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Posted by on Oct 8, 2013 in Featured, Politics | 1 comment

Are We Heading Toward a Constitutional Crisis?

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The roots of our Constitutional system of government lay deep in the Western political tradition. But as for the architecture of our government, no philosopher exerted greater influence upon the Constitutional convention than Baron de Montesquieu. His Spirit of the Laws, published in 1748, held the attention of James Madison and others in 1787 as they sought a new governing document to replace the failed Articles of Confederation. At the heart of Montesquieu’s model lay the principle that all governments employ three separate and distinct powers: legislative (to make the laws), executive (to enforce the laws), and judicial (to interpret the laws). The new Constitution was designed to codify this framework so that the three branches of the new government would “check and balance” each other for all time. Two parallel structures were added to this one: a provision balancing the “big” states against the “small” states (in the bicameral legislature), and balancing the new central Federal government with the existing State governments (federalism). Brilliantly constructed as this Constitutional framework was, no other country on earth successfully replicated it; parliamentary systems predicated on the confluence of powers proved more amenable. But in America, at least, the Constitution has managed to survive for 226 years.

It did not always work smoothly, of course. Early on, and continuing for over a century, disputes arose over selection of Vice Presidents, the extent of judicial review, state nullification of Federal law, state secession from the Union, Federal powers of war and reconstruction, the selection of US Senators and women’s suffrage. By 1920, however, the Constitutional framework was fairly well-established and, with a few modest Amendments and alterations (lowering the voting age, Presidential term limits, Inauguration Dates, Presidential succession) it has remained intact.

But one issue vexed the first generation of Americans and continues to do so today: debt. Repeated arguments over public debt would have both economic and Constitutional implications. The United States of America emerged from the Revolutionary War already in debt. The question immediately arose: should a central power (Articles or Federal Congress) service that debt or should the States? With the Federal government assuming the debt with the new Constitution, a new question arose: should the Federal government pay off that debt – in western lands, if necessary – so that a Jeffersonian yeoman republic could provide debt-free lands to farmers only marginally connected to global capitalist markets? Or, on the contrary, should the Federal government establish an English-style Bank of the United States based on fractional reserve banking principles that could expand the US economy and develop industrial capitalism? With fractional reserve banking, the bank is only required to maintain as gold in its vaults a fraction of the currency it releases to the public. It is considered essential to the growth of capitalism, though, when poorly managed, can lead to either bank runs or rampant inflation.

Alexander Hamilton won this first battle, establishing a Bank of the United States that could manage public finances and serve as a private lending institution. It would assume the nation’s existing debt, and acquire future capital from a collection of internal whiskey taxes and import tariffs. When re-chartered after the War of 1812, much of the country had come to accept the principle of fractional reserve banking, as post-Napoleonic War trade led to a massive boom in the US industrial and agricultural economy.

But then the Panic of 1819 hit, the nation’s first true downturn in the modern business cycle. The bubble fueled by the market for monkey jackets , burst and the early doubts about the Bank’s influence on the American economy re-emerged in full force. The Supreme Court ruled in McCulloch v. Maryland that the Bank was Constitutional. But the political opposition to the bank grew with the rise of Andrew Jackson.

What were the objections to the now-Second Bank of the United States? They were twofold. One was over the location of the Bank, which concentrated financial power along the Eastern seaboard. The other was more ideological: banks encouraged rampant speculation, which would necessarily reduce yeoman farmers into debt and dependence upon a growing industrial capitalist economy. The two-fold objection helped to destroy the Second Bank, and briefly gave the United States something in 1835 that it would never attain again: total freedom from public debt. But the price of the bank’s destruction and the elimination of US public debt was a massive depression in 1837 that helped spawn the Second Party System of the United States.

