14th Amendment, Resolving Debt Question

[Hellestal]

This thread is about a very specific constitutional issue. It’s not a debate about Social Security. GQ. It’s about the law, which can be fuzzy sometimes, but I want as factual an answer as there exists.

In a Great Debate thread, Ravenman makes an astonishing claim when talking about the Social Security Trust Fund which possesses more than two and a half trillion dollars worth of bonds.

@Ravenman

While Congress could eliminate the trust fund, the bonds could not constitutionally “go poof”. There must be some kind of repayment of the bonds - it is required by the 14th Amendment. The intragovernmental debt is on the books, and has to be resolved somehow, probably by issuing debt to the public in order to retire the intragovernmental debt. Anything short of that would be an unconstitutional law, so the idea that those bonds could “go poof” is quite simply illegal.

The argument here is that the 14th amendment requires repayment, and strictly repayment, and nothing but repayment to satisfy outstanding government debt. He reiterates the argument in another post:

@Ravenman

The bonds have to be repaid, right? Simply possessing the bonds doesn’t resolve the debt - there has to be a satisfaction of the debt.

Well… I haven’t studied law let alone constitutional law.

But I know some accounting. And from an accounting perspective, this is utterly insane. The debt is quite obviously and indisputably satisfied when the original issuer retakes possession. There is literally no one left who can legally challenge that. It does not have to be a purchase. It could just as easily be a Congressional gift. (There is no dispute that Congress has the power to give out these bonds wherever they want.)

We can all read the relevant excerpt of the 14th Amendment. It makes no distinction between “repayment” and “gifts”. It doesn’t mention either word.

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

There is no universe I know of where retaking possession of your own debt – and I mean personally retaking possession, not through a different company or intermediary or subsidiary or whatever – is not an act of satisfying that debt. If Congress eliminates the Trust Fund, then they can give the bonds to whoever they want. They can mail each of us a share. They can order the bonds sold to the public to finance gold plated toilets for all federal buildings.

Or they can return the bonds to Treasury, which should – in a sane world – immediately resolve the debt.

If this is truly a constitutional problem, then… okay. But we got a lot of lawyers here, and I want some sort of GQ information about that. I want a cite, a court case (Treasury vs Treasury?), an explanation of legal reasoning and rationales, an excerpt from a thick leather-bound volume, or something. Because the bare assertion that the 14th Amendment requires “repayment” even after Treasury repossesses the very bonds that it issued itself is just beyond belief for me right now.

(It’s easy to demonstrate how absurd “repayment” would be after Treasury possesses the bonds themselves.

Treasury could sell three trillion in new bonds in order to raise money. (Not all at once.) Then they could “repay” themselves for the bonds that they themselves possess. “Repayment” would, as already admitted, resolve the debt in a mystically constitutional way. Then they could use the “repaid” money, which they gave to themselves, to repurchase the three trillion they’d just issued to the public. That debt would be immediately resolved, too, since it’s a purchase. The net result is that all the bonds disappear. The net result is exactly the same as if they’d just gone POOF when they’d first retaken possession.

Now maybe this is what the law actually dictates. I guess that’s possible. It’s the stupidest reading of the 14th amendment I can imagine, but that’s why I’m opening this thread. )

[Ravenman]

In 1918, Mr. John Perry bought a U.S. government bond for $10,000 which guaranteed him repayment of principle and interest in 1934 in gold. However, Congress enacted a law in 1933 which stated that the U.S. Government shall no longer repay any bond that guaranteed repayment in gold – only cash would be provided.

Mr. Perry was upset and sued. He lost because of lack of standing, but in the Supreme Court’s decision, there was a considerable discussion of whether Congress can tinker around with lawfully issued debt in such ways.

