There's a quote attributed to the late Senator Everett Dirksen from Illinois: "A billion here, a billion there, and pretty soon you're talking real money." When Senator Dirksen passed away in 1969, the U. S. federal debt stood at about $354 billion. The word "trillion" hadn't really entered our vocabulary yet. In fact, it took another thirteen years to pass that threshold. How did this happen? (Learn more in What The National Debt Means To You.)
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The chart below displays the key thresholds discussed in this article, based on cumulative debt:
|27B||1919||World War I|
|270B||1946||World War II|
|1.0T||1981||Recession (oil embargo)|
|2.1T||1986||Cold War military buildup|
|5.0T||1995||Recession, government growth|
|10.0T||2008||WTC attacks, Iraq War, Afghanistan War, financial meltdown|
|11.9T||2009||Recession, corporate bailouts|
|13.6T||2010||Recession, stimulus spending (estimated)|
The original national debt of about $80 million was caused by the Revolutionary War as the federal government refunded the debts incurred by the states. This resulted from the ratification of the U.S. Constitution in 1788, and the appointment of Alexander Hamilton as the first Secretary of the Treasury. At the time the debt was assumed, it's estimated that it represented about one-third of GDP. The debt was paid off by 1835, and began to grow again during the period leading up to the start of the Civil War in 1861.
At the outset of the Civil War, the debt was back to where it was at the conclusion of the Revolutionary War. A year later it topped $500 million, and first crossed the $1 billion mark in 1863. While the amount of debt had exploded, as a fraction of GDP it remained about the same percentage as during the Revolutionary War. The Civil War debt peaked in 1866 at $2.8 billion, and it didn't change much over the next fifty years. (Find out just how much war affects the economics of money in The History Of Money: Currency Wars.)
The pattern of only going into debt during wartime continued with the U. S. entry into World War I in 1917. Two years later, the debt had exploded to $27 billion. The war debt problem was compounded by a severe depression during 1920-21. When Warren Harding became president in 1921, he slashed government spending and put the economy on a course to recovery. Over the next ten years, the debt was reduced by $10 billion. Then came the collapse.
The Great Depression and World War II
The pattern changed in 1932, when the government went heavily into debt during peacetime. Following Keynesian economic theory, Presidents Hoover and Roosevelt embarked on massive fiscal stimulus to bolster the collapsing economy. By the outbreak of World War II in 1941, the debt had risen to $50 billion. (Learn more in What Caused The Great Depression.)
By 1943, the debt exceeded $100 billion, and had reached almost $270 billion by the conclusion of hostilities. At its peak in 1946, the debt stood at approximately 109% of GDP, an all-time record high. From that point, the debt bounced around and then started a slow upward trend, reaching $475 billion by 1974. The majority of the increase was incurred as a result of the Vietnam War during the prior ten years. However, GDP growth in the interim brought the debt percentage back below 50%.
1970s Recession and Aftermath
The economy suffered from a double whammy in the early 1970s. The postwar debt combined with rising oil prices took the Dow Jones Industrial Average down 40% from January 1973 through December 1974. In late 1973, OPEC halted oil shipments and the price of gasoline quadrupled in a matter of months. Long gas lines plagued much of the country as the supply shrank and motorists panicked. The embargo demonstrated the rising power of the oil-rich countries in the Middle East, and the influence they could exert over western nations by restricting production.
A year later, the embargo was lifted but the damage was done. The impact on the American economy was immediate as the price of everything made from petroleum increased dramatically. Between 1974 and 1981, the debt more than doubled to $1 trillion. (To learn more, check out Monetary Inflation from Investopedia Video.)
Confronted with a staggering economy and high inflation when he took office in 1981, President Reagan cut taxes and increased spending dramatically. Following through on his campaign promise to strengthen the American military, budget deficits grew as the Cold War escalated. By the end of his second term, the debt had grown to over $2.6 trillion. While Reagan is generally regarded as a model of modern conservatism, the reality is that his fiscal policies featured the largest deficits in history during a period of relative peace.
The debt has been on a steady uptrend since President George H. W. Bush assumed office in 1989. It has been caused by a combination of factors including the overall expansion of the federal government, uncontrolled spending by Congress, and two of the longest wars in American history. After the terrorists attacks in 2001, huge sums were spent on homeland security, including the establishment of a new cabinet level department.
Based on Office of Management and Budget forecasts, annual deficits will exceed $1 trillion for at least the next decade, and the cumulative debt will exceed GDP in the same timeframe. What will be done to control runaway spending in the future remains to be seen. (For more on this, check out Breaking Down The U.S. Budget Deficit.)
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