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Winston Churchill, president of the Board of Trade, and Kaiser Wilhelm II of Germany at the German Army manoeuvres, 1909.
Winston Churchill, president of the Board of Trade, and Kaiser Wilhelm II of Germany at the German Army manoeuvres, 1909.

Who to blame for the U.S. budget crisis? Try the Kaiser Add to ...

The United States is again in the political grips of a self-destructive budgetary crisis. High time to engage in the nation’s favourite political sport – assigning the blame.

It would be far too easy and obvious to blame the Republicans in the U.S. House of Representatives, as tempting as that is, given their extreme political intransigence. The fact that Americans and global financial markets are once again staring at the abyss of default can ultimately be traced back to the warring machinations of Germany nearly a century ago.

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To see how this plays out, let’s start with the important observation that setting a debt ceiling is highly uncommon globally. Why then did the United States resort to it?

World War I was, as you may recall from the history books, largely a European war, pitting Germany, Austria-Hungary and Turkey against Britain, France, Russia and Italy. When the war began in 1914, U.S. President Woodrow Wilson, representing the will of the vast majority of the people of the United States, promised neutrality.

However, the German navy, with its submarines, managed to cut Britain off from supplies. This effective blockade led to the sinking of two U.S. steamers off the British coast in February, 1917. President Wilson broke off diplomatic relations with Germany and, after receiving congressional authorization, declared war on the Kaiser on April 6, 1917.

Now, as we know all too well, wars cost money. U.S. involvement in World War I was no different. And as far as most wars are concerned, they are not budgeted. President Wilson had to borrow money to fund U.S. troops in their fight against Germany; this was politically and administratively troublesome.

Why? Because every single time President Wilson went to the markets to issue more debt, he had to ask Congress for approval.

To resolve this, Congress had a stroke of genius. So that the President would not have to return each time to beg for more, why not do the patriotic thing and give him the ability to borrow a fair number of times? To keep this from getting out of hand, the proposal to set a debt ceiling was enacted.

And so, with the approval of the Second Liberty Bond Act in October, 1917, a patriotic-minded U.S. Congress loosened the nation’s debt issuance purse strings and basically created what we refer to today as the debt ceiling.

But Germany’s guilt for the U.S. predicament of today does not end there. The Second Liberty Bond Act also contained the so-called gold clause. Its effect was that these war bonds had to be redeemed in gold. And yet, U.S. gold reserves were far too small to make good on that promise.

Thus, some decades later, the U.S. Congress, upon the request of President Franklin D. Roosevelt, revoked the clause in 1933 retroactively. Many (including four of nine Supreme Court Justices in 1935) consider that action as the first U.S. debt default.

So here is our golden escape clause for today’s U.S. Congress: Instead of the two major parties doing the usual thing, i.e. blaming each other, why not approve a joint resolution of both Houses – condemning Germany for its responsibility, nearly a century ago, in triggering the existence of the debt ceiling in the first place? That way, the Congress, in solemn bipartisan fashion, could wipe its hands of any responsibility for today’s conundrum and place the blame with the Germans. Case closed.

Uwe Bott is the chief economist of the Globalist Research Center. Copyright The Globalist, where a version of this article first appeared. Follow on Twitter @theglobalist.

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