The National Debt: How Did We Get Here?

A Brief History of the National Debt in Graphs

In a previous post (The National Debt…Washington We Have a Problem) I wrote about how the debt is becoming problematic. Now, I thought I might provide some background information in the hopes that I can glean some useful insights from a broader perspective. So lets begin with a graph depicting the debt as a percentage of GDP 1791-2010:


I chose the debt as a percent of GDP as the key indicator to look at because it is the most useful in determining the ability to pay off debt.

The National debt came into being shortly after the adoption of the constitution in 1788. The creation of the national debt was part of Alexander Hamilton’s economic plan for the newly formed republic. The national debt was created when the federal government assumed the debts of the states. The initial debt was mainly the result of the Revolution and came in around 38% of the GDP. The above graph proved to be the most important in my study, because it led to a new revelation that my post World War 2 perspective (in an earlier post) could not provide.

The graph above can be divided into two parts: pre-World War 1, and post World War 1. Looking at the graph it is easy imagine a trend line being drawn from 1791 to just before WW1. The trend is one of declining debt as a percentage of GDP. This is due to two factors, economic growth and a commitment to responsibly manage the debt. The second part, post WW1 (beginning about 1918), produces a general increasing trend, unfortunately it is a steep trend line.

In my last post on the debt I concluded that the ideologies and strategies of the Democrats and Republicans were to blame for the ballooning debt. I still stand by this assessment. However, this new revelation shows the impact of America’s changing role in the world. Post WW1 the US became increasingly involved in world affairs and the US’s growing power pushed us into the role of a global policeman. The increasing debt to GDP ratio, post WW1, shows the cost of the so-called ‘Pax Americana.’ This is not meant to be a criticism of US foreign policy other than to say that we may be reaching a point of over-extension.

The concept of debt management is shown here. The large spike in the middle of the graph represents debt accrued because of the War of 1812. Notice how it was paid down in a matter of 20 years or so. The increase in debt beginning in the late 1830s was caused by the Panic of 1837 (an economic depression.)

Here again, we see the impact of war on the debt. The huge spike in this graph (which dwarfs any previous debt) was caused by the Civil War. And again, almost immediately after the war the debt begins to decline, even with the continued costs of reconstruction. The upward curve at the end of the graph was caused by the depression of 1893.

The numbers in this chart get really huge. The Civil War spike on the last graph would barely register on this one. During the 1920s the debt declined only modestly but the debt to GDP ratio declined much more significantly due to dramatic economic growth. This chart makes another revelation clear, wars are expensive and contribute tremendously to the debt. Here, the effects of the World Wars can be seen, as well as the domestic spending of the New Deal. The debt and economy would never be the same.

Have we reached the point of no return? The most striking thing about this graph is that no specific events can be discerned, not the Korean War, Vietnam War, the Great Society programs, recessions, the space program, arms race; nothing. It is just an exponential curve of skyrocketing debt.

Conclusion: What, if anything, can be done?

Historically, the debt generally increased because of wars and economic depressions. The debt was then reduced after the war or during more prosperous times. This trend was broken beginning about 1918, and definitely so by the end of WW2. The last time the debt was actually reduced was in 1957 when it declined by 0.82%.

To begin to manage the debt we need to raise taxes and cut spending.* Until the economy begins to grow more rapidly and produce more jobs we need to act moderately and carefully, but we must at least take the first steps now. Secondly, the US needs to push its allies to take more responsibility for their own security and for helping maintain world order. The US can no longer afford to be the global police. Something must be done. Another way to make the debt more manageable and reduce the debt to GDP ratio is to grow the economy, but the debt cannot be completely ignored in favor of growth. The debt to GDP ratio is moving up to levels never seen before (except briefly and temporarily during WW2) and there is no end in sight. The economic health and future of the republic depends upon our leaders making smart decisions now before the debt becomes a crisis.

Japan once had a rapidly growing economy that was one of the most dynamic in the world. During the 1970s and 198os many in the US feared Japan would over take the US as the largest and most powerful economy. However, due to their uncontrolled debt, during the 1990s the US left Japan in the dust. Today, Japan’s debt to GDP ratio is at a stunning 210%! Their economy is stagnant and has been for sometime. If we do not begin to more carefully manage the debt we could end up like Japan: a former giant struggling to stay relevant.

* I’m even open to the idea of a second round of quantitative easing. Although it is not the ideal solution, it may be better than default.

_____________________________________________________________________________________________

Sources:

Historical Debt Outstanding – Annual,” TreasuryDirect.gov.

Featured Image: http://vator.tv/images/attachments/040711073602green_money.jpg

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13 thoughts on “The National Debt: How Did We Get Here?

  1. evocativepower says:

    Thanks for an informative, sensible and well-reasoned analysis. I find your blog refreshing for its fact-based approach, free of partisan rhetoric. I look forward to reading you again.

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  8. stephenpruis says:

    I am intrigued that there are still a few of us for whom “reason” is not a dirty word. What with the attacks on science and education by conservatives and the “God fearing” and the mass media having succumbed to the Jersey Shore Modality I am curious to how many will actually read a blog with the word “reason” so prominant. After all, “reason” does rhyme with “treason” and probably should be avoided.

    • I’ve always been a fan of reason. Hyper partisanship may be more fun but it does not lead to good decision making. As far as how many people will read my blog, there are a handful of people who read my blog regularly. To them I am thankful.

      • stephenpruis says:

        Amen! I used to teach rational decision making to group facilitators and now . . . well I have hope for your generation, not so much for mine as we have been the ones screwing it up.

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