National Debt

I

Introduction

National Debt, also public debt, sum total of governmental financial obligations, the result of a state's borrowing from its population, from foreign governments, or from international institutions such as the International Bank for Reconstruction and Development. Public debts tend to be large-scale credit operations and are contracted on a national scale by central governments and on a lesser scale by provincial, regional, district, and municipal administrative bodies. In the United States, public debts are also contracted by the states and by local governments, primarily for public works. See also Public Finance.

II

Kinds of Debt

National public debts are contracted chiefly by incurring interest-paying loans, in the form of bonds, bills, or notes. Historically, these loans have been undertaken to raise money for wars and national defense and to finance public works. More recently, governments have taken loans to meet national budgets or expenditures that are not covered by revenue, or to seek to improve economic conditions by counteracting unemployment or depressions, or both, with deficit budgets. Not all financial authorities agree that nations should carry a high level of public debt, as it can be inflationary. Rather than the level of debt, however, the most important consideration is the capacity of a nation to service its debt.

Some long-term maturing debt is repaid by short-term borrowing that does not add significantly to the total debt level. The redeeming of public debts includes the repayment of principal on maturity, amortization through periodic payment of part of the principal, and the buying up of government securities on the open market. Most government loans fall due at fixed dates, but a number, known as perpetual loans, have no definite expiration dates, and governments floating them have the privilege of redeeming them when convenient or desirable.

Most government loans are not secured by physical assets, however they are regarded in law as contracts carrying an obligation on the part of the debtor to repay. Nevertheless, governments, when hard-pressed during economic crises or as a result of political upheavals, have sometimes refused to repay their public debts.

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III

History

In earlier times debts contracted by heads of state had the legal status of personal debt. Public debt emerged as a systematic element in a country's economy when regular sources of income became available to provide funds to repay loans, a monetary system became fully formed, and an organized money market came into operation. The first examples of public debt surfaced in the late 17th century in Europe and became more prevalent with the rise of the modern state and the banking and credit system that grew out of the Industrial Revolution. Today, the finances involved in contracting and redeeming the public debt of a country are a sizable proportion of its government budget.

Taken on a world scale, national public debts have shown a tendency to increase, although comparisons of the amounts do not take into account the effects of inflation. The estimated total public indebtedness of the world at the end of the 18th century was about $2.5 billion. During the 19th century, Britain was the only world power to reduce its national debt. In 1890 the world total of public indebtedness had risen to an estimated $27.5 billion, an increase in a little less than a century of more than 1000 percent. Thereafter the increase continued until the end of World War I, after which indebtedness declined. Following the onset of the Great Depression in 1929, public debts rose as governments resorted to public works to provide jobs for the unemployed. World War II (1939-1945) caused national indebtedness to increase significantly again.

Beginning in the 1970s, inflation, high interest rates, and a tenfold rise in the price of oil contributed to the increasing world debt. Developing nations borrowed heavily from international capital markets to finance their import bills. The borrowing, primarily in the form of floating interest rate loans from major banks, precipitated a debt crisis in 1982 when worldwide economic growth fell. Several developing nations, including Mexico, Brazil, and Argentina, had to adopt austerity programs in order to continue to service their debts.

IV

U.S. Public Debt

In 1790, when Alexander Hamilton, as secretary of the treasury, made his first report on the national debt of the United States, he estimated it at close to $70 million. After alternately rising and falling, the debt stood at only $4 million, or 21 cents per capita, in 1840. That was the lowest point ever reached by the public debt of the U.S. After 1840 it rose to a peak, in the last year of the Civil War, of almost $2.68 billion and a per capita figure of $75.01. The debt subsequently fell and fluctuated around $1.15 billion for a number of years, until it began to rise again during World War I. In 1919 the national public debt amounted to almost $25.5 billion. Throughout the prosperous years of the 1920s, the public debt declined. During the depression of 1929 and in the 1930s, the national debt rose again, particularly because of the deficit spending during the administration of Franklin D. Roosevelt in support of the newly enacted welfare programs. During World War II the debt rose to $260.12 billion.

The national debt declined for a few years after the end of the war, but then began to increase again as the federal government undertook extensive domestic programs and foreign aid commitments and financed the Korean and Vietnam wars. In the early 1980s, increased government spending and tax cuts helped push the national debt to $1 trillion. In 2000 it stood at $5.7 trillion.

The U.S. debt is divided into two major kinds of loans, marketable and nonmarketable. Marketable loans are made up of bills, notes, and bonds that can be traded. Nonmarketable loans include U.S. savings bonds, foreign-government-owned securities, and government account securities that are redeemable but not tradable. Maturity of U.S. debt ranges from less than a year to over 20 years, with the average maturity about 3 years. More than half of the debt, however, is short term, maturing in less than a year. A ceiling is placed on U.S. federal debt, and Congress must enact new legislation to raise the ceiling. In 1997 the debt ceiling was set at $5.95 trillion.