The history of the United States public debt began with federal government debt incurred during the American Revolutionary War by the first U.S treasurer, Michael Hillegas, after the country's formation in 1776. The United States has continuously experienced fluctuating public debt, except for about a year during 1835–1836. To facilitate comparisons over time, public debt is often expressed as a ratio to gross domestic product (GDP). Historically, the United States public debt as a share of GDP has increased during wars and recessions, and subsequently declined.
The United States public debt as a percentage of GDP reached its peak during Harry Truman's first presidential term, amidst and after World War II. It rapidly declined in the post-World War II period, reaching a low in 1973 under President Richard Nixon. Since then, debt as a share of GDP has consistently risen, with exceptions during the terms of Presidents Jimmy Carter and Bill Clinton. Public debt surged during the 1980s, as Ronald Reagan cut tax rates and increased military spending, while it decreased in the 1990s due to reduced military spending, increased taxes, and the economic boom.
Public debt sharply rose following the 2008 financial crisis, driven by significant tax revenue declines and spending increases.
During the COVID-19 pandemic, US public debt dramatically increased due to emergency measures aimed at sustaining the economy amidst widespread economic retraction across various industries, alongside high unemployment rates.
Early history
1790s Except for about a year during 1835–1836, the United States has continuously had a fluctuating public debt since its Constitution went into effect on March 4, 1789. During the American Revolution, the Continental Congress, under the Articles of Confederation, amassed huge war debts, but lacked the power to repay these obligations through taxation or duties on imports.Staloff, Darren. 2005. Hamilton, Adams, Jefferson: The Politics of Enlightenment and the American Founding. Hill and Wang, New York. . p. 69.Miller, John C. 1960. The Federalists: 1789–1801. Harper & Row, New York. . p. 37.
On the founding of the United States, the financial affairs of the new federation were in disarray, exacerbated by an economic crisis in urban commercial centers.Hofstadter, Richard. 1948. The American Political Tradition and the Men Who Made It. New York: A. A. Knopf. p. 125. In 1790, Secretary of the Treasury Alexander Hamilton pushed for Congress to pass a financial plan, called the First Report on the Public Credit,First Report of the Public Credit, issued on January 9, 1790. a controversial part of which involved the federal government assuming state debts incurred during the Revolutionary War. Northern states had accumulated a huge amount of debt during the war, amounting to $21.5 million, and wanted the federal government to assume their burden. The Southern states, which had lower or no debts, whose citizens would effectively pay a portion of this debt if the federal government assumed it, were disinclined to accept the proposal. Some states, including Virginia, had already paid off almost half of their debts, and felt that their taxpayers should not be assessed again to bail out the less provident, and further argued that the plan was beyond the constitutional power of the new government. James Madison, then a representative from Virginia, led a group of legislators from the South in blocking the provision and prevent the plan from gaining approval. Jefferson supported Madison. The plan was finally adopted as part of the Compromise of 1790, as the Funding Act of 1790. The compromise meant that the state debts were all picked up by the federal Treasury, and the permanent national capital would be located in the South, along the Virginia-Maryland border in what became the District of Columbia.
The assumption issue Historian Max M. Edling has explained how assumption worked. It was the critical issue; the location of the capital was a bargaining ploy. Hamilton proposed that the federal Treasury take over and pay off all the debt that states had incurred to pay for the American Revolution. The Treasury would issue bonds that rich people would buy, thereby giving the rich a tangible stake in the success of the national government. Hamilton proposed to pay off the new bonds with revenue from a new tariff on imports. Jefferson originally approved the scheme, but Madison had turned him around by arguing that federal control of debt would consolidate too much power in the national government. Edling points out that after its passage in 1790, the assumption was accepted. Madison did try to pay speculators below 100%, but they were paid the face value of the state debts they held regardless of how little they paid for them. When Jefferson became president he continued the system. The credit of the U.S. was solidly established at home and abroad, and Hamilton was successful in signing up many of the bondholders in his new Federalist Party. Good credit allowed Jefferson's Treasury Secretary Albert Gallatin to borrow in Europe to finance the Louisiana Purchase in 1803, as well as to borrow to finance the War of 1812.Max M. Edling, "'So immense a power in the affairs of war': Alexander Hamilton and the restoration of public credit." William and Mary Quarterly 64#2 (2007): 287–326. in JSTOR
The Southern states extracted a major concession from Hamilton in the recalculation of their debt under the fiscal plan.Staloff, 2005, pp. 96–97 For example, in the case of Virginia, a zero-sum arrangement was contrived, in which Virginia paid $3.4 million to the federal government, and received exactly that amount in federal compensation.Ellis, 2000, p. 73 The revision of Virginia's debt, coupled with Potomac residence issue, ultimately netted it over $13 million.Staloff, 2005, pp. 96, 313; Ellis, 2000, pp. 73–74 Another result of federal assumption of state debts was to give the federal government much more power by placing the country's most serious financial obligation in the hands of the federal government rather than the state governments. The federal government was able to avoid competing in interest with the States.
