Simone Lawson
The U.S. Constitution's Debts and Engagements Clause gives Congress the power to pay off debts incurred by the country. During the American Revolution, the Continental Congress borrowed money from foreign and domestic sources, and the new U.S. government faced the challenge of paying off these debts. The Constitution's Debts Clause provided that The Legislature of the U.S. shall have the power to fulfil the engagements...and to discharge...the debts of the U.S.. This clause has rarely been a topic of debate since the federal government satisfied its inherited financial obligations.
| Characteristics | Values |
|---|---|
| Who has the power to settle foreign debts? | Congress |
| When was the power to settle foreign debts established? | 1790 |
| Who proposed the plan to settle foreign debts? | Secretary of the Treasury Alexander Hamilton |
| What did the Debts Clause originally propose? | "The Legislature of the U.S. shall have power to fulfil the engagements which have been entered into by Congress, and to discharge as well the debts of the U.S.: as the debts incurred by the several States during the late war, for the common defence and general welfare." |
| What was the outcome of the debate over whether the Debts Clause should state that Congress "shall discharge the debts" or "has the power to do so"? | The final version of the Debts Clause states that Congress has the power to discharge debts, rather than that it shall discharge debts. |
| What is the relevant section of the U.S. Constitution? | Article I, Section 8, Clause 1 |
| What is the relevant clause of the U.S. Constitution? | The Debts and Engagements Clause |
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What You'll Learn
The US Constitution's Debts and Engagements Clause
The clause assures creditors that the adoption of the Constitution would not erase existing obligations. This provision was included in the Constitution to assure the United States' foreign creditors that the new government would honour its financial obligations.
The original proposal for the Debts Clause stated that:
> The Legislature of the U.S. shall have power to fulfil the engagements which have been entered into by Congress, and to discharge as well the debts of the U.S.: as the debts incurred by the several States during the late war, for the common defence and general welfare.
There was debate over whether the Debts Clause should state that the new Congress "shall discharge the debts", or merely that it has the "power to do so". The final version of the clause, as written by the Committee of Style, states that:
> All Debts contracted and Engagements entered into, before the Adoption of this Constitution, shall be as valid against the United States under this Constitution, as under the Confederation.
The Debts and Engagements Clause has rarely been a topic of debate since the federal government satisfied the financial obligations inherited from the Confederation.
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The validity of public debt
The US Constitution grants Congress the power to pay debts and provide for the common defence and general welfare of the United States. The Constitution's Debts and Engagements Clause states that:
> The Legislature of the US shall have the power to fulfil the engagements entered into by Congress, and to discharge the debts of the US and the debts incurred by the several States during the late war, for the common defence and general welfare.
The Public Debt Clause was inspired by the desire to ensure the obligations of the government issued during the Civil War were met, but its language indicates a broader connotation. It embraces whatever concerns the integrity of public obligations and applies to government bonds issued both before and after the adoption of the Amendment.
The US government has a history of struggling to pay off debts, including those incurred during the American Revolution, when Congress relied on printing more money, which led to hyperinflation. After the Revolutionary War, the US government also struggled to pay off loans from the French, Dutch, and Spanish governments, eventually defaulting on some of these debts.
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Congress's power to pay debts
The U.S. Constitution of 1789 vested the new federal government with the authority to settle debts, an issue that had previously been a challenge for the new U.S. government. The Constitution's Spending Clause grants Congress the power to tax and spend money for the general welfare of the United States. This includes the power to pay debts and provide for the common defence.
Article I, Section 8, Clause 1 of the U.S. Constitution states that "The Congress shall have Power...to pay the Debts and provide for the common Defence and general Welfare of the United States". This clause, known as the Debts and Engagements Clause, gives Congress the authority to fulfil the financial obligations of the U.S. government, including debts incurred by the states during the war.
