A debt ceiling has existed since 1917. Before that, Congress had to provide its stamp of approval each time the Treasury Department wanted to sell US debt to raise money. (Here's a wonky history of the debt ceiling [PDF], courtesy of the Congressional Research Service.) Putting a borrowing limit in place gave the federal government more flexibility to fill its coffers without going to Congress over and over. Lawmakers in Congress have raised the debt ceiling on many occasions, including eight times in the past decade, and Treasury Secretary Tim Geithner has said that failing to raise it and allowing the US default "would shake the basic foundation of the entire global financial system."
What Happens If Congress Doesn't Raise the Debt Limit? In a word: Catastrophe.
At least that's what Geithner told Congress in January. In an ominous letter, he wrote that a US default would wreak havoc on the domestic economy and essentially result in a hefty tax on all Americans.
That's economics 101. If you default on, say, your mortgage or car payment, creditors consider you a bigger risk and as a result, it'll cost more for you to take out loans in the future. The same idea applies here, too, except that everyone—consumers, cities, states, corporations, and the government—will pay higher borrowing costs if the federal government defaults, Geithner says. Not to mention that the government would run out of cash to pay the salaries of federal employees and members of the military, veterans benefits, Social Security and Medicare, unemployment benefits to states, individual and corporate tax refunds, Medicaid payments, and on and on.
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Source: Mother Jones
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