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The U.S. National Debt

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 ever-growing figure brings with it several social and economic implications. Therefore, the national debt is a frequently debated topic that has over the years produced various schools of thought on how the U.S. government should manage it. In order to understand how the national debt could ultimately affect future generations of the United States and the different ways the government can best deal with it, it is first necessary to discuss its’ history.

The origin of the national debt dates back to the War of Independence. In 1775, the Continental Congress authorized an issue of $2 million of bills of credit called Continentals to finance the war. At the end of 1779, $241.6 million of Continentals had been authorized in addition to several U.S. loan certificates, foreign loans, and state-issued bills of credit. This caused the worst inflation in U.S. history. By 1780 the Continentals became nearly valueless and the loan certificates, foreign loans, and state- issued bills of credit also depreciated greatly in value. Following the end of the war in 1782, Congress authorized commissioners to travel around the country to examine claims against Congress and the Continental army and revalue them in terms of hard money. 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 Untied 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 associated to the policies put into effect by the Reagan administration (1980-1988). These policies included a large increase in defense spending, reluctance to cut spending on inflation, and enlarged entitlement programs. In 1988, the national debt was $3 trillion, equal to 53 percent of the GNP. From 1988 to 1993, the national debt’s average annual increase was approximately $400 billion. From 1993 to 2001, the average annual increase was less than $200 billion. Some argue this period of debt reduction can be linked to the policies carried out by the Clinton administration (1992-2000). These policies incorporated several tax increases and a reduction in government spending (Nordhaus).

From 2001 to the present, the national debt has risen on an average of $500 billion to $600 billion per year. Accordingly, the United States Treasury Department continues to sell bonds and other forms of government debt to the public as well as several foreign nations. This growing trend has disturbed many Americans, causing the national debt to become a major national issue, especially during election years. This has prompted several attempts by the government to bring the national debt under control (Bureau).

One of the first actions taken by Congress was the Balanced Budget and Emergency Deficit Control Act of 1985, which tried to mandate a balanced budget. The main theme in this Act was a set of federal deficit targets for Congress and the President to meet over a six year time period. The federal deficit was to decrease each year until it reached zero in 1991. If Congress and the President could not agree on a budget that met the target in any given year, the automatic reductions would take over and reduce spending. Splitting reductions equally between defense and non defense expenditures would do this. This law was popular among legislatures because it reduced spending without forcing Congress to vote against popular programs. Ultimately, the Act of 1985 failed. As



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