Let me quote a bit:

There is no question as to the power of the Congress to regulate the value of money: that is, to establish a monetary system and thus to determine the currency of the country. The question is whether the Congress can use that power so as to invalidate the terms of the obligations which the government has theretofore issued in the exercise of the power to borrow money on the credit of the United States. . . . In attempted justification of the Joint Resolution in relation to the outstanding bonds of the United States, the government argues that ‘earlier Congresses could not validly restrict the 73rd Congress from exercising its constitutional powers to regulate the value of money, borrow money, or regulate foreign and interstate commerce’; and, from this premise, the government seems to deduce the proposition that when, with adequate authority, the government borrows money and pledges the credit of the United States, it is free to ignore that pledge and alter the terms of its obligations in case a later Congress finds their fulfillment inconvenient. . . . On that reasoning, if the terms of the government’s bond as to the standard of payment can be repudiated, it inevitably follows that the obligation as to the amount to be paid may also be repudiated. The contention necessarily imports that the Congress can disregard the obligations of the government at its discretion, and that, when the government borrows money, the credit of the United States is an illusory pledge.

We do not so read the Constitution. . . . In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment. By virtue of the power to borrow money ‘on the credit of the United States,’ the Congress is authorized to pledge that credit as an assurance of payment as stipulated, as the highest assurance the government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise; a pledge having no other sanction than the pleasure and convenience of the pledgor. This Court has given no sanction to such a conception of the obligations of our government. . . .

The Fourteenth Amendment, in its fourth section, explicitly declares: ‘The validity of the public debt of the United States, authorized by law , … shall not be questioned.’ While this provision was undoubtedly inspired by the desire to put beyond question the obligations of the government issued during the Civil War, its language indicates a broader connotation. We regard it as confirmatory of a fundamental principle which applies as well to the government bonds in question, and to others duly authorized by the Congress, as to those issued before the amendment was adopted. Nor can we perceive any reason for not considering the expression ‘the validity of the public debt’ as embracing whatever concerns the integrity of the public obligations.

We conclude that the Joint Resolution of June 5, 1933, in so far as it attempted to override the obligation created by the bond in suit, went beyond the congressional power.

I believe it is pretty clear that Congress cannot pass a law fundamentally restructuring the terms of debt that was lawfully issued.

[Hellestal]

@Ravenman

I believe it is pretty clear that Congress cannot pass a law fundamentally restructuring the terms of debt that was lawfully issued.

There are two parties involved in that suit.

It’s not clear to me in the slightest that taking possession of its own issued debt involves a restructuring of any kind.

[Ravenman]

@Hellestal

There are two parties involved in that suit.

It’s not clear to me in the slightest that taking possession of its own issued debt involves a restructuring of any kind.

I don’t see how that impacts the language used by the Court, such as:

In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment. By virtue of the power to borrow money ‘on the credit of the United States,’ the Congress is authorized to pledge that credit as an assurance of payment as stipulated, as the highest assurance the government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise; a pledge having no other sanction than the pleasure and convenience of the pledgor.

There is no doubt that the intragovernmental debt of the United States is backed by the full faith and credit of the United States. The bolded portion (as well as other pieces of the decision) seems to make clear that Congress cannot pass a law that alters the validity of the promise to repay a debt that was lawfully issued.

[Really_Not_All_That_Bright]

The SS trust fund isn’t quite the same as other types of intragovernmental debt, though. There are ascertainable beneficiaries of the fund (though presumably they would have no better claim to standing than Mr. Perry.)

[OldGuy]

@Ravenman

In 1918, Mr. John Perry bought a U.S. government bond for $10,000 which guaranteed him repayment of principle and interest in 1934 in gold. However, Congress enacted a law in 1933 which stated that the U.S. Government shall no longer repay any bond that guaranteed repayment in gold – only cash would be provided.

Mr. Perry was upset and sued. He lost because of lack of standing.

This is dumbfounding. If the original purchaser and owner of a bond does not have standing to sue who in the world does? I guess I cold understand sovereign immunity not allowing the suit to go forward, but not hits.

[Really_Not_All_That_Bright]

On reading the case, I think Ravenman conflated it with another. There’s no standing problem (which is why the court goes to the merits in the section he quoted). Brown merely wasn’t entitled to the damages he sought.

Plaintiff seeks to make his case solely upon the theory that by reason of the change in the weight of the dollar he is entitled to $1.69 in the present currency for every dollar promised by the bond, regardless of any actual loss he has suffered with respect to any transaction in which his dollars may be used. We think that position is untenable.

