CQ

Visualizing the Debt Problem

Personal Savings Rates, 1929-2007

Public Debt in Billions, 1958-2007

Our National Credit History

Under Alexander Hamilton, the United States started off in 1791 with a debt of $75.4 million. It would drop to zero — for the first and only time — in 1835 under President Andrew Jackson. Suspicious of banks, Jackson in 1837 liquidated the Second Bank of the United States, returning the government’s original investment, plus a profit, and distributed the surplus to the states.

The costs of war with Mexico would help push the U.S. debt to $63 million by 1849. When the Civil War began in 1860, the debt tallied at about $64.8 million, and ended in 1965 with interest-bearing public debt at $2.2 billion.

"The North could borrow money and the South couldn’t," said John Steele Gordon, author of the 1997 book, Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, in an interview. "That’s how we won the war."

The Northern states also raised taxes to fund the Civil War, as what was hoped to be a short skirmish turned into a long and costly one. The Revenue Act of 1862 brought about the first federal income tax and the creation of the forerunner to the Internal Revenue Service. Texas A&M University researcher Gary Giroux has said that about one-quarter of the cost of the Civil War was financed through taxes, customs duties, and other federal revenues. During World War I, the federal government used public relations campaigns to get Americans to buy their nation’s debt — and ended up in 1919 with debt exceeding $25 billion.

That would serve as a warm-up for World War II, when about $211 billion of the estimated $323 billion spent on war costs was borrowed. Hollywood stars and posters appealing to patriotism urged people to buy War Bonds. The entire U.S. economy largely shifted to weapons and equipment production, making consumer goods such as cars and clothes more scarce — so consumers gladly handed over their cash to help the cause, author Gordon said.

"There was very little to buy during World War II. The savings rate went through the roof and people put this money that they couldn’t spend into war bonds," author Gordon said.

Once the war ended, some of those savings went toward major purchases such as homes and automobiles. Flush with cash and having shaken loose the Great Depression, many Americans began having larger families and kicked off the baby boom that lasted from 1946 to 1964. In 1965, President Lyndon B. Johnson signed a law enacting the Medicare program, guaranteeing health care to people 65 and older.

At that point, the U.S. debt was estimated at $317 billion. That’s less than the estimated $396.3 billion cost for Medicare this year (2008). The cost of Medicare has increased about sevenfold since fiscal 1983, when the tab was $52.6 billion.

All images property of the Smithsonian Institute, from their exhibit Over the Top: American Posters from the World War, used with permission.