- Historic Sites
The Federal Debt
And how it grew, and grew, and grew…
November 1995 | Volume 46, Issue 7
The Democratic party, for its part, decided to take advantage of the fact that January 1835 was also the twentieth anniversary of Jackson’s sweeping military victory over the British at the Battle of New Orleans. It held a banquet to celebrate the two triumphs, although Jackson modestly refused to attend, sending the Vice President in his stead. “New Orleans and the National Debt,” the Washington Globe wrote,”—the first of which paid off our scores to our enemies , whilst the latter paid off the last cent to our friends .”
But Jackson’s hope of a debt-free federal government lived only briefly. Shortly after he left office, the country plunged into depression, one of the most severe of the nineteenth century. Revenues, which had reached $50,827,000 in 1836, shrank to $24,954,000 the following year. Until the depression lifted in 1843, the government would have only one year of surplus as the debt climbed back up to $32 million. The Mexican War then caused a further rise, to $68 million.
It was in 1847, during the Mexican War, that Congress for the first time altered the practice of appropriating specific amounts of money for each expenditure it authorized. Instead it empowered the Treasury to pay all interest and principal on the national debt as it came due, regardless of the amount paid out. This raised little comment at the time. After all, there was no choice about paying the money if the ability to borrow at reasonable rates was to be maintained, and it saved Congress the trouble of passing a specific bill every year.
For many years this was the only federal spending that was put on what a later age might call automatic pilot. In the twentieth century, however, Congress would resort more and more to this so-called backdoor spending, until it became one of the prime reasons the budget went out of control.
After the Mexican War the peace and prosperity of the early 185Os allowed the debt to be cut in half. Then a new depression struck in 1857, and the debt moved back up until, at the end of 1860, it amounted to $64,844,000. Only one year later it reached $524,178,000 and was rising at a rate of well over a million dollars a day.
The Civil War was by far the largest war fought in the Western world between the end of the Napoleonic era and World War I, and its cost was wholly without precedent. To pay for it, the federal government moved to tax nearly everything. Annual revenues, which had never exceeded $74 million before the war, were $558 million by 1866 and would never again drop below $250 million.
But revenues did not come anywhere near to matching outlays, especially in the early years of the war. In fact, 1862 would be the worst year ever—so far—for spending in excess of income: The deficit amounted to an awesome 813 percent of revenues (almost four times the worst year of World War II). Radical new methods were needed to meet the emergency.
It was a Philadelphia banker, Jay Cooke, who invented the means by which modern wars have been financed ever since: the national bond drive. Offering bonds in amounts as small as fifty dollars, Cooke peddled them retail to hundreds of thousands of ordinary citizens, most of whom did not even have bank accounts. So successful was he that by the end of the war he was actually raising money faster than the War Department could spend it.
By 1866 the national debt stood at a then-staggering $2,755,764,000, no less than forty-two times what it had been only six years earlier. Once again, however, the emergency over, the government began doggedly to pare it down, running a surplus of 7 percent in 1866, and would not have a deficit year—through good times and bad—until the severe depression of the 189Os produced one twenty-eight years later. By then the national debt had been reduced by nearly two-thirds in absolute dollars. As a percentage of the rapidly expanding GNP, it declined at an even faster rate, to well under 10 percent.
The same pattern repeated in World War I and its aftermath. The debt rose by a factor of twenty during the war and was reduced by more than a third in the 1920s. But again government revenues and outlays moved to a new, permanently higher plane, as they have after every great war in our history. With the exception of 1865 the government never spent even close to a billion dollars in one year until 1917. Since that year it has never spent less than $2.9 billion.
Still, the old consensus held. Andrew Mellon, Secretary of the Treasury for most of the 1920s, explained that “since the war two guiding principles have dominated the financial policy of the Government. One is the balancing of the budget, and the other is the payment of the public debt. Both are in line with the fundamental policy of the government since its beginning.”
FDR had no trouble discerning that new spending programs were politically popular while new taxes most emphatically were not.
But it was not to hold much longer. In the 139 years encompassing the period from 1792 to 1930, the federal government ran a surplus ninety-three times and a deficit forty-six times. Beginning with 1931, however, we have had a surplus in only eight years and a deficit for the rest (except in 1952, when spending exactly matched revenues).