50-year-old ‘confidential’ memo reveals secret debt ceiling escape hatch
Fed Confidential: Secret memo from 1973 debt ceiling fight reveals Fed’s failsafe
A formerly confidential memo of half a century ago suggests that the Federal Reserve may be able to play a bigger role than expected in easing the burden on the U.S. Treasury if the White House and Congress fail to reach an agreement to raise or suspend the debt ceiling before the government defaults of borrowing room this summer.
The rating derives from a fighting for the debt ceiling in 1973 which finds echoes in the debt ceiling debates of 2011 and today. The White House in 1973 was looking for a clean bill that would raise the debt ceiling and allow the Treasury to continue borrowing money. The government was divided, however, and the opposing party that controlled Congress sought to attach the debt ceiling legislation to another bill containing provisions opposed by the president and his party.
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Of course, party lines have been reversed. The President was a Republican Richard Nixon. Both the House and the Senate had Democratic majorities. The bill that liberals in the Democratic and Republican parties sought to tie into raising the debt ceiling would have funded federal election campaigns with public funds. He was opposed by conservative Republicans and Democrats on Capitol Hill, as well as the Nixon administration.
President Richard Nixon addresses a joint session of Congress on June 1, 1972. (AP Photo)
Congress had temporarily raised the debt ceiling from its “permanent” level of $400 billion to $465 billion. But this increase was to expire on November 30, 1973, after which it would revert to the $400 billion limit. Nixon had used the “extraordinary measures” of his time to keep borrowing below the limit by seizure of funds, which meant not spending the money allocated by Congress. (Congress later passed the Congressional Budget and Impoundment Control Act of 1974 to ban the practice.)
The end of November has come and gone with Congress still at an impasse over the campaign finance measure, leaving the United States in exceeding the debt limit. On the morning of December 3, 1973, Under Secretary of the Treasury Paul Volcker phoned the chairman of the Fed Arthur Burns whether the Federal Reserve would refrain from offering to buy back its holdings of Treasury bills as they matured. That would leave the US Treasury with cash to pay for other bonds and treasury bills, giving the government wiggle room while the debate continued in Congress.
Arthur F. Burns, Chairman of the Federal Reserve Board, is pictured in Washington, DC, May 21, 1970. (AP Photo/John Duricka)
Burns convened a committee consisting of the Federal Reserve Board’s general counsel, its chief economist, its secretary and other Fed officials, including attorneys from the Federal Reserve Bank of New York. The memo states that the General Counsel informed Burns that:
(1) there was no statutory impediment to the Federal Reserve’s proposed action;
(2) such action was not inconsistent with any applicable Federal Open Market Committee regulations, rules, or authorizations;
(3) by virtue of his inherent powers, the Chairman of the Committee had the power to make the proposed commitment, even in the absence of any consultation with the Committee; And
(4) and that it would be desirable to notify Committee members in a timely manner of the undertaking, if made.
Burns says to Volcker: Game On
At around 11 a.m. on December 3, 1973, Burns told Volcker that, as the memo explains, “if developments relating to debt ceiling legislation pending in Congress warrant it, the system will would refrain from bidding the Treasury for redemption on Thursday, December 6, 1973, its holdings of approximately $1.6 billion of Treasury bills maturing on that date. Burns said he would go along with Volcker’s plan.
Paul Volcker, Under Secretary of the Treasury for Monetary Affairs, February 10, 1972, in Washington, DC. (AP Photo/Harvey Georges)
The memo was written by Fed Board Secretary Arthur L. Broida and marked confidential. It was released on August 21, 2020, but has gone unnoticed so far.
It turned out that the Senate raised the debt ceiling to $475 billion on the same day, rendering the scheme useless.
The existence of this plan could have a major implication on today’s debt ceiling, as the Federal Reserve holds the 5 trillion dollars US Treasuries, with more than $1.1 trillion maturing in the next 12 months. If the Treasury did not need to repay these bonds, it would significantly improve the Biden administration’s ability to pay other bonds as they come due.
There is no indication from Biden’s Treasury Department or the Federal Reserve that a similar deal has been reached.
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