A Quick Look at U.S. Government Debt
By Robert Higgs • Monday February 28, 2011 10:53 AM PDT • 9 Comments
The U.S. government historically went into debt suddenly to fight wars and then gradually repaid the debt, entirely or in large part, in the postwar period. This pattern held until the Great Depression and World War II, when the government went massively into debt, but did not pay off much of that debt afterward. However, it did not add much to the debt between 1946 and the early 1980s, so for more than thirty years, the real debt hovered in the neighborhood of $2 trillion (dollars of 2010 purchasing power).
As the charts show, however, a new debt regime became established at that time. Afterward, real debt increased relentlessly except during Clinton’s second term. As soon as the George W. Bush administration began to steer the ship of state, the debt accelerated. Under Obama, it has exploded. The only previous such explosion occurred when the U.S. government undertook to engage in World War II.
For more than three decades after the end of World War II, the U.S. economy grew faster than the outstanding debt, and therefore the ratio of debt to GDP fell. During the Reagan and George H. W. Bush administrations, this pattern was broken. Under Obama, it has been smashed with a vengeance, although, to be fair, one ought to note that the George W. Bush administration had got the smashing well under way before Obama took office.
Federal debt held by the public now stands at nearly $10 trillion, and it will soon fly past this marker. As the government continues to run budget deficits of $1.5 trillion or more, the debt will mount rapidly. Although the government projects a turnaround in this fiscal profligacy, its actions so far belie its promises. Nevertheless, the bond market may eventually rein in the Treasury, as investors lose confidence in the government’s ability to meet its contracted obligations.
The foregoing discussion relates to the official debt. The government has also assumed effective possession and control of Fannie Mae and Freddie Mac, which means that it has also assumed responsibility for those institutions’ debts, which amounted to approximately $5 trillion at the time they were taken over. How much of this indebtedness will end up as a burden to U.S. taxpayers depends on Fannie and Freddie’s future net earnings, which in turn depend on future events in the housing market and the overall economy.
Tags: American History, Budget and Tax Policy, Economics, Money and Banking, Politics, Taxation, The State 
One interesting thing about these charts is that the debt in inflation-adjusted dollars is roughly constant throughout the 1960s and 1970s, and declined substantially as a share of GDP, even though the federal government ran deficits every year except 1969 in that interval. This happened because of the ever-increasing inflation during that period.
From 1970 to 1980 the price level approximately doubled, effectively inflating away half of the national debt that existed in 1970. With high inflation, we ran deficits but did not increase the inflation-adjusted amount of debt.
We could do that again, which is something that concerns the Chinese who hold a substantial share of the government’s debt.
Randall Holcombe | Feb 28, 2011 | Reply
Inflation is the only way out. Alexander Hamilton must be turning in his grave out of envy for the latitude the Fed has, that he largely did not have.
But he did what he could, the b******.
N. Joseph Potts | Mar 1, 2011 | Reply
Dr Higgs: Why didn’t you mention that (predictably)increased spending and price inflation, soared after Nixon abrogated Bretton Woods in Aug-1971 , thus allowing the Fed to create money out of thin air with no brakes due to redeemabilty for gold. A HUGE issue!!
Dave
Dave Redick | Mar 5, 2011 | Reply
The true problem is not the thieves that continue to infest and infect the government. They are only doing what they can get away with. The true responsibility is the people. Amerikans are greedy, selfish, arrogant, and inconsiderate and most have absolutely no idea that it is their government and they are not doing anything about it.
Religion is a total failure. Religion should be preaching obligation and responsibility and they have failed the society. Keep in mind that once they became 501(3)(c) tax exempt organizations they were no longer anything but a corporate, government, allowance as long as they obeyed what government demanded; and they are great toadies.
The history of mankind is being repeated today in its worst form. I cannot remember the actual stages that freedom returns to slavery, but you get the point: We are only a few years away from total slavery and hopefully Armaggedon will happen and take me away from the misery of the mental cowardice of my alleged fellow person!
d daxx | Mar 5, 2011 | Reply
Dave, what part of “quick look” did you misinterpret?
One might have referred to the “crime of 1873″ as a factor affecting money policy, and FDR’s gift to “do something for silver” which ultimately destroyed China’s silver-based economy, turning them communist in 1949 and thus added another factor to the Cold War.
Then it wouldn’t have been a quick look and someone else might point out another huge issue, which was why the U.S. entered WW1 in 1917 — and the real reason was not to make the world safe for democracy.
Novista | Mar 5, 2011 | Reply
One report I saw indicates that almost half of the public debt of the United States is held by the Federal Reserve Bank. Given that the harmful effects of that debt have already happened (i.e., inflation), could not that debt be extinguished (defaulted on or forgiven) with no subsequent harm to the economy?
Adam Smith | Mar 6, 2011 | Reply
Novista: Why the gratuitous sarcasm? Would you act this way in person, or if you signed with your real name like Dave did? Why be an a******?
P.S. I agree with your points btw.
Mark V | Mar 6, 2011 | Reply
World’s financial systems are exhausted. As showing in past patterns, only wars will heal government and private debts and allow a new start-up and I hope not only financially.
parma | Mar 6, 2011 | Reply
One other very important issue is the Comprehensive Annual Financial Report (CAFR) funds. Throughout the USA there are trillions of dollars, actually (un)federal (no)reserve notes, invested by all forms of governments, federal, state, county, city, town, township, among others, that are completely and totally illegal. Governments are, in accordance with the Constitution and the state Constitutions, supposed to tax according to their needs, not take taxpayer monies and set them aside for their personal gratification. Not one media agency will expose this massive fraud! If these fraudulent confiscations were to be used for debt, there would be no debt—period!!!
d daxx | Mar 6, 2011 | Reply