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Memo to Trump: U.S. Debt 'Shall Not Be Questioned'

Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to the Bloomberg View. Follow him on Twitter at @smihm.
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Donald Trump got into hot water last week for suggesting that the U.S. could effectively repudiate some of its debt, offering to give the holders of its securities something less than what they are owed. The presumptive Republican nominee eventually backpedaled, claiming that the U.S. would “never have to default because you print the money."

In Trump’s defense, similar ideas have been floated by serious politicians before and even by Democrats. Unfortunately for him, however, the last genuine debate on this question, immediately after the Civil War, ended with a change to the Constitution meant to settle the question forever. (Although the question did arise in 2011 and 2013 when Republicans threatened to refuse to raise the debt ceiling, the legal argument wasn’t put to the test.)

QuickTake The Debt Ceiling

When the founders drafted the Constitution, payments on the national debt weren’t enshrined as sacrosanct. That’s probably because the fledgling U.S. had already effectively defaulted on scads of obligations incurred during the Revolution.

Secretary of the Treasury Alexander Hamilton consolidated these obligations into a new national debt, and the U.S. soon acquired the kind of reputation for creditworthiness that became the envy of the world. But there was nothing that forbade the nation’s leaders from defaulting on their debt if they opted to do so.

During the Civil War, however, the Union racked up unprecedented levels of debt, though it could readily be serviced by a wartime tax-collection system. Any default by the U.S. would be a matter of choice, and who would possibly want to do that?

The Democrats. When the Confederate states seceded, they left control of Congress and the presidency in the hands of the Republican Party. The end of the war brought the final destruction of the Confederacy and the passage of the 13th Amendment to the Constitution, which formally abolished slavery throughout the country.

The 13th Amendment did something else, too: it abolished the “three-fifths” clause in the original Constitution. The net effect -- absent an enfranchisement of the former slaves -- was that the South gained significant political power in Congress. When the former rebels returned to Washington, everyone correctly assumed they would vote Democratic and would, in the words of historian Franklin Noll, “combine with Northern Democrats in Congress to form an unstoppable majority that could rewrite many of the changes made during the war.”

This looming supermajority could certainly undo much that the Republicans had accomplished. They might even force the U.S. to assume the debts of the Confederacy and compensate slave-owners for the loss of their property.

But according to Noll, one thing in particular began bothering Republican leaders in the months after the war. As one Republican representative wrote at this time: “None of the white population of the Southern States is interested in paying the public debt … If the whites be restored to political power, their representatives are interested in repudiating that public debt.”

The South already had a history of repudiation: In the 1840s, a number of Southern states defaulted on their debts. No less a public figure than Jefferson Davis, future leader of the Confederacy, was believed to have advocated repudiation for his home state of Mississippi. This reputation stuck. In 1863, a Unionist from Mississippi claimed “secession, repudiation, and slavery are the same in principle and had the same leaders.”

In December 1865, the popular newspaper Leslie’s Illustrated Weekly referred to Davis as the “apostle and high priest” of repudiation. “Whoever assails the public credit is an enemy to his country,” the newspaper said. Leslie’s labeled the unnamed Democratic proponents of repudiation “traitors to the interests and welfare of the country.”

Congress itself sought to head off this threat, considering a resolution in the House of Representatives that declared the public debt created during the Civil War to be “sacred and inviolate,” and that “any attempt to repudiate or in any manner to impair or scale the said debt shall be … promptly rejected by Congress if proposed.” The measure passed, 162-to-1. The single holdout was Lawrence Trimble, a former slave-owner from Kentucky.

But what would happen when the Confederacy rejoined the Union? In January 1866, the Nation warned readers that “it would hardly be a safe thing for the national credit to have such a body of men in Congress, reinforced … by a considerable number of Northern men ready to go for at least qualified repudiation.”

This was an exaggeration. In fact, by this point, Republican leaders realized that fears over repudiation could be deployed to protect and advance party interests. This strategy came together in the language of the 14th Amendment, which granted former slaves the rights of citizens. Section 4 declared that “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and services in suppressing insurrection or rebellion, shall not be questioned.”

Yet, at the same time, it declared the debts of the Confederacy to be “illegal and void.”

If it passed, the amendment would enable former slaves to vote -- and they would almost certainly vote Republican, blunting the impact of the demise of the three-fifths clause. At the same time, it protected the national debt from political meddling. More immediately, it handed Democrats a poison pill: If they voted against the amendment, they could be portrayed as favoring repudiation. The Republicans wasted no time in reminding voters of that prospect. This resonated with many Northerners because, as historian David Thomson has shown, bond sales during the Civil War reached an astonishing cross-section of the populace. A vote for the 14th Amendment helped guarantee a return on investments made by a broad swath of society.

Indeed, the anti-repudiation clause was far more popular than the other clauses giving full rights to the former slaves. But the debt helped insure the passage of the entire amendment.

While the ratification of the 14th Amendment protected the national debt against a full-scale repudiation, Democratic politicians continued to push the idea of a soft repudiation, arguing that the government should use the printing press to repay its bondholders with paper greenbacks instead of the promised gold.

But this, too, went down in defeat when President Ulysses S. Grant signed the Public Credit Act of 1869, which dictated that bonds be repaid in coin.

The battle over repudiation was over. From that point forward, the only politicians who dared endorse the idea were fringe figures who catered to the ignorant and the foolish -- the sorts of leaders whom Leslie’s memorably described as “demagogues of the basest kind.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Stephen Mihm at smihm1@bloomberg.net

To contact the editor responsible for this story:
Max Berley at mberley@bloomberg.net