Isabella Carter
The power to borrow money is a vital power for the US government, and it is one of the few real powers expressly delegated to the government created under the Articles of Confederation. The ability to borrow money is also known as the power of the purse, and it is held by Congress, which decides how borrowed money is spent. The US Constitution, in Article I, Section 8, Clause 2, empowers Congress to 'borrow money on the credit of the United States. This power is typically exercised through the sale of bonds or the issuance of bills of credit. The US Treasury issues or creates the debt, and the Bureau of Fiscal Service manages the government's debt, keeping records, selling the debt, and handling the repayment of loans.
| Characteristics | Values |
|---|---|
| Who has the power to borrow money? | Congress |
| Who decides how the borrowed money is spent? | The legislative branch of the government (Congress) |
| Who manages the government's debt? | The Bureau of the Fiscal Service |
| Who does the government borrow money from? | Other federal government agencies, individuals, businesses, state and local governments, as well as people, businesses and governments from other countries |
| What does the government borrow money for? | To pay its bills |
| What does the government issue or create when it borrows money? | Debt |
| What is the maximum amount of debt the government can have? | The debt ceiling |
| Who decides to raise the debt ceiling? | Congress |
| What does the government sell to borrow money? | Treasury marketable securities such as Treasury bills, notes, bonds and Treasury inflation-protected securities (TIPS) |
| What is the power to borrow money also called? | The power to authorize the issue of definite obligations for the payment of money borrowed |
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What You'll Learn
The US Constitution
The Borrow Money Power, as outlined in the Constitution, grants Congress the authority to "borrow money on the credit of the United States." This power is derived from Section 8 of Article I, which enumerates the powers of Congress. It states that "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States." The borrowing power is implicitly included in the phrase "to pay the Debts."
The inclusion of the Borrow Money Power in the Constitution was not without debate during the Constitutional Convention of 1787. The Founding Fathers recognized the potential benefits and risks associated with this power. On one hand, the power to borrow money could provide the young nation with the financial flexibility needed to respond to emergencies, fund infrastructure projects, and promote economic growth. On the other hand, there were concerns about excessive debt accumulation and the potential for future generations to bear the burden of repayment.
Alexander Hamilton, the first Secretary of the Treasury, played a pivotal role in shaping the understanding and use of the Borrow Money Power. Hamilton argued that the power to borrow money was essential for establishing the nation's creditworthiness and ensuring financial stability. He proposed the assumption of state debts incurred during the Revolutionary War, which helped create a unified national credit market and strengthened the federal government's fiscal position. Hamilton also established the practice of issuing federal bonds, which became a key tool for financing government operations and managing the national debt.
Over time, Congress has exercised the Borrow Money Power on numerous occasions, particularly during times of war, economic crises, and national emergencies. For example, the power was invoked during the Civil War to finance the Union's war efforts, and again during the Great Depression to fund relief programs and stimulate the economy. More recently, the federal government has relied on borrowing to fund responses to the 2008 financial crisis and the COVID-19 pandemic.
While the Borrow Money Power has been a critical tool for the federal government, it has also led to debates and concerns about fiscal responsibility and the long-term sustainability of the national debt. The Constitution provides some checks and balances on this power, as all borrowing must be authorized by Congress, and the President plays a role in executing the laws enacted by Congress. Additionally, the Supreme Court can interpret the scope and limits of the Borrow Money Power, ensuring that it is exercised within the boundaries set by the Constitution.
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Congressional control
The US Constitution grants Congress the power to borrow money on the credit of the United States. This power is typically exercised through the sale of bonds or the issuance of bills of credit, which are intended to circulate as currency and require the public to lend money to the government.
The Constitution's framers recognised the importance of empowering the government to borrow money to provide for emergencies, particularly during wartime. They did not place a limit on how much money Congress could borrow, instead leaving this as a political question to be determined by elected representatives.
Congress, as the ultimate authority on government spending, controls the appropriations process. The House Committee on Ways and Means, which has jurisdiction over tax policy, plays a key role in this process. However, legislation and funding are kept separate, with priorities spelled out in one law and money appropriated for those priorities in another.
The power to borrow money is considered so important that it was one of the few real powers explicitly granted to the government under the Articles of Confederation. This power has been interpreted differently by Federalists and Republicans, with Alexander Hamilton, for example, seeking to use it to authorise the chartering of the First Bank of the United States to maintain federal control over the federal reserves.
The Court has affirmed the power of Congress to borrow money, holding that Congress creates a binding obligation to pay the debt as stipulated and cannot thereafter vary the terms of its agreement.
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Treasury bills and bonds
Treasury bills are short-term investments, with maturities ranging from a few weeks to a year. They are considered safe and liquid securities due to their short-term and nearly risk-free nature. T-bills are bought at a discount to their par or face value and then redeemed at their full face value upon maturity. The difference between the discounted price and the face value represents the investor's return on investment. For example, an investor who purchases a $100 T-bill at a discounted price of $97 will receive the full $100 face value when the bill matures. T-bills pay no interest during the term, and interest is only paid at maturity.
