National Debt

SLIDE 1 "The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled."

The Roman Republic, the foremost power of its day, had reached its zenith. Its leadership had attained unbounded wealth and unstinted power. The rulers were intolerant of restraint, indifferent to the demands of the middle class, and contemptuous of the Constitution which was designed to curb their ambitions. The time was some 70 years before the birth of Christ.

Young Marcus Cicero, then a student of law and an eminent lawyer of this day, was just about to suffer his first great disillusionment with grasping government. Rome, by force of arms, guile and trickery, dominated the world. Its citizens had grown slick and fat, careless of their rights, and had fallen prey to the ruthless politicians who craved more and ever more power and riches.

SLIDE 2 The national debt was born in the War of Independence. Within a week of the Battle of Bunker Hill in 1775, the Continental Congress, following colonial precedents, authorized an issue of $2 million of bills of credit, called Continentals, to finance the war.

In January 1780, Alexander Hamilton, installed as the first Secretary of the Treasury, submitted his Report on the Public Credit to Congress and called for funding nearly all the government's obligations, including state debts, into long-term federal securities payable in specie or hard money. He argued in his report that his plan would restore faith in the government and public credit, attract foreign capital and increase the effective stock of money, thus stimulating the economy. Subsequent experience proved him right.

The U.S. government was nearly bankrupt in the 1780s; but in 1803, had trouble borrowing $11Ð'ј million on short notice, mostly from foreign subscribers, to finance the Louisiana Purchase, thus doubling the size of the nation. It was a political and economical masterstroke for the new republic.

SLIDE 3 The national debt reached its high with the Louisiana Purchase. Aside from this, the administrations of Thomas Jefferson and James Madison were both noted for fiscal frugality. Although some of the old Federalist taxes were cut, the Treasury Security, Albert Gallatin, was able to cut the debt in half between 1804 and 1811.

Another notable event in the history of the debt was its elimination in 1835 and 1836, an unprecedented occurrence in the history of modern nations. This took place during Andrew Jackson's administration. Like his Jeffersonian predecessors, was frugal. Another factor was the rapid economic growth which swelled federal tariffs and land-sale revenues.

SLIDE 4 Although Thomas Jefferson acknowledged the need, to some degree that credit was a necessary evil, he was also known to have said:

"To preserve [the] independence [of the people,] we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitudeÐ'..."

"I consider the fortunes of our republic as depending in an eminent degree on the extinguishment of the public debt before we engage in any war; because that done, we shall have revenue enough to improve our country in peace and defend it in war without recurring either to new taxes or loans. But if the debt should once more be swelled to a formidable size, its entire discharge will be despaired of, and we shall be committed to the English career of debt, corruption and rottenness, closing with revolution. The discharge of public debt, therefore, is vital to the destinies of our government." --Thomas Jefferson to Albert Gallatin, 1809. FE 9:264

SLIDE 5 Since 1930, the national debt has never been reduced for more than a year or two. In the depressed 30s, the collapse of the Gross National Product (GNP) led to federal fiscal deficits and debt growth.

World War II saw the debt rise, by far, to its highest level in relation to the GNP in previous or subsequent experience. The national debt peaked at 128% in 1946 and afterwards, although the debt continued to rise, the GNP rose much faster. This trend continued until 1980.

SLIDE 6 A government creates budgets to determine how much is needed to run a nation. Often times, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt for example, by borrowing from the public.

SLIDE 7 The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations, and other governments. U.S. securities issued include Treasury-bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds.

When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities. Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.

The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).

SLIDE 8 This chart shows the United States' national debt with the various Presidents' terms marked by vertical lines.

Since 1938 the Democrats have held the White House for 35 years, the Republicans, as of 2004, 31 years.

The national debt peaked at 128% of the Gross Domestic Product (GDP) in 1946 due to the war effort. Roosevelt, Truman, Ike, Kennedy, LBJ, Nixon, and Carter all did their part to bring the national debt back to pre-war levels. However, when Reagan took office, the national debt took off. It rose, non-stop, for 12 years to 66.3%. At the end of Bush's term, 25 years of progress in paying down the national debt was erased.

Clinton stopped the bleeding in just three years and then dropped the debt from 67% to 57% in his last five years.

Bush wasted no time in reversing this progress. He immediately gave yet another massive tax

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