The United States has been in debt since its founding. The debts from the American Revolutionary War reached over $75 million by January 1, 1791, setting the stage for a long history of national borrowing. Understanding the current state of US debt requires examining its historical trajectory, recent drivers, and economic implications.
For the next 45 years, the debt continued to expand. However, in 1835, a significant reduction occurred due to the sale of federally-owned lands and federal budget cuts. Soon after, an economic downturn led to a resurgence in debt, pushing it back into the millions. The American Civil War caused a massive increase of over 4,000%, climbing from $65 million in 1860 to $1 billion in 1863 and almost $3 billion shortly after the war ended in 1865. In the 20th century, the debt steadily grew, reaching roughly $22 billion after financing the country’s participation in World War I.
Several key events in recent history have triggered substantial increases in the national debt. These include the Afghanistan and Iraq Wars, the 2008 Great Recession, and, most recently, the COVID-19 pandemic. From FY 2019 to FY 2021, federal spending saw an increase of approximately 50%, largely attributed to the economic impact and related government response to the COVID-19 pandemic.
Tax cuts, stimulus programs, increased government spending across various sectors, and decreased tax revenue due to widespread unemployment are primary factors that contribute to sharp increases in the national debt. These fiscal policies and economic conditions often necessitate increased borrowing to cover budget shortfalls and stimulate economic activity.
Comparing a country’s debt to its gross domestic product (GDP) is a crucial step in evaluating its fiscal health, as it reveals the country’s capacity to manage and repay its obligations. This ratio is widely regarded as a more insightful indicator of a country’s financial standing than solely looking at the absolute value of the national debt, because it contextualizes the debt relative to the country’s total economic output and, therefore, its potential to repay it. In 2013, the U.S. debt to GDP ratio exceeded 100% when both debt and GDP were approximately $16.7 trillion. This milestone highlighted the growing burden of debt relative to the nation’s economic activity. Analyzing the debt-to-GDP ratio over time offers valuable insights into the sustainability of a nation’s debt and its ability to meet its financial obligations.