The United States would not create a new central bank until the creation of the Federal Reserve System in 1913, though the Civil War created a new paper “greenback” currency that was secured not by gold but by the sale of US government bonds. Free banking replaced the national bank, as local banks issued currency discounted and secured according to widely varying rules. Capital and debt continued to grow, especially with the growth of railroads. By the late 19th century, many farmers had become indebted (as their Jacksonian forebears had warned) and they had now become advocates for a looser currency to help make the repayment of debts easier. Big business, no longer needing a large-scale fractional reserve national bank and loose currency to stimulate expansion, fought to restore the nation back to the gold standard again by the 1890s.

Still, the question of currency and debt continued, with the Panic of 1907 leading to the creation of a Montesquieu-ian financial institution – the Federal Reserve system. With checks and balances between large and small lending institutions, and a mix of public and private influence, the Federal Reserve system was supposed to maintain a steady money supply that prevented both rampant inflation and contraction. Needless to say, it wasn’t always successful, as the Great Depression revealed. But its power of the nation’s money supply – and subsequently, the world’s financial system – grew after World War One. Britain, long the world’s banking bulwark, was now surpassed by the United States. World War Two accentuated the point, as the US government now helped protect and rebuild the entire Western world. Differences between residual gold-based banking and the Fed’s new power over a dollar that had become the world’s effective base currency led President Nixon to sever all remaining ties to the gold standard in 1971. From that point on, the US dollar would float freely, depending on global currency exchange and the actions of the Federal Reserve.

But as for public indebtedness, the Federal government continued to require funding to finance all kinds of public expenditures, including war, infrastructure and the administration of western lands. The Constitutional system of checks and balances made the process of government financing precarious from the beginning. After all, if the President decides that his Commander-in-Chief responsibilities require the construction of several naval vessels, and the Congress refuses to borrow money to pay for it, what happens next? The answer, typically, was to resort to the sale of various forms of public and private bonds, secured by gold reserves or, in the Civil War at least, the future ability of the Federal government to pay off those bonds. Congress jealously protected its power over the purse, not just in the appropriation of monies but in the ability to finance those appropriations through treasury bonds.

Congress responded to the mismatch by requiring two separate votes – one to provide funding (as the Constitution requires) and another to approve the issuance of treasury bonds to borrow the money to finance those expenditures. These were done per each appropriation. As the US entered World War One, the scale of debt-financed public expenditures became so massive that the Congress simplified the process by holding regular debt ceiling votes to authorize all debt-financing for each fiscal year.

Alas, we ended up with a clunky Montesquieu-ian approach to public finance to match our brilliantly Montesquieu-ian political system. With the world effectively treating the US dollar as the most stable currency on Earth, the consequences of failure to administer public debts would most certainly ripple through the entire global financial system. And yet, that debt has had to be authorized in separate Congressional votes since 1917 – an oddity that means the initiation of debt-based expenditures requires a second authorization to pay debts already authorized. It’s as if you decided to use a credit card to buy a new television and then tasked yourself with a separate decision of whether to pay off your credit card bill when the statement arrived. Needless to say, if the credit card company knew you’d seriously consider balking at paying your monthly minimum payment they would not be very willing to lend you money in the future, unless at exorbitant interest rates.

For decades, the debt limit has been used as a mostly-obscure mechanism for occasional Congressmen to raise a symbolic protest against objectionable expenditures. Passage was typically pro forma. Never, until 2011, did a major, governing faction in Congress seriously consider refusing to raise the debt limit as the price for other concessions – whether budget-related or otherwise. To head off the crisis in 2011, Obama and Congress agreed to a binding debt-reduction plan that, if it failed, would trigger an automatic “sequester”, or austerity measure. The 2010 election had sent a powerful message that Congress would no longer approve of expanded spending (regardless of prior Republican spending) without very serious and immediate consideration of its effect on the national debt. And the Congress would use the debt ceiling vote as leverage. A weakened Obama after the 2010 midterm elections agreed to the sequester as a way to head off default. But it was an unprecedented shift in power from the Executive branch to the Legislative, as the Congress was exerting more influence over the practices of the Federal Reserve and the US Department of Treasury than had been used in a very long time.

