The U.S. National Debt
Econ Problems & Issues: ECO405
Professor Myung Han
Alex R. Scales
June 10, 2012
The national debt is the total amount of money the United States Treasury Department has borrowed and currently owes to the federal government's creditors (Sylla). These creditors are mostly comprised of the public, including individuals, corporations, as well as state, local and foreign governments. They also consist of various government trust funds, such as Social Security and Medicare. Additionally, they include the Federal Reserve, mostly in the form of treasury bonds, bills and notes. Currently, the U.S. national debt is estimated to be $8.5 trillion (ZFacts). This ...view middle of the document...
The revalued debt amounted to approximately $27 million. At that time, the Articles of Confederation did not grant Congress an independent power to raise revenue. Also, the states had debts of their own, so they were reluctant to respond to Congress's requests for revenue. Due to this inability to raise funds, interest payments in the 1780s were dealt with by issuing certificates of interest indebtedness. In 1787, the Constitution solved the revenue problem by granting the new federal government the power to tax. Despite this, by 1790 the indebtedness of the United States had increased to $13.2 million of foreign debt and $40.7 million of domestic debt, while state governments had outstanding debts of $18.3 million (Sylla).
In 1790, Alexander Hamilton was named the first Secretary of the Treasury and submitted a report on the national debt to Congress. In this report, he advised Congress to fund all the government's obligations, including the state debts, into long-term federal securities. Later that year, Hamilton's proposals were adopted and all foreign and domestic debt was funded by federal securities. Hamilton's refunding plan was generous to the government's creditors, who replaced securities selling for as little as fifteen cents on the dollar in 1789. Hamilton justified this by arguing it would restore faith in the government and public credit, attract foreign capital to the United States, and increase the effective stock of money, thereby stimulating the economy. Future economic events proved Hamilton was correct. For example, in 1803 the U.S. government had no difficulty borrowing $11.25 million on short notice from foreign nations to finance the Louisiana Purchase, which doubled the size of the nation. By that time almost sixty percent of the national debt had been purchased by foreigners, who in turn lent money to Americans in return for the government's promises to repay them in the future (Sylla).
The national debt continued to grow in the following decades, largely due to the need for wartime funding. The national debt tripled between 1811 and 1816 during the War of 1812. At the end of the Mexican War in 1851, the debt had quadrupled. During the Civil War time of 1860 and 1866 the debt increased forty-two-fold. The debt rose fifty percent between the Spanish-American War era of 1893 and 1899. In World War I, the debt increased another twenty-one-fold between 1914 and 1919. The debt increased an additional six-fold during the World War II period of 1939 to 1946. At the end of World War II, the national debt was $260 billion, equal to 128 percent of the United States Gross National Product (GNP) (Wieczorek).
After World War II, the debt continued to rise, but until the 1980s the GNP rose much faster. By 1981, the national debt was $1 trillion, equivalent to 33 percent of the GNP. From 1981to 1988, the national debt began to increase dramatically. Some argue the potential reasons for his rise can be...