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posted on 16 July 2016

The First Debt Ceiling Crisis

from the New York Fed

-- this post authored by Kenneth D. Garbade

In the second half of 1953 the United States, for the first time, risked exceeding the statutory limit on Treasury debt. Congress, the White House, and Treasury officials dealt with the looming crisis by deferring and reducing expenditures, monetizing "free" gold that remained from the devaluation of the dollar in 1934, and, ultimately, raising the debt ceiling.

Treasury Debt and the Debt Ceiling before 1953

Congress adopted the modern form of the debt ceiling in July 1939: a $45 billion limit on the aggregate outstanding amount of debt issued under the authority of the Second Liberty Loan Act of 1917. (A small amount of indebtedness, including $50 million of fifty-year bonds issued in 1911 to finance construction of the Panama Canal, was issued or incurred under other authorities and was not subject to the ceiling.) Congress raised the debt ceiling to a peak of $300 billion during World War II and then lowered it to $275 billion in June 1946. Debt subject to the limit (hereafter, "Treasury debt") stood at $268 billion in mid-1946, fell to $252 billion in mid-1948, and thereafter fluctuated between $252 billion and $258 billion until mid-1951.

Beginning in mid-1951, Treasury debt began to rise, primarily because of the costs of the Korean War and other defense appropriations. As shown in Chart 1, Treasury debt rose in the fall of each year and declined the following spring, but nevertheless increased from one year-end to the next.

[click on image to continue reading]

Source: https://www.newyorkfed.org/medialibrary/ media/ research/ staff_reports/ sr783.pdf?la=en

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