The national debt is the total amount of money that the U.S. government has borrowed from various sources, including the governments of other nations, from private investors and different federal agencies. The government’s ability to pay off that debt is a function of our gross domestic product (GDP), and experts are concerned about any country defaulting on its debt when the debt-to-GDP ratio gets above 77 percent. The U.S. debt-to-GDP ratio has been above 100 percent since 2013.
What Is the National Debt?
The national debt is the amount of money that a national government has borrowed through various means, including foreign governments, investors and federal agencies.
When the U.S. federal government runs a deficit, or spends more than it receives in tax revenue, the U.S. Treasury Department borrows money to make up the difference.
A major way it does this is by issuing bills, notes and bonds, which are bought by investors, including the public, the Federal Reserve and foreign governments.
In addition to this public debt, the national debt also includes intra-governmental debt, also known as intragovernmental holdings, which is money borrowed from trust funds used to pay for government programs like Social Security and Medicare.
If the federal government spends more than it receives as tax revenue in a given fiscal year, it adds to the national debt. If revenues are greater than spending, the government can use the surplus to pay down some of the existing national debt. The two ways to reduce debt are to increase taxes or reduce spending, both of which can slow economic growth.
The impact of the national debt can only fully be understood by comparing the debt with the federal government’s ability to pay it off. The debt-to-GDP ratio does this by dividing a nation’s debt by its gross domestic product.
Investors worry about a country defaulting on its debt when the debt-to-GDP ratio reaches above 77 percent.
U.S. National Debt Through World War I
The United States began incurring debt even before it became a nation, as colonial leaders borrowed money from France and the Netherlands to win their independence from Great Britain in the Revolutionary War.
The Continental Congress, forerunner to the U.S. Congress, did not have the power to tax citizens, and the debt continued to grow. By 1790, it had topped $75 million, with a 30 percent debt-to-GDP ratio, according to an accounting presented that year by Alexander Hamilton, the first secretary of the U.S. Treasury.
The growing U.S. economy helped decrease the debt-to-GDP ratio to below 10 percent until the War of 1812, when the country had to go deep in debt to fight Britain once again.
By the time Andrew Jackson took office in 1828, the national debt was $58 million, an obligation Jackson called the “national curse.” By selling off federally owned land in the West, Jackson had paid off all of the national debt by January 1835. Within a year, however, an economic recession led the government to start borrowing, and it would never again be debt-free.
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During the Civil War, the national debt ballooned to some $2.76 billion by 1866. Economic growth in the late 19th century, accompanied by inflation, helped make debt a smaller percentage of economic output. But after World War I, the debt-to-GDP ratio hit a record high 33 percent, with a debt of more than $25 billion (roughly $334 billion in today’s dollars).
World War I also saw a major shift in control over the national debt, as Congress agreed to give the Treasury Department more flexibility in raising money through sales of its bonds. Though it ceded its right to approve or disapprove of each individual sale, Congress would set an overall limit to that borrowing, known as the debt ceiling.
Congress has since raised or lowered the debt ceiling, or the maximum amount of outstanding debt that the federal government can legally incur, numerous times.
U.S. National Debt: Great Depression to Great Recession
Then came World War II, when the debt-to-GDP ratio would rise above 77 percent for the first time in the nation’s history, reaching 113 percent (an all-time record) by the end of that conflict.
In the post-war years, the national debt shrank in comparison to the booming post-war economy, which saw high GDP growth. The debt-to-GDP ratio went as low as 24 percent in 1974.
Recession and rising interest rates soon caused it to swing upwards again, as did the huge permanent tax cuts during Ronald Reagan’s first term and increased spending on both defense and social programs, and by the early 1990s, the debt-to-GDP ratio had reached nearly 50 percent.
Economic growth in the late ‘90s, combined with tax increases under both Presidents George H.W. Bush and Bill Clinton helped bring the debt load back in line, and by 2001 the national debt was less than 33 percent of GDP.
But that would soon change, thanks to increased military spending after the terrorist attacks of 9/11, tax cuts under George W. Bush, and the arrival of the Great Recession, when GDP fell rapidly and business activity and tax revenues shrank.
What Is the Current National Debt?
Despite the nation’s economic recovery, and the end of the wars in Afghanistan and Iraq, the U.S. debt-to-GDP ratio has remained above 100 percent since 2013. During fiscal year 2017, the total national debt passed $20 trillion for the first time in the nation’s history. Debt levels continue to rise.
In early 2018, an analysis by the nonpartisan Committee for a Responsible Federal Budget concluded that recent tax and spending legislation passed by Congress under President Donald Trump was on track to push the country’s debt-to-GDP ratio to highs not seen since immediately after World War II.The report stated that if the temporary spending increases and tax cuts are made permanent, the national debt would reach $33 trillion, or 113 percent of GDP, by 2028, and could be twice the size of the U.S. economy in about 25 years.
The COVID-19 epidemic is impacting national debts across the globe. The Congressional Budget Office projects a federal deficit of $1 trillion in 2020. An economic stimulus package from congress could prompt the U.S. national debt to surpass $25 trillion or higher.
Matt Phillips, “The Long Story of U.S. Debt, From 1790 to 2011, in 1 Little Chart,” The Atlantic (November 13, 2012).
Federal Debt, U.S. Government Accountability Office.
Robert Smith, “When the U.S. Paid Off the Entire National Debt (And Why it Didn’t Last),” NPR (April 15, 2011).
Michael Collins, “Tax cuts, spending helping push national debt to historic highs, new report says,” USA Today (March 2, 2018)