Debt / Economy / Fiscal policy / U.S. Domestic Policy

The National Debt: Factors Contributing to Growth and Decline

Our elections may be over, but our growing national debt remains. It is also approaching unprecedented levels—last year, it exceeded 100% of GDP for only the fourth time in history. The other three times were during World War II, when we were fighting a war on all seven continents. Yet the economy is recovering from a recession and two foreign wars are winding down, so why does the debt continue to rocket skyward relative to less favorable periods? This series on the history of the national debt since 1790 will attempt to find an answer.

There are a number of challenges in examining historical trends in the federal budget. Firstly, the way that revenues are collected have changed radically. Before the twentieth century, the primary source of revenue was tariffs instead of income taxes. Additionally, the scope of the federal government’s purview has broadened. Therefore, we will begin our analysis by examining changes on a year-to-year basis in order to isolate the primary factors that have historically influenced the national debt.

We can do this by taking the yearly change in the national debt and calculating growth or decline compared to the previous year’s change.* Not simply growth or decline in the national debt, but the acceleration or deceleration of that growth. Then we will rank the results and examine the years with the biggest fluctuations.

Here are the top five increases:

#5: 1851

  • Percent Increase: 1,141.20%
  • President: Millard Fillmore
  • Reason: The Compromise of 1850. Under this law, Texas agreed to give up its territory in New Mexico and south of the Missouri Compromise line. In exchange, the federal government agreed to assume its debts. This transferred $10 million in debt to the federal government.

#4: 1862

  • Percent Increase: 1,584.61%
  • President: Abraham Lincoln
  • Reason: The Civil War, in President Lincoln’s own words, “produced a national debt and taxation unprecedented, at least in this country.” The annual budget in 1860 was just over $60 million, and government debt was about equal. But the war drove these numbers into the billions. To cope with the need for war funds, the Legal Tender Act of 1862 authorized the issue of hundreds of millions of dollars of “greenbacks” which could later be redeemed for “hard currency” backed by gold.

#3: 1915

  • Percent Increase: 4,030.16%
  • President: Woodrow Wilson
  • Reason: It would be two years before the U.S. formally entered World War I, but the sinking of the Lusitania triggered a “Preparedness” movement which pressured the Congress to embark on a program to strengthen the Navy. While the growth of the national debt in 1915 was unremarkable compared to that of the actual wartime years, it represented a significant increase over the small surplus which had been achieved the previous year.

#2: 1847

  • Percent Increase: 6,305.37%
  • President: James Polk
  • Reason: President Polk pursued an aggressive agenda which involved acquiring territories in Columbia and Mexico. This policy reached a fever pitch in 1847, which saw the height of the Mexican War. During that year, the U.S. Army moved into and occupied central Mexico. In addition, the recently passed Walker Tariff reduced government revenues, which had been producing a surplus from 1844 to 1846. In this one year, the national debt doubled from about $15.5 million to $38.8 million.

#1: 1837

  • Percent Increase: 7,821.82%
  • President: Andrew Jackson and Martin Van Buren
  • Reason: The Panic of 1837 drastically reduced government revenues. The preceding decade had seen surpluses which eliminated the national debt for the only time in American history. He did this by being fiscally frugal and selling off federal lands in the West, which were high due to a speculative bubble. When the government produced surpluses, they were distributed to the states, which responded by printing their own bank notes with questionable value. Then people started using these bank notes to buy federal land, so President Jackson issued an order that land purchases had to be conducted in gold or silver specie. This crashed the bubble and created the Panic of 1837 and a seven-year depression. With it went the federal government’s source of income, and it started financing itself with credit again. The problem continued to worsen the following year, 1838, which is #7 on this list.

The number one factor at play here are wars. They account directly for three of the top five, and indirectly for a fourth. A financial crisis accounts for another. These two factors account for the rest of the top ten as well: 1838 (lingering effects of the Panic of 1837), 1950 (Korean War), 1892 (events leading up to the Panic of 1893), and 1911 (possibly a result of the Panic of 1910-11). So wars and economic crises can have an adverse effect on the national debt. 1899 also appears, when the federal government agreed to the purchase of Spanish territories following the Spanish-American War.