[Hellestal]

@Ravenman

I don’t see how that impacts the language used by the Court, such as:There is no doubt that the intragovernmental debt of the United States is backed by the full faith and credit of the United States. The bolded portion (as well as other pieces of the decision) seems to make clear that Congress cannot pass a law that alters the validity of the promise to repay a debt that was lawfully issued.

I had a post that got eated where I walk through that case in some depth.

To keep it (relatively) short in this rewrite, I totally disagree with this reading.

The entire rationale that builds up to the 14th amendment in that case is contractual obligations. The cites are all of them to contractual relationships, where one party is in violation because it has broken its promise to another. That is inherently what a debt pledge is. It’s not a pledge in isolation. With respect to debt, the existence of a pledgor necessitates the existence of a pledgee to whom the debt is owed. There is no challenge to the validity of the pledge when the original owner reclaims the paper. That is just the plain meaning of the words, and that is the broader context of the case, in which the 14th Amendment is mentioned.

I’m not saying I can’t be convinced. You made a solid argument in other constitutional issues that I previously misunderstood. But as for now, this case is very different. I remain convinced that Treasury reclaiming its paper automatically dissolves the debt in a perfectly constitutional way.

[UltraVires]

@Hellestal

I had a post that got eated where I walk through that case in some depth.

To keep it (relatively) short in this rewrite, I totally disagree with this reading.

The entire rationale that builds up to the 14th amendment in that case is contractual obligations. The cites are all of them to contractual relationships, where one party is in violation because it has broken its promise to another. That is inherently what a debt pledge is. It’s not a pledge in isolation. With respect to debt, the existence of a pledgor necessitates the existence of a pledgee to whom the debt is owed. There is no challenge to the validity of the pledge when the original owner reclaims the paper. That is just the plain meaning of the words, and that is the broader context of the case, in which the 14th Amendment is mentioned.

I’m not saying I can’t be convinced. You made a solid argument in other constitutional issues that I previously misunderstood. But as for now, this case is very different. I remain convinced that Treasury reclaiming its paper automatically dissolves the debt in a perfectly constitutional way.

Agreed. If I write you a check for $10 and I come back into possession of that check lawfully (whether I paid you $10, you gifted it back to me, lost it in a poker bet, etc) then nobody could possibly say that I didn’t honor my debt if I threw the check in the garbage.

[rbroome]

@jtgain

Agreed. If I write you a check for $10 and I come back into possession of that check lawfully (whether I paid you $10, you gifted it back to me, lost it in a poker bet, etc) then nobody could possibly say that I didn’t honor my debt if I threw the check in the garbage.

I am FAR from knowledgeable on these matters, especially compared to Ravenman, but I think this is a significant part of the discussion.
What I think is implicit in Ravenman’s position is something that isn’t obvious to non-governmental types: the government has a fundamental position of NEVER being generous or free with public money. It is inherent in how the government functions. The government considers the tax dollars to be public dollars, not theirs. I know that this isn’t how the government looks or even acts, but based on my observations that is how public money is thought of. So, to Ravenman (I believe he works in the government) or to Congress or to a Supreme Court, it is an inconceivable policy to cancel a public debt without real compensation. In a very basic way, they don’t have that power. That is what Ravenman and the supreme court is saying. A corporation can give it’s funds away to the United Way or to the local charity, an individual can do the same and include a church or a politician, but the Government simply doesn’t have that power. It MUST get something of value back for the debt. One can freely debate what value the government might accept and that would be up to Congress. But it has to be something. For the treasury to go to their filing cabinets and find the SS bonds and say, cool lets shred these, isn’t an option. It isn’t an option for Congress or the President or anyone in the government. If congress were to say, here take these infinity zero-interest bonds we just created and “sold” to the public as payment for the SS bonds, the treasury could then say, OK, if you say so. But there has to be something. And in that case I bet they could be sued for canceling a debt without real compensation.