Treasury bonds, on the other hand, are long-term debt obligations with maturities of 20 to 30 years. They are the opposite of T-bills in terms of maturity and yield, as they typically offer the highest yields among T-bills, T-bonds, and Treasury notes. T-bonds pay interest every six months until the bond is sold or matures, at which point the investor receives the bond's face value. It is possible to sell a T-bond before maturity, but there is a risk of losing money as it may not be possible to sell it for its face value.
Both Treasury bills and bonds play a crucial role in the US government's borrowing system, offering investors safe and predictable investment options with varying maturity periods and interest payout structures.
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Federal government control
The US Constitution grants Congress the power to borrow money on the credit of the United States. This power is usually exercised through the sale of bonds or the issuance of bills of credit, which are intended to circulate as currency and require the public to lend money to the government.
The Constitution, under Article I, Section 8, states that "Congress shall have Power [...] to borrow Money on the credit of the United States." This clause, known as the Borrowing Clause, gives Congress the authority to issue debt and borrow money by selling Treasury securities such as Treasury bills, notes, bonds, and Treasury inflation-protected securities (TIPS) to various entities, including federal government agencies, individuals, businesses, and other countries' governments.
The Framers of the Constitution recognized the importance of empowering the government to borrow money, especially in emergencies and times of war. They intentionally did not place a limit on how much money Congress could borrow, leaving it as a political question to be determined by elected representatives. This stands in contrast to the English system, where the king had wide latitude over spending once funds were raised.
The power to borrow money is considered vital to the government, as it can be essential for the country's life and security in times of extremity. However, the exercise of this power creates a binding obligation for the government to repay the debt as stipulated, and it cannot unilaterally change the terms of its agreement.
The interpretation and implementation of the Borrowing Clause have been a subject of debate between Federalists and Republicans, with Alexander Hamilton seeking to use it to authorize the chartering of the First Bank of the United States to maintain federal control over the federal reserves. The constitutionality of the bank was widely debated, as the Constitution did not expressly authorize Congress to charter corporations. Nevertheless, the Supreme Court upheld the bank's constitutionality in McCulloch v. Maryland (1819), asserting federal government control over its reserves.
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The Bank of the United States
The Constitution grants Congress the power to borrow money and issue bills on the credit of the United States. This power is derived from Article I, which outlines the legislative powers of Congress. When Congress borrows money, it creates a binding obligation to repay the debt as stipulated and cannot change the terms of its agreement. This power to borrow money has been a topic of debate, with critics arguing that the Constitution grants power to tax and print money to Congress, not a private corporation.
The history of central banking in the United States has been shaped by earlier experiments and political responses. One notable figure in the development of central banking was Alexander Hamilton, who played a key role in the establishment of the country's first central bank. In 1791, Hamilton wrote about the importance of preserving the intrinsic value of the money unit, which set the foundation for the Federal Reserve System.
The First Bank of the United States was established in 1791 and operated as the country's national bank for 20 years. It was successful in paying off war debts and in its commercial operations. However, critics argued that it was unconstitutional for a private corporation to have the power to tax and print money. As a result, in 1811, Congress refused to renew the bank's charter by a single vote, and the bank ceased operations.
With the outbreak of the War of 1812, federal debt began to accumulate again, and most state-chartered banks suspended specie payments. Public opinion once again favoured the idea of a national bank, and Congress chartered the Second Bank of the United States in 1816. The primary role of this new bank was to promote a uniform currency by resuming specie payments.
The Federal Reserve System, established in 1913 with the passing of the Federal Reserve Act, took a decentralised approach to central banking. This was done to prevent the concentration of power and address concerns that the bank would be controlled by Wall Street. The system consisted of 12 District Banks that operated independently, with an oversight board located in Washington, D.C. Each District Bank issued its own currency, backed by the promise to redeem it in gold.
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Frequently asked questions
The 'borrow money power' is the ability of Congress to borrow money and issue bills on the credit of the United States.
This means that the US government can issue debt by selling treasury marketable securities such as Treasury bills, notes, bonds and Treasury inflation-protected securities (TIPS) to other federal government agencies, individuals, businesses, state and local governments, as well as people, businesses and governments from other countries.
The legislative branch of the government, Congress, decides how the money is spent.
There is a maximum amount of debt the US government can have, known as the 'debt ceiling'. If the government wants to raise this amount, the US Treasury must get approval from Congress for a new, higher limit.
The original draft of the US Constitution, reported to the convention by its Committee of Detail, empowered Congress with the ability to borrow money. In 1870, the Court relied on this clause to hold that Congress had the authority to issue treasury notes and make them legal tender.
