Keith Suter’s Global Insights

What on earth is going on?

Saturday, July 4, 2009

The US National Debt

The US Government is plunging even more deeply into debt. Here are two short videos which set out graphically the continuing crisis.

To try to make sense of a "trillion" dollars, if a person spent a US$1 million per day for every day since Jesus was born, then it would take until about the year 2737 to spend just the first trillion dollars.

History of the Debt

The US has always had a national debt. The first version was created at the outset of the American war of independence against the British (1776-1783). As soon as the fighting started, the Continental Congress authorized the issue of US$2 million of bills of credit (called "Continentals") to finance the war.

There is an old American expression that something is not "worth a Continental". This refers to the way that the Continental Congress issued too many "Continentals" and created the worst bout of inflation in US history in 1780. The new country had a very poor international credit rating because foreigners did not think that the Americans could handle their finances properly.

The British were eventually driven out in 1783. Under the original constitution, the new US Government did not have any independent power to raise revenue. Meanwhile, the 13 states had their own debts to pay off and so were reluctant to provide money to the new Government.

The new country started to slide into chaos. The Government was broke and the individual states were squabbling among themselves.

In 1787, there was a conference in Philadelphia to create a better constitution and a stronger national government. That 1787 constitution remains in force. The US Government was now given the power to tax.

The current form of national debt was started in 1791 and it was US$75 million. This may seem a small amount of money but it represented about 40 per cent of the US's gross national product.

The Debt Continues

The national debt has tended to keep on growing. The national debt reached a new high in 1804 when the US Government bought the Louisiana territory off France (the "Louisiana Purchase") for US$11.25 million. Ironically, Thomas Jefferson, one of the authors of the new Constitution, hated debt but the French offer was too good to refuse.

Thomas Jefferson, the third president, knew a lot about debt because he inherited from his father in law in 1773 an estate burdened with debt. He hated bankers and debts. Creating a national debt would serve only to enrich "the tribe of bank-mongers...seeking to filch from the public their swindling and barren gains". Hatred of financiers is nothing new in US politics!

But the Louisiana Purchase was too good to miss - and it has been justified by history. This means that the national debt is not necessarily a bad thing - providing the money is being used for worthwhile projects.

The Debt Goes Down

In the 1830s, the national debt went down to its lowest ever level: US$37,513. This was due both to President Andrew Jackson being very frugal and to the US Government selling land for development purposes.

Generally speaking the national debt has gone down in times of peace and gone up in times of war. The national debt increased by 21 times in World War I and six times in World War II.

The longest sustained period of debt reduction occurred after the Civil War (1861-5) to 1893, when the US Government ran a budget surplus every year and cut the debt to about a third of initial value. This resulted in more money in circulation for private expenditure and so contributed to the booming US economy. By the beginning of the 20th century all this growth meant that the US had become of the world's main economies.

The Great Depression and War

The Depression of the 1930s was another turning point because the national debt started a dramatic increase. The US Government was spending its way out of the Depression, such as through the creation of roads and other public works. Then the US ran into the financial problems of World War II.

The national debt in 1946 - the year after the war ended - was 128 per cent of gross national product.

Then the US embarked upon its biggest period of economic growth - as did most of the rest of the world - as it recovered from the war. For two years during the eight years of the Eisenhower Government in the 1950s, the US Government even ran at a surplus. From the 1960s, US Governments started to fall back into increasing the national debt. For example, the War in Vietnam was politically unpopular and could not be financed from traditional methods (compulsory saving and increased taxation) and so the Government borrowed to pay for it.

The Reagan Administration (1982-88) had the largest military build up in peacetime US history and this added to the national debt.

Clinton Cuts the Debt

By the time of the Clinton Administration (1992-2000), the Cold War was over and the president was reluctant to get the US involved in further wars. Additionally, the US economy was booming again.

In the late 1990s, Clinton was speculating on what could be done about the first lot of budget surpluses since the Eisenhower Administration. In June 1999, Clinton said that if the current rate of annual government budget surpluses could be maintained, then the entire national debt could be paid off by 2015.

Reducing the level of annual government budget deficits was one of the Clinton Administration's greatest achievements. It ran four consecutive budget surpluses. In May 2000 Clinton announced the largest paydown on the national debt in US history. The national debt was US$2.4 trillion lower than it was projected to be when he entered office in 1992. He said that the US could "pay off the entire national debt by 2013 for the first time since Andrew Jackson was president".

The Crisis Returns

But that optimism has now gone.

President George W Bush increased the annual government deficits by both introducing tax cuts and raising defence expenditure. The War on Terrorism and the cost of rebuilding Iraq are adding to the national debt.

The current crisis is over the need to rebuild the US financial system. The US government is now back with record government budget deficits.

You Tube user 10000Pennies uploaded a video clip entitled "The National Debt Road Trip".

National Debt - How Much Is A Billion Dollars? Dave Walker,  is another interesting You Tube video from mjack3003 that is worth a look.

Keith Suter

Posted by: Webeditor at 12:31 AM

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One comment

It's absolutely ridiculous that the National Debt is getting this far out of control! There's no way the US can remain a world power if the national debt continues to increase at such an alarming rate. It seems like the Obama administration and the congress elect don't understand the long term implications of spending this much money. A guest speaker on CNBC called our debt the monkey on our back and had this to say, "We have a huge amount of debt. Instead of the government doing that, now they're trying to look at stimulus plans and things that may inflate assets. That may run out of control.”

kathy | July 7, 2009 09:55

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