Now I am sure there are lots of specific cases where this doesn’t work. I am sure the IRS makes deals all the time to take less than full value for back taxes for instance. But the principle of the government canceling a debt or giving away public money just because it wants to is not something they can consider. Of course one might argue that canceling the SS debt is in the best interests of the public and that might succeed, but it has to be in the best interest of the public, not just because.

[Hellestal]

@rbroome

I am FAR from knowledgeable on these matters, especially compared to Ravenman, but I think this is a significant part of the discussion.
What I think is implicit in Ravenman’s position is something that isn’t obvious to non-governmental types: the government has a fundamental position of NEVER being generous or free with public money. It is inherent in how the government functions. The government considers the tax dollars to be public dollars, not theirs.

Okay. But this has nothing to do with the question at hand.

We’re not talking about public dollars. The issue is public obligations, specifically, the obligation to pay future public dollars.

That obligation disappears once there is no longer a different party to whom the obligation is owed. I would say it’s absurd to believe the obligation still exists, but “absurd” isn’t quite the right word. Congress is free to write absurd laws. A better word is impossible. It is impossible for Treasury to have a constitutional duty to preserve this debt obligation, when there is no longer another party to whom this obligation is owed.

You can’t have a legally binding contract between one party and itself.

@rbroome

It MUST get something of value back for the debt. One can freely debate what value the government might accept and that would be up to Congress. But it has to be something.

This is entirely backward to the issue here.

This argument would preclude monetary gifts to the Treasury, and that is flatly wrong. Treasury isn’t required to give anything in return when it accepts cash. These bonds are an equivalent sort of gift. And in fact, in searching for the cite to prove that, I just dug this up:

The Bureau of the Public Debt may accept gifts donated to the United States Government to reduce debt held by the public. Acting for the Secretary of the Treasury, Public Debt may accept a gift of:
Money, made only on the condition that it be used to reduce debt held by the public.

An outstanding government obligation, made only on the condition that the obligation be retired and the redemption proceeds used to reduce debt held by the public.

Not only is it possible for Treasury to automatically retire outstanding debt gifted to them, they have a regular procedure for doing exactly this.

Treasury already receives bonds as gifts. Congress could give a similar gift just as easily. No constitutional issues anywhere. Unless someone out there has a very specific cite that Treasury receives these bonds from the public, and then for some idiotic reason transfers money from its own account, into its own account, in order to satisfy these bonds – rather than just dissolving them – then my case is made.

[UltraVires]

@rbroome

A corporation can give it’s funds away to the United Way or to the local charity, an individual can do the same and include a church or a politician, but the Government simply doesn’t have that power. It MUST get something of value back for the debt. One can freely debate what value the government might accept and that would be up to Congress. But it has to be something. For the treasury to go to their filing cabinets and find the SS bonds and say, cool lets shred these, isn’t an option. It isn’t an option for Congress or the President or anyone in the government. If congress were to say, here take these infinity zero-interest bonds we just created and “sold” to the public as payment for the SS bonds, the treasury could then say, OK, if you say so. But there has to be something. And in that case I bet they could be sued for canceling a debt without real compensation.

I’m not following this line of thought. Who would be in a position to sue the government for allowing its own debt to be forgiven?

Let’s say you owe me $100. I am feeling unusually charitable on a certain day, so I tell you to forget it; debt over; no need to pay. Who could possibly sue you for the $100?

Your “must get value” argument seems backwards. There is no value for the U.S. Government in its own debt. It is a liability.

[Richard_Parker]

I don’t think there is a factual answer. The holdings of Perry do not control this case, and no other legal authority clearly answers the question. So we’re left in the land of legal speculation.

Perry has been interpreted as applying to contracts between the government and private parties. It has never been applied to intergovernmental obligations. Moreover, Petty stands for the proposition that “When the United States, with constitutional authority, makes contracts, it has rights and incurs responsibilities similar to those of individuals who are parties to such instruments.” Perry v. United States, 294 U.S. 330, 352, 55 S. Ct. 432, 435, 79 L. Ed. 912 (1935). The willingness to read such implicit common law provisions into government debt occurs in many cases in this line. See, e.g., Smyth v. United States, 302 U.S. 329, 360, 58 S. Ct. 248, 255, 82 L. Ed. 294 (1937) (finding the right to accelerated payment implicit in bonds). The common law principle that re-possession of the debt satisfies it would normally apply to these bonds.

