NATIONAL DEBT (ISSUE)

The national debt is the amount of money owed by the U.S. government to its creditors, which may include private individuals, corporations, banks and other financial institutions, as well as foreign governments. As a result of better communications technology, improved information processing, and cheaper enforcement costs the ability of the federal government to collect taxes improved over the years. This made lenders more willing to fund the national debt and enabled the government to borrow at favorable interest rates.

The United States began its existence with a large (for the time) national debt of $75 million. This debt was the result of a deliberate policy of the first Secretary of the Treasury, Alexander Hamilton (1755–1804). Hamilton wanted to secure the confidence of wealthy
citizens in the new federal government, establish the government as a good credit risk, and provide a compelling rationale for constructing as effective federal tax system. With this in mind he convinced the U.S. Congress in 1790 to assume the debts incurred by the individual states during and after the American Revolution (1775–1783).

According to Hamilton, the funding and assumption of this debt served several purposes. One was to establish the credit of the United States among other nations. If the U.S. federal government voluntarily undertook to retire its debt the credit of the nation would be restored at home and abroad. With the repayment of the loans interest rates would be lowered. With lower interest rates investments in land, commerce, and industry would increase, and capital would multiply along with wages and jobs. Hamilton believed that, with responsible fiscal leadership, the day would not be long before economic dominance would soon pass from Great Britain to the United States—as indeed it did, but not for another one hundred and twenty years.

The South was especially hostile to Hamilton's vision of refunding and assuming the national debt. This was because many of the southern states had made substantial progress in meeting their financial obligations under the Articles of Confederation. New England states on the other hand favored funding and assumption because those states owed the largest portion of the states' collective debt.

Today we understand that the federal government has the ability to expand its own income through borrowing money, printing money, and tax increases. Since the 1930s, however, the economic theories of John Maynard Keynes (1883–1946) brought the realization that retiring the debt should not be an automatic reflex. That is because the debt can help in the fight against depression. If, during a depression, the government borrowed money and invested it in government projects that created jobs and produced a ripple effect and stimulating secondary investment and employment (such as a restaurant near a factory), the economy might regenerate itself and pay off the debt. Keynes believed that government attempts to increase revenues and decrease expenditures during a depression worsened, rather than cured, the problem of widespread unemployment and underutilized industrial capacity. Keynes argued that government spending should be counter-cyclical, that it should move in the opposite direction to private consumption and investment. Keynes believed that during an economic downturn the government should increase its expenditure to compensate for the decline in private demand for goods and services. Conversely, during an economic upturn the government should decrease its expenditure to make room for productive investment and consumption. Thus, governments should increase the national debt during economic downturns and retire the debt during business cycle upturns.

Since the founding of the republic the main source of increasing the national debt has been war. Initially, the war debt was easily retired. Within twenty years of the War of 1812 (1812–1814) the United States government paid off its war debt of $128 million. In World War I (1914–1918) the national debt underwent the first of several huge increases that would last through the end of the century. By 1990 the U.S. national debt soared to $3.2 trillion. In the late 1990s some economists believed that the anti-Keynesian tactics of President Ronald Reagan's (1981–1989) administration only made matters worse. They point to for the fact that his economic recovery program combined tax cuts with increases in government spending, thereby increasing the U.S. national debt by almost __BODY__.9 trillion during his term. Proponents of Reagan's economics defend the administration's plan and the ensuing national debt on the grounds that a Congress controlled by the Democrats would not follow the president's wishes and dramatically cut domestic spending. They also argue that a high level of military spending was necessary to bring the Cold War to an end, and the tax cuts successfully stimulated the economy, as the stock market rose to record levels.

NATIONAL DEBT (ISSUE)

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