The debts of the federal government on January 1, 1791 amounted to $75,463,476.52, of which about $40 million was domestic debt, $12 million was foreign debt, and $18.3 million were state debts assumed by the federal government, of the $21.5 million that had been authorized.
1790s to 1834 To reduce the debt, from 1796 to 1811 there were 14 budget surpluses and 2 deficits. There was a sharp increase in the debt as a result of the War of 1812. In the 20 years following that war, there were 18 surpluses.
Payment of US national debt On January 8, 1835, president Andrew Jackson paid off the entire national debt, the only time the United States federal government has reported no national debt. However, this and other factors, such as the government giving surplus money to state banks, soon led to the Panic of 1837, in which the government had to resume borrowing money.
1836 to 1910
In 1836 debt began again (the debt on January 1, 1836 was $37,000).
Another sharp increase in the debt occurred as a result of the Civil War. The debt was just $65 million in 1860, but passed $1 billion in 1863 and reached $2.7 billion by the end of the war. During the following 47 years, there were 36 surpluses and 11 deficits. During this period 55% of the national debt was paid off.
World War I and Great Depression Debt increased again during World War I (1914–1918), reaching $25.5 billion at its conclusion. Approximately $17 billion in debt was raised through the selling of Liberty Bonds to the general public to finance the U.S.'s military effort. The war was followed by 11 consecutive surpluses that saw the debt reduced by 36% by the end of the 1920s.
Warren G. Harding was elected president in 1920 and believed the federal government should be fiscally managed in a way similar to private sector businesses. He had campaigned in 1920 on the slogan, "Less government in business and more business in government." Under Harding, federal spending declined from $6.3 billion in 1920 to $5 billion in 1921 and $3.3 billion in 1922. Over the course of the 1920s, under the leadership of Calvin Coolidge, the national debt was reduced by one third. The decrease was even greater when the growth in GDP and inflation is taken into account.
Debt held by the public was $15.05 billion (~$ in ) or 16.5% of GDP in 1930. When Franklin D. Roosevelt took office in 1933, the public debt was almost $20 billion (~$ in ), 20% of GDP. Decreased tax revenues and spending on social programs during the Great Depression increased the debt and by 1936, the public debt had increased to $33.7 billion (~$ in ), approximately 40% of GDP. During its first term, the Roosevelt administration ran large annual deficits of between 2 and 5% of GDP. By 1939, the debt held by the public had increased to $39.65 billion (~$ in ) or 43% of GDP. The buildup and involvement in World War II during the presidencies of Roosevelt and Harry S. Truman led to the largest increase in public debt. Public debt rose over 100% of GDP to pay for the mobilization before and during the war. Public debt was $251.43 billion or 112% of GDP at the conclusion of the war in 1945 and was $260 billion in 1950.
After World War II
The public debt as a percentage of GDP fell rapidly after the end of World War II under the presidency of Harry S. Truman, as the U.S. and the rest of the world experienced a post-war economic expansion. Unlike previous wars, the Korean War (1950–53) was largely financed by taxation and did not lead to an increase in the public debt.
Growth rates in Western countries began to slow in the late-1960s. Beginning in the mid-1970s and afterwards, U.S. national debt began to increase faster than GDP.
The public debt relative to GDP reached a post-World War II low of 24.6% in 1974. In that year, the Congressional Budget and Impoundment Control Act of 1974 reformed the budget process to allow Congress to challenge the president's budget more easily, and, as a consequence, deficits became increasingly difficult to control.Dennis S. Ippolito. Why Budgets Matter: Budget Policy and American Politics. Penn State Press, 2004. . pp. 185–86 National debt held by the public increased from its postwar low of 24.6% of GDP in 1974 to 26.2% in 1980.
Debt held by the public relative to GDP rose rapidly again in the 1980s. President Ronald Reagan's economic policies lowered tax rates (Reagan slashed the top income tax rate from 70% to 28%, although bills passed in 1982 and 1984 later partially reversed those tax cuts.) and increased military spending, while congressional Democrats blocked cuts to social programs. As a result, debt as a share of GDP increased from 26.2% in 1980 to 40.9% in 1988, and it continued to rise during the presidency of George H. W. Bush, reaching 48.3% of GDP in 1992.
Debt held by the public reached a high of 49.5% of GDP at the beginning of President Clinton's first term. However, it fell to 34.5% of GDP by the end of Clinton's presidency due in part to decreased military spending, increased taxes (in 1990, 1993 and 1997), and increased tax revenue resulting from the 1990s boom.FactCheck.org : The Budget and Deficit Under Clinton The budget controls instituted in the 1990s successfully restrained fiscal action by the Congress and the President and together with economic growth contributed to the budget surpluses at the end of the decade.Federal Debt: Answers to Frequently Asked Questions: An Update – U.S. Government Accountability Office The surpluses led to a decline in the public debt from about 43% of GDP in 1998 to about 33% by 2001.