unconstitutional insofar as it would prevent timely service of principal and interest on the public debt.
The key to the analysis of this question is the Supreme Court decision in Perry v. United States, one of the three "Gold Clause Cases." In Perry the Court held that the Joint Resolution of June 5, 1933 (the Gold Clause Resolution), which had the effect of voiding gold clauses in private and government contracts, was unconstitutional insofar as it operated to deprive a bondholder of the benefit of the provision in a U.S. Government bond that the principal and interest would be payable in United States gold coin of standard of value fixed when the bond was issued. The Court said:
By virtue of the power to borrow money ‘on the credit of the United States,’ the Congress is authorized to pledge that credit as an assurance of payment as stipulated, – as the highest assurance the Government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge, it is to assume that the Constitution contemplates a vain promise, a pledge having no other sanction than the pleasure and convenience of the pledgor.
As one of the key reasons for this conclusion, the Court cited section 4 of the 14th Amendment which provides: "The validity of the public debt of the United States, authorized by law,… shall not be questioned." The Court then proceeded to give this provision a significance that is highly relevant to today’s discussion of the debt limit. The Court stated:
While this provision was undoubtedly inspired by the desire to put beyond question the obligations of the Government issued during the Civil War, its language indicates a broader connotation. We regard it as confirmatory of a fundamental principle, which applies as well to the government bonds in question, and to others duly authorized by the Congress, as to those issued before the Amendment was adopted. Nor can we perceive any reason for not considering the expression "the validity of the public debt" as embracing whatever concerns the integrity of the public obligations. We conclude that the Joint Resolution of June 5, 1933, in so far as it attempted to override the obligation created by the bond in suit, went beyond the congressional power.
The broad scope of this language articulated a fundamental principle of the Constitution that gives a very high priority to maintaining the full faith and credit of the United States. In articulating this principle, the Court gave a very broad meaning to section 4 of the 14th amendment when it stated that it understands the expression "the validity of the public debt" in this section "as embracing whatever concerns the integrity of the public obligations." It is clearly recognized today that the debt limit has a direct and critical impact on the “integrity of the public obligations.”
Because of this direct impact of the debt limit of the “integrity of the public obligations” the Supreme Court decision in Perry the United States means that the public debt limit statute is unconstitutional and void insofar as it would prevent timely service of principle and interest on the public debt. The decision of the Court in Perry made the Gold Clause Resolution void as it applied to government obligations containing a gold clause. Similarly, it makes the debt limit statute void as it applies to servicing interest and principal of U.S. debt obligations.
The debt limit was not void when it was adopted because it had no effect on the validity of the public debt. Beginning on August 2, 2011, it will have that effect, and accordingly, the Supreme Court, under the rationale of Perry, would find it void with no force and effect limiting the full faith and credit pledge of the United States for the payment of its debt.
In some recent discussions of the impact of the 14th Amendment on the debt limit, it has been suggested that the debt limit cannot be ignored because under the Constitution only Congress can authorize borrowing in the name of the United States. However, Congress has already authorized the Secretary of the Treasury to borrow such amounts as are necessary to meet the obligations of the United States and provided a continuing appropriation of the sums necessary to service interest and principal on the debt. Congress has not repealed this authorization. Instead, at the very least, in the last 10 years it has authorized expenditures that it was well aware could not be fully paid from revenues but only from a combination of revenues and borrowing from the public. And, in addition, Congress was aware that many years of running a budget surplus would be necessary before it would be possible to service the public debt entirely from revenues and not at least partially from public borrowing.
In this situation there is a direct conflict between the spending policy and public debt policy of the Congress. Where this conflict exists, the Supreme Court has said that the section 4 of the 14th Amendment gives priority to the payment of interest and principal on the public debt and Congress does not have the power to override the obligations created prior to the time that the debt limit is breached. Accordingly, just as the Supreme court held that the Gold Clause Joint Resolution was void when it repudiated the Government’s obligation to pay its debt in a value measured by a previously contractually specified weight of gold, the Supreme Court would hold that a limit on borrowing to provide the funds necessary to pay debts contracted before the debt limit was beach would be similarly void.
Since section 4 of the 14th amendment only applies to the public debt authorized by Congress, the debt limit statute would not be void with respect to the payment of other obligations of the United States. Accordingly, it is argued by some that the Secretary of the Treasury could use incoming revenues to pay interest and principal on the public debt of the United States and not pay other obligations of the United States.
There may be many practical and legal reasons why the Secretary of the Treasury does not have the ability to use the revenues of the United States in this manner, least of which is the fact that the law does not give him the discretion to choose among the creditors of the United States in carrying out the functions assigned to him by statute. Moreover, the Perry Case is also very clear that the Congress does not have the constitutional authority to repudiate the contractual obligations of the United States owed to third parties.
Specifically, the Supreme Court has firmly determined in a considerable number of decisions that the Congress under the Constitution has the power to control or modify the contracts of private parties when they interfere with the exercise of its constitutional authority, but does not have the power under the Constitution to alter or repudiate the substance of its own contracts with private parties. In such cases of default on private contracts, the Court said "The United States are as much bound by their contracts as are individuals.”
The Court stated the general constitutional principle that the repudiation of private contracts by the U.S. government “… it is as much repudiation, with all the wrong and reproach that term implies, as it would be if the repudiator had been a state or a municipality or a citizen." In addition, the Court has specifically held that economic emergency does not give the Congress greater authority to repudiate private contracts of the U.S. Government. The Court stated in that in March 1933 when “in the administration of all government business economy had become urgent because of lessened revenues and the heavy obligations to be issued in the hope of relieving widespread distress,” that the Congress “was without the power to reduce expenditure by abrogating contractual obligations of the United States,” and that “To abrogate contracts, in the attempt to lessen government expenditure, would be not the practice of economy, but an act of repudiation.”
In other words, Congress does not have the constitutional authority to adopt a statute that has the effect of forcing a repudiation of the contractual obligations of the United States. This is true even if the Congress is acting or not acting “because of lessened revenues and the heavy obligations to be issued in the hope of relieving widespread distress.” Accordingly, the debt limit is void to the extent that it would cause the repudiation of the contractual obligations of the United States.
Leaving aside the political issues, there is one important practical problem. The question arises as to the effect on the market for the issuance of the debt of the United States in the period of time it would take to have a decision of the Supreme Court. The reality of this potential problem needs the attention of experts in the Treasury and Federal Reserve who carefully follow market developments. In addition, perhaps there is some way of accelerating the decision making process. In the light of the Perry and other cases, it appears that the Supreme Court would be bound by it prior decisions and by issues of principle to uphold any decision by the President to ignore the debt limit in present circumstances.
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