In order to apply the Fourteenth Amendment, you have to make one of two arguments: That intergovernmental bonds implicitly alter this common law rule by their nature and context, and Congress would be repudiating the implicit promise not to satisfy them by re-possession without compensation; or that satisfying them by re-possession without any other offsetting compensation is effectively repudiating them and that effective repudiation is the same as formal repudiation.

Either argument is at least a few steps out from Perry, and neither is open-and-shut.

The implicit “no satisfaction by ordered transfer” argument would argue that, without such a provision, styling the instrument as debt is just an empty formalism. It fails to give meaning to the choice of Congress to have this intergovernmental debt be in the form of Treasury Bonds. If you get that far, then the Fourteenth Amendment analysis if pretty straightforward. If you find that implicit provision, then it would indeed be repudiating that provision to nevertheless order the bonds returned. But the whole thing turns on reading a pretty important clause into a statute just based on its context and purpose, which courts are loathe to do. It is certainly not a sure-shot.

The effective repudiation argument has as its premise that a debt is considered repudiated if the debt-holder is given no compensation for its satisfaction. But that’s not quite true. A debt-holder can voluntarily return the debt to the debtor and it is thereby considered satisfied. So the legal question would be whether a statute transferring the bonds is analogous to compelling the STTF to return them or analogous to the STTF voluntarily deciding to gift them. I’m not aware of any law on that subject, and I can see arguments on both sides.

[tonyfop]

I found a history of the SS Trust Fund and SS laws on the SSA website here:http://www.ssa.gov/history/BudgetTreatment.html

[QUOTE=SSA]
The investment rules governing payroll tax income were also established in the 1935, and are essentially the same ones in use today. Specifically, the 1935 Act stated: “It shall be the duty of the Secretary of the Treasury to invest such portion of the amounts credited to the Account as is not, in his judgment, required to meet current withdrawals. Such investment may be made only in interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States.” (See Title II, Section 201of the 1935 law)

[QUOTE]

First off, IANAL.

The way I read this, since the Secretary of the Treasury controls both the SS Trust Fund and the “interest-bearing obligations of the United States or in obligations guaranteed as to both principal and interest by the United States”, he could not just cancel the bonds. If he did, then the obligations that he invested in were not guaranteed by the United States. I may be venturing into circular reasoning here, but I have seen some pretty tortured logic put before the Supreme Court.

The other interesting part for me was the whole “On-Budget” “Off Budget” idea. The way I see it, and correct me if I am wrong, since the assets of the SS Trust Fund are “Off-Budget”, but the Securities that make up the Trust Fund are “On-Budget” as liabilities owed to itself, it creates a $2.5 trillion illusion of debt. If we just moved the assets of the trust fund back “On-budget” the assets would cancel out the liabilities, and the working capital that the trust fund has would show up as an asset, and our books would look better. To me, this would be a better gauge of where we stand, since listing a debt to yourself is stupid.

[rbroome]

I see your point. I was over-simplistic in my discussion.
I failed to grasp the difference between a debt and a value.

Though I fully understand that the Government can accept a donation. I just don’t think the Government can give a donation. Probably wrong in that, but I can’t think of case where the Government itself made a donation.

[Really_Not_All_That_Bright]

What do you think a tax rebate is?

[Ravenman]

@tonyfop

The other interesting part for me was the whole “On-Budget” “Off Budget” idea. The way I see it, and correct me if I am wrong, since the assets of the SS Trust Fund are “Off-Budget”, but the Securities that make up the Trust Fund are “On-Budget” as liabilities owed to itself, it creates a $2.5 trillion illusion of debt. If we just moved the assets of the trust fund back “On-budget” the assets would cancel out the liabilities, and the working capital that the trust fund has would show up as an asset, and our books would look better. To me, this would be a better gauge of where we stand, since listing a debt to yourself is stupid.

That isn’t quite a correct reading of on-budget and off-budget, because those terms refer to annual revenue and expenditures, not to assets and liabilities. There is only an indirect (but of course very important!) connection between on-, off-, and unified budget numbers.