But then came the 2012 election, where the Affordable Care Act (Obamacare) was front and center in the campaign. Mitt Romney vowed to repeal the ACA on “Day One.” However, Obama won re-election fairly easily, the Democrats held on to the US Senate, and Democratic House members received 1.6 million more votes than did Republicans. Population distribution and gerrymandering meant that the House would still be in GOP hands, of course. All is fair love, war and gerrymandering. But typically, when a party’s control over one House of Congress is dependent entirely upon the bizarre apportionment of votes and not a national voting majority, that “majority” would not assume it had some kind of national mandate to enact an agenda generally rejected by the voters. Doing so would be seen, rightly, as blackmail and would undoubtedly blow up in the “majority” party’s face. So one would think.

After initially agreeing that the 2012 election meant that Obamacare was here to stay, Speaker John Boehner and the House voted over 40 times to repeal the act anyway. And then, despite warning from many Republicans and conservatives that the law could not be repealed, defunded or delayed given the political balance in Washington, the House Tea Party members insisted that Boehner use any and all leverage to force major changes to the health law. So this is where we are: a single faction of a minority party that happens to control one House of one branch of government using the threat of national default as leverage to enact policy concessions just rejected by the national electorate.

Politically, this has been predictably disastrous for the GOP. Despite objections over Obamacare, very few Americans believe that repealing or delaying it is a higher priority than putting the government back in operation with a clean continuing resolution. But there is now a Constitutional crisis that may emerge with the debt limit vote as well. As most economists are warning, a failure to raise the debt limit will have catastrophic implications for the global financial system. And yet, House Republicans continue to insist that Reid and Obama give in to myriad demands before they raise the debt ceiling. Knowing that such concessions are unprecedented (2011 excepted), Obama would never undo his signature achievement that had already survived Supreme Court challenge and a national election, and would set a monstrous precedent for any future President, Republicans have pushed ahead with their plan.

So, what happens if, as expected, Reid and Obama do not blink? Most people assume that Boehner will quietly work out some kind of face saving gesture and will go ahead and pass a mostly clean debt ceiling and CR vote in the end. But what if he fails (or is unwilling) to do so?

We would face a Constitutional crisis. At first, it would put the ball in the President’s court. He has some unprecedented and somewhat bizarre policy measures in his arsenal to raise the debt limit – invoking the 14th Amendment and minting a trillion-dollar coin, for example. But House Republicans would almost certainly respond with impeachment, which would invariably fail in the Senate and rebound against Republicans as it did in 1998. And we would still have this problem going forward.

Our brilliant political system has survived all kinds of crises in the past. But it has occasionally required adjustments to the architecture of government to ensure that the government operates efficiently and fairly. We may be at such a point of adjustment now. At the very least, the separate debt limit vote must be eliminated so that no future Congressional faction can hold the nation’s financial system hostage to its demands. And we need a better system to manage the government when Congress cannot agree to an annual budget – something to the effect of making a continuing resolution automatic unless a majority in both houses positively votes to prevent it from going forward. These may require Constitutional Amendments, but mostly likely will not.

Nobody knows how this will all play out. Our Montesquieu-ian and Madisonian system was designed to prevent large scale change. Obamacare itself – though critics claim it “was rammed through” the Congress – had to get 60 votes to overcome a now-regular filibuster, and was the product of decades of deliberation. That no Republicans voted for it may be politically problematic, but it has no Constitutional implications – the Founders, after all, detested political parties and certainly never wanted to enshrine partisan minority rights into the founding document. Of all the checks and balances in our Constitution, we have managed to develop even more checks – excessive filibusters, uncompetitive gerrymandered districts, a broken appropriation and debt-service process – that have actually thrown the government out of balance and out of order. We are at a breaking point where divisions over means are as important as divisions over ends.

One hopes that sanity will prevail, and that House members will recognize that the 2012 election does not give them the authority to hold the nation’s prosperity as ransom for a political objective, not to mention partisan pique.

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