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The US government debt ceiling: what did Eisenhower do back in 1953?

Thursday, July 28th 2011 - 06:22 UTC
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Republican President Eisenhower faced a similar impasse and apparently appealed to the ‘dollar’ profits from gold deposit certificates   Republican President Eisenhower faced a similar impasse and apparently appealed to the ‘dollar’ profits from gold deposit certificates

Should the US follow the example of President Dwight Eisenhower back in 1953, asks Alex J Pollok, resident fellow at the American Enterprise Institute and Anne Canfield president of Canfield & Associates, Washington, D.C. in an article published in The American Journal of the AEI.

The question refers to the current dispute between President Barack Obama and conservative Republicans lawmakers over the debt ceiling and the August 2 deadline when the US could default in a significant percentage of its payments.

Nothing is ever new, it is just history repeating itself”—at least in finance, says the article. In his “A History of the Federal Reserve”, Allan Meltzer describes what happened during the Eisenhower administration when the Treasury ran out of debt authorization and the US Congress did not raise the debt ceiling. This was in 1953.

In order to keep making payments, the Treasury increased its gold certificate deposits at the Federal Reserve, which it could do from its dollar “profits” because the price of gold in dollars had risen. The Fed then credited the Treasury’s account with them, thereby increasing the Treasury’s cash balance. Treasury then spent the money without exceeding the debt limit.

By the spring of 1954, Congress had raised the debt ceiling from 275 to 280 billion (2% or so of today’s limit), so ordinary debt issuance could continue.

According to Pollock and Canfield the US Secretary of the Treasury still is authorized to issue gold certificates to the Federal Reserve Banks, which will then credit the Treasury’s cash account. This is correctly characterized as monetizing the Treasury’s gold, of which it owns more than 8,000 tons. An old law says this gold is worth 42 and 2/9 dollars per ounce, but we know the actual market value is about 38 times that, at more than $1,600 per ounce.

So, should the Obama administration follow Eisenhower’s example?

The AEI is a conservative, nonpartisan think tank founded in 1943 with the stated mission “to defend the principles and improve the institutions of American freedom and democratic capitalism, limited government, private enterprise, individual liberty and responsibility, vigilant and effective defense and foreign policies, political accountability, and open debate” AEI is an independent non-profit organization supported primarily by grants and contributions from foundations, corporations, and individuals. It is headquartered in Washington, D.C.

The AEI think-tank is Washington political circles is considered close to the Republican Party as the Brookings Institute is to Democrats.

Categories: Economy, Politics, United States.

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