So if in 20xx the government planned this budget:

On-budget: Revenues $1,200 billion, expenditures $2,000 billion
Off-budget: Revenues $800 billion, expenditures $500 billion

That would result in a deficit of $500 billion. $300 billion of intragovernmental debt would be issued to preserve the off-budget surplus as an asset in the trust fund. Additional debt would be issued to the public in the amount of $200 billion.

The $300 billion and $200 billion of debt issuance is the result of those figures, but nowhere in the revenue and expenditure plans is a specific accounting of the liability of the government issuing $500 billion in debt, other than the fact that there is clearly a $500 billion deficit.

If you’re looking for a government balance sheet that lists the comprehensive amount of assets and liabilities you’re going to be sorely disappointed. The liabilities is only really reflected in the amount of the national debt (subject to the debt limit established by Congress, of course), but also broken down by intragovernmental debt and debt issued to the public. The only statement of assets I’m aware of is the value held by various government trust funds (Social Security, highway, civil service retirement, and a few other cats and dogs). But let’s get real, that’s not a comprehensive statement of the government’s assets.

Under the Chief Financial Officers Act of 1990, agencies are supposed to prepare auditable financial statements, but the results are basically a joke. Those should reflect the assets of any particular department, but frankly, such statements would not make a whit of difference to how government actually runs.

[Ravenman]

@Richard_Parker

The effective repudiation argument has as its premise that a debt is considered repudiated if the debt-holder is given no compensation for its satisfaction. But that’s not quite true. A debt-holder can voluntarily return the debt to the debtor and it is thereby considered satisfied. So the legal question would be whether a statute transferring the bonds is analogous to compelling the STTF to return them or analogous to the STTF voluntarily deciding to gift them. I’m not aware of any law on that subject, and I can see arguments on both sides.

@rbroome

Though I fully understand that the Government can accept a donation. I just don’t think the Government can give a donation. Probably wrong in that, but I can’t think of case where the Government itself made a donation.

First of all, good post, Richard.

The government’s ability to receive gifts is generally limited to donations to reduce the national debt, and a very select number of agencies which are specifically authorized to handle donations (or sponsorships in a couple of cases). If you wanted to donate cash to the Department of Defense because you think the troops need better body armor or something, the DoD is prohibited from accepting such a donation. If you want to donate to, say, the Smithsonian Institution, that’s okay, but that’s a fairly unique case. The government can give a “donation” to the extent that there is a law providing for that expenditure, as required by Article I Section 9.

Like Richard says, the key point here is whether Congress can pass a law which would in some aspect call into question the ability or intent of the United States to repay a lawfully authorized debt. The 14th Amendment says Congress cannot. However, the factual question of what it means to question the debt is not resolvable.

It seems clear to me that making intragovernmental debt vanish without some kind of actual redemption for the bond would indeed mean that the debt did not have the full faith and credit of the United States, because the United States would have had to legislate away the requirement to repay the debt.

I think this is bolstered by the fact that if Congress simply mandated that intragovernmental debt simply paid for itself and vanished (and consequently also elimiates the corresponding surpluses in the various trust funds), the national debt would instantly be reduced by approximately 35%. I don’t think Congress can constitutionally pass a law that waves a magic wand and reduces our national debt by $5 trillion in the blink of an eye.

[ftg]

Note that the Treasury Dept. regularly buys back securities. The link gives some reasons. They did this a lot in the 90s to swap out old high interest bonds for new lower interest ones.

Most of what goes on now is just for market management and adjusting the spread of maturation dates. But when they did it big time, there was a bit of a gamble regarding how rates and inflation would go in future years. It turns out it paid off fairly well.

There’s links to rules and such about this program but nothing about the mechanics of what happens once the Feds get their hands back on the securities. I expect it is much like when someone cashes in a Savings Bond in terms of the accounting gets taken care of then they are removed from the “debt” books. No actual tax money has to be raised or swapped or anything. I think the Treasury would be amused if someone asked them if the 14th Amendment is somehow involved in this last part.