The scope of Congress's spending power has been a subject of debate throughout history, with key members of the founding generation holding differing views. The Supreme Court addressed the issue in the 1930s, embracing a broad interpretation of Congress's discretion to identify expenditures that further the general welfare. This power has been used to pursue broad policy objectives and incentivize states to adopt policies that the federal government cannot impose directly.
Congress's spending power is not without limitations. The Supreme Court has placed restrictions on it, particularly regarding the conditions Congress places on appropriations. Congress must exercise its spending power in pursuit of the general welfare, and any conditions placed on the receipt of federal funds must be unambiguous and relate to the federal interest.
Additionally, the Public Debt Clause of the Fourteenth Amendment addresses the validity of public debt, stating that the debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion shall be valid. However, neither the United States nor any state shall assume or pay any debt incurred in aid of insurrection or rebellion against the United States.
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The US government's financial obligations
US Government's Financial Position
The US government's financial position and long-term financial condition can be evaluated in dollar terms and in relation to the economy. As of 2024, the budget deficit was $1.8 trillion, financed primarily through borrowing from the public. The debt held by the public, excluding accrued interest, equates to 98% of GDP.
Federally Guaranteed Obligations
Federally guaranteed obligations are debt securities issued by the US government and are considered risk-free due to the full faith and credit of the federal government. These obligations include US Treasury bonds, Treasury notes, and Treasury bills (T-bills). T-bills are short-term debt obligations that mature in less than a year and are sold in denominations of $1,000 up to $5 million. Treasury inflation-protected securities (TIPS) protect investors from inflation, while Floating Rate Notes (FRNs) are variable interest rate notes issued by government agencies and financial institutions.
Historical Context
Historically, the US government has struggled to repay loans, particularly after the American Revolution, when it owed money to the French, Spanish, and Dutch governments, as well as private investors. Under the Articles of Confederation, the government lacked sufficient tax authority to secure revenue to repay these debts. However, in 1795, the US government settled its debts with France with the help of American banker James Swan.
Constitutional Framework
The US Constitution's Debts and Engagements Clause addresses the government's power to pay debts. It states that "The Congress shall have Power...to pay the Debts and provide for the common Defence and general Welfare of the United States." This clause has rarely been a topic of debate since the federal government satisfied the financial obligations inherited from the Confederation.
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The US's debts to foreign governments
The US Constitution's Debts and Engagements Clause gives Congress the power to pay off debts and provide for the common defence and general welfare of the country. The US has two types of debt: public and intragovernmental. Public debt is sold as Treasury bonds, bills, and notes to outside investors, including foreign governments, while intragovernmental debt is what the government owes to its own programs, like Social Security and Medicare.
Historically, the US has relied on foreign loans to finance its deficits, which has introduced economic risks and vulnerabilities. During the American Revolution, the Continental Congress accepted loans from France, which caused diplomatic tension during the post-independence period. The US also owed money to the Spanish Government, Dutch bankers, and private Dutch investors. In 1795, the US settled its debts with the French Government with the help of American banker James Swan, who resold the debts at a profit on domestic markets.
Today, foreign ownership of US debt remains significant, with Japan, China, the United Kingdom, Luxembourg, and Canada being the top five countries owning the most US debt as of April 2024. Over the past two decades, Japan and China have owned more US Treasurys than any other foreign nation. The US's reliance on foreign capital to finance its deficits has contributed to its national debt and could lead to economic imbalances affecting jobs and industries within the country. The US also has the largest external debt in the world, with total US federal government debt exceeding $30 trillion as of February 2022.
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Frequently asked questions
The US Constitution states that "The Congress shall have Power... to pay the Debts and provide for the common Defence and general Welfare of the United States."
This is covered under the Debts and Engagements Clause.
No, there was debate at the Constitutional Convention over whether the new Congress "shall discharge the debts" or merely has the power to do so. The Debts Clause was separated from the Debts and Engagements Clause, which became part of Congress's Article I spending power.