Additionally, we see that these drastic fluctuations happened primarily during the 19th century. This can be explained by of the way the government has viewed its debt over American history. During the 19th century, debt was used as a way to finance wars or to cope with revenue crises, so it is natural that financing wars would produce larger proportional deficits when the scope of government was smaller. Even in the 1851 case, the debt that the federal government took on was primarily accrued during the Texas Revolution. In this way, we see drastic fluctuations in federal debt as a result of temporary exigencies. After these moments of intense borrowing, we see periods of a general decline in national debt. Today, with the government borrowing money to finance its basic operations, these effects are not as noticeable.

Now let’s look at the other end of the list: the five years with the greatest deceleration in debt growth.

#5: 1870

  • President: Ulysses Grant
  • Percent Decrease: -363.86%
  • Reason: The U.S. economy had doubled since 1861, and high tariffs after the Civil War to protect U.S. industry produced a period of surpluses. In fact, #6 (1880), #7 (1889), and #8 (1875) on the list were also during the 1870s and 1880s. President Grant was particularly active in generating surpluses and expressed his commitment to paying down the massive debt incurred during the Civil War. 1870 stands out, however, largely because of his efforts to improve the efficiency of collecting taxes and a dramatic reduction in the federal workforce.

#4: 1886

  • President: Grover Cleveland
  • Percent Decrease: -365.89%
  • Reason: High tariffs continued into the 1880s. The rapid increase in surpluses caused a big dispute over reduction or preservation of the tariffs, as protectionists in the Congress believed that lower tariffs would harm industries. Continued efforts to lower tariffs failed, but Cleveland proved a spendthrift. He vetoed a number of bills including pension funds for veterans.

#3: 1818

  • President: James Monroe
  • Percent Decrease: -421.09
  • Reason: While Monroe was anything but frugal in his private life, he opposed calls for heavy investment in internal improvements. At the same time, revenues likely increased due to a combination of new tariffs imposed toward the end of Madison’s administration and increased demand for agricultural products in Europe following the destruction of the Napoleonic Wars.

#2: 1825

  • President: James Monroe
  • Percent Decrease: -969.35%
  • Reason: The Panic of 1819 lasted until 1823 and took a big dent in revenues during in the middle of Monroe’s administration, but they bounded back during his second term. Economic recovery along with a new tariff passed in 1824 probably accounts for much of the reversal.

#1: 1802

  • President: Thomas Jefferson
  • Percent Decrease: -3,865.47
  • Reason: Thomas Jefferson had an antipathy toward the national debt which was not equaled by his Federalist predecessors led by Alexander Hamilton. While the debt briefly spiked in 1804 because of the Louisiana Purchase, his overall presidency saw a 31.33% reduction in the national debt, compared to a 1.19% increase under the Federalist John Adams. He cut expenses and sought to put the government’s revenues strictly on customs duties, which was extremely successful in his first year, 1802. He may have been able to pay off the entire debt had the Napoleonic Wars not broken out in 1803, which disrupted trade and cut into the revenues. While Jefferson oversaw the reduction in the national debt, by the time the war spread to North America ten years later under Madison, the government began to need to borrow again.

So we can see that historically, large surpluses have been the result of a favorable combination of economic growth, budget cuts, and recent tax reforms. Another critical factor was a firm commitment to bring the debt down.

In this article, we tried to isolate the factors which have historically had a temporary but significant impact on the national debt. In the second part of the series, we will broaden our view and look at how various administrations stack up in debt management by examining nominal debt (not adjusted for inflation) compared to GDP.

To conclude…

If you want to accelerate debt growth: go to war, have an economic crisis, adopt a measure that creates an immediate obligation for the federal government

If you want to decelerate debt growth: post strong economic growth, cut expenditures dramatically, reform the tax code

* So if the debt grew by $1 million last year but by $2 million this year (how cute) then we would have a 100% increase. Gross federal debt is the measure being used in this analysis.

See the full table, ranked highest to lowest, here: Change in National Debt Relative to Previous Year’s Growth or Decline

4 thoughts on “The National Debt: Factors Contributing to Growth and Decline

  1. Pingback: Emily’s list: Scary debt edition « Debt Consolidation Bakersfield

  2. Pingback: The National Debt: Ranking the Presidents | Policy Interns

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