A Brief History of America’s National Debt

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Last week, on Monday November 2, the federal government added $339 billion to the national public debt in just a few hours. That amounts to over $1,000 for every person in the country. You are the one obligated to pay this off. How in the hell did we get in this mess?

In September 1789 Alexander Hamilton was appointed the first Treasury Secretary of the United States. His first of order business was to report to Congress on the sorry state of government credit and devise a scheme to improve it. As a result of the Revolutionary War and the weak government that preceded the adoption of the Constitution, the federal government and the thirteen states were saddled with a wide variety of debts that threatened the financial viability of the new country. Few people seriously believed that the feds and the states would honor their debts causing high interest rates and runaway inflation. And European powers threatened invasion if the national or state governments defaulted.

Hamilton’s scheme lumped together the bonds issued by the Continental Congress and the short-lived American Confederation with any state debt that was currently outstanding and declared that the new government would pay it all off at its original value. To do this he issued new federal Treasury Bonds using the proceeds to pay off the existing debt. Thus, the US government began its practice of borrowing money to pay off the loans it already owed and America’s public debt was born.

While this sounds as irresponsible as the current government’s mode of operation, it wasn’t. Hamilton added a feature that is missing from the current program – a sinking fund. As the feds collected taxes every year they earmarked money for the sinking fund. The fund was then used to buy back 5% of the outstanding debt, often at a discount when interest rates were high (bonds lose value when interest rates go up), and then they held the bonds to sell later at a profit when interest rates fell or to completely eliminate that fraction of the debt. In 1792 the public debt was $77 million ($1.9 billion in 2015 dollars or about $462 per 1792 citizen). Using the sinking fund and by selling massive amounts of federally owned land, the Andrew Jackson administration completely paid off the debt in 1835. That’s right, in 1835 the American government and the taxpayers who support it didn’t owe any money to anybody. This state of fiscal responsibility lasted all of two years.

The real estate boom that allowed Jackson to pay off $58 million ($1.5 billion in 2015 dollars) in just six years finally crashed in 1837. With the economy in a six-year long depression, tax revenue fell forcing the Martin Van Buren administration to borrow once more. Like Dracula from his grave, the federal public debt was resurrected to suck the blood of America’s taxpayers.

19th century politicians were just as happy to sell their votes as their modern counterparts are, but they weren’t as greedy, thus the national debt grew slowly and a few feeble attempts were made to reel it in. When Abraham Lincoln was elected the debt stood at $65 million, or about the same as it was in 1792 when adjusted for inflation. Then the Civil War set off a debt explosion. When America’s bloodiest war finally ended in 1865 the federal debt of $2,681 million was 41 times bigger than it had been five years earlier ($39.4 billion in 2015 dollars, or about $1,133 per 1865 citizen).

Once the dust settled the country got down to business resulting in a massive economic expansion. Fueled by western settlement, a huge immigrant inflow, and rapid industrial development, federal revenues blossomed causing year after year of budget surpluses. By 1893 the debt was cut nearly in half to $1,546 million, however the value of a dollar had also grown making the real value of the debt about the same as in 1865 ($40.7 billion in 2015 dollars). The federal public debt would never be this low again.

Like a drunken blue-haired Floridian driving his Hoveround, the US economy kept bumping into walls. Seven recessions struck in the next two decades, stifling tax receipts, only to be capped by World War I with its gigantic bill. The result was a record debt of $27.4 billion in 1919 ($380 billion in 2015 dollars). The Harding and Coolidge administrations cut spending drastically and even with an income tax cut churned out ten successive years of budget surpluses, thus hacking 40% from the debt and leaving Herbert Hoover only $16.2 billion in the hole in 1930 ($231 billion in 2015 dollars). But with Hoover and FDR the era of big government was born.

The Depression hit and the Keynesians, economists and politicians who think increased government spending will stimulate the economy, took over. Even before the start of World War II, the Roosevelt administration went on a spending spree that grew the government budget by 60% with absolutely zero economic growth to show for it. Then the Germans invaded Poland, the Japanese bombed Pearl Harbor, and FDR pulled out the national gold card to pay for the weapons produced by the Arsenal of Democracy. The national debt grew like a mushroom cloud until the Japanese finally cried “Uncle!” in 1945. As a result of the war and misbegotten economic policy the national debt was now $260 billion ($3.5 trillion in 2015 dollars or $24,524 per 1945 citizen).

The Truman administration made weak attempts to pay some of this off but the advent of the Cold War allowed the Military-Industrial Complex to use the Soviet bogeyman to get the government tap turned on high. As America fought the Red Menace in Vietnam, President Lyndon Johnson pushed through his Great Society programs and created the corpulent welfare state. Despite this the economy boomed in the 60s churning out enough tax receipts to actually allow a small budget surplus in 1969. The surplus cut the debt to $365.8 billion ($2.4 trillion in 2015 dollars) and since that year it has never been lower.

Beginning in the 70s, Congress turned into a teenage girl with daddy’s credit card. Budget restraint went out the window as the feds tried to bribe every constituent while simultaneously building a military behemoth. The nominal federal debt first exceeded nine figures under Reagan in 1982 when it hit $1.1 trillion ($2.8 trillion in 2015 dollars). Ronnie then broke another milestone in 1986 when he and Congress dug a hole that was $2.1 trillion deep ($4.6 trillion in 2015 dollars). Bush 41 took us through the $3 and $4 trillion barriers, followed by Clinton reaching $5.2 trillion in 1996 ($7.9 trillion in 2015 dollars).

Ironically, crazy Newt Gingrich led Congress to a moment of near sanity in the late 90s, severely reigning in spending to create the fictitious Clinton surplus. Through sleight-of-hand government accounting, using methods that would land private sector accounts in prison, the Gingrich-Clinton team posted a total surplus of $560 billion from 1998 to 2001. But in reality, the surplus never existed. During that time the federal public debt rose $401 billion, the slowest rate of growth for quite some time, but most definitely NOT a surplus.

Then we got Bush 43 and the government showed the restraint of a fratboy in a titty bar. Two wars, an expansion of Medicare, and a bailout of the government’s banking cronies doubled the debt in eight years to $11.9 trillion ($13.3 trillion in 2015 dollars). The “hope and change” administration followed, fulfilling neither of these promises. Obama and his Democrat cohorts added to the existing wars, added to the bank bailout, engaged in ineffective but expensive FDR-like Keynesian programs, and buried the economy in stifling regulations. The result was year after year of near record deficits that brought us to our current debt of $18.6 trillion, 67% higher than when Obama took office. In just fifteen years, the feds tripled what the taxpayers owe.

Your share of this is now $57,750. When tax time rolls around this year, $943 of the cash you send the IRS will be used to pay interest on this debt. You will get NOTHING in return for this $943. This is simply money you are obligated to pay for the privilege of owing such an outrageous amount.

The country came out of the Revolutionary War with Americans only owing $462 per person, which was then paid off. We got through the Civil War with each citizen only owing $1,133. To this was added debt for World War I, the Depression, and World War II, but by 1945 each American was on the hook for just $24,524. In comparison to those events the US has had a pretty smooth ride since, undergoing the greatest economic expansion in world history, a time that the debt should have been paid off. Instead the political duopoly running the federal government added $33,226 to what you owe.

How much more can we afford before the weight of the debt crushes us all?

Wayne Middlesteadt is the author of Five Ways to Beat the Market and The Golden Age of Distance Running.

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Wayne Middlesteadt is a 1986 graduate of Georgia Tech and has an MBA from Georgia State University. Currently working as a financial writer and track and field historian, his latest book is Five Ways To Beat The Market.