President Obama says it would be folly for the White House to negotiate with Congress over the government’s debt — but the nation’s founders thought differently.
Indeed, the entire reason Mr. Obama lives in Washington, on the banks of the Potomac, is because of the first great debt deal, struck in negotiations by no less than Alexander Hamilton, Thomas Jefferson and James Madison.
Hamilton, ever eager to build a strong and financially robust national government, wanted to assume the states’ Revolutionary War debt. Southerners, particularly Virginians who had done a good job of paying off their debt, said that was a bad deal because it would reward the laggard states.
But over dinner, Jefferson and Madison agreed that preserving the new government was paramount. They asked only for a face-saving measure, which was to build a capital in the South.
“Hamilton wanted to assume the state debt, and people in Virginia weren’t real keen on that, especially their leadership. So they got together over dinner and made the swap,” said Robert E. Wright, an economic historian at Augustana College in South Dakota.
That dinner meeting stands in contrast to the current status of talks in Washington, where sitting down and negotiating has been in short supply on both sides of the aisle.
Mr. Obama has said that holding talks when the government is poised to hit its borrowing limit is akin to negotiating with terrorists and has adamantly ruled it out.
House Republicans have only recently embraced negotiations on a 2014 budget, after resisting for nearly six months.
Both sides also spar over whether it’s proper to demand the kind of face-saving add-ons that Jefferson and Hamilton sought in 1790, and that some Republicans are floating today in exchange for voting for debt increases or spending bills to reopen the government.
Republicans say even recent history proves it’s normal to demand something in return for a debt vote.
“You can’t say that it’s unprecedented to have negotiations and reforms tied to a debt increase,” Sen. Chuck Grassley, Iowa Republican, told Treasury Secretary Jack Lew on Thursday.
Mr. Lew agreed, but said the circumstances were different this time. He said Republicans are using the national debt as a threat to the economy in order to leverage changes.
“The debt increase has always been a hard vote,” he said, recounting its history.
For the first half of the republic, every issuance of bonds to cover national debts required a vote by Congress. In 1917, lawmakers instead set a ceiling and gave the Treasury Department the power to float bonds to that level.
“The debt limit was put in place to reduce the number of times Congress had to vote on debt,” Mr. Lew said, adding that the goal was to make it more routine and less painful. Indeed, in the 1970s and 1980s, Democrats tried to create a system in which the House wouldn’t even have to vote specifically on debt increases but would raise the level automatically when they voted for procedural motions.
Then, during the 2011 negotiations, Senate Minority Leader Mitch McConnell, Kentucky Republican, came up with a solution that would allow the president to request a debt increase. To reject the debt increase, Congress would have to pass legislation that the president could veto, meaning it would take a two-thirds vote in each house of Congress to stop an increase.
The U.S. defaulted on its debt once, in 1979.
The Treasury Department failed to pay several bills on time, blaming a last-minute debt ceiling increase from Congress and, according to a scholarly paper in the Financial Review, because a word-processing system failed.
Payments were restored quickly, but the default sent the government’s borrowing rate higher, showing even a short default had consequences.
Mr. Wright, the economic historian, said the country usually ignores the debt, but several major exceptions have been made, particularly during wars.
That happened in the War of 1812, the Civil War, which ushered in the country’s first income tax, and World War I and World War II. The questions then were usually how much of the war costs should be covered by printing money, how much by tax increases and how much by borrowing.
Then there were the 1830s, when the issue was the reverse — the country, under President Andrew Jackson, managed to pay off its debt and had surpluses.
By the 1840s, there was another debt crisis: A number of states had gone into debt for major infrastructure projects and were defaulting. Mississippi even repudiated its debt, said Mr. Wright, author of the forthcoming book “Corporation Nation,” due out in December.
Mr. Wright said the solutions almost always involve deal-making — something that’s lacking among leaders today. He said he doesn’t see House Budget Committee Chairman Paul Ryan, Wisconsin Republican, and Mr. Obama talking it out, or House Speaker John A. Boehner, Ohio Republican, and Minority Leader Nancy Pelosi, California Democrat, sitting down for cocktails. Indeed, Mrs. Pelosi said Thursday that she didn’t get a notice about Mr. Boehner’s offer of a short-term debt increase.
“That founding generation, even though political parties are forming at the time, they still always are asking what’s best for the country. They might differ on that, but they’re willing to be persuaded, they’re willing to compromise,” he said. “That seems like it’s disappearing.”