When the US paid off the entire national debt.

Thomas Klinger

In recent America history citizens are so used to a massive national debt that we no longer even think about the possibility of paying it off or even slowing down its growth and we worry about the effect this massive debt will have on future generations who must service it. In this episode of NPR’s Planet Money podcast the hosts examine several interesting episodes in the history of US national debt such as when we had none at all and why we have such a such a massive debt now. American national debt began when after its revolution the government made a conscious choice to assume the debts accrued fighting the war, largely due to the urging of Alexander Hamilton. Hamilton wished to take on the debts of the individual states in order that the new national government would have a large debt, in order to create trust in the issuance of future US debt. If the debt from the US was trusted by the world at large to be serviced trade and industry would benefit from the spending the US could make off of the borrowed money. This policy largely worked for the first decades of American government, trade and industry flourished as US debt became one of the safest investments in the world. However this would all change with the of Andrew Jackson. Jackson had a personal dislike of debt, having had a bad experience when he held an investment in debt, and wanted to see the national debt paid completely off. The national debt went through cycles where in bad times it increased and in good times it was paid down, but it had never been paid completely off before. Indeed when America paid off its national debt completely it was the first country up until then to do so. The debt at the time of Andrew Jackson’s presidency was 58 million dollars but he benefited from a land bubble at the time in paying it off. Using the inflated land values the government sold off property in the West and used the proceeds to pay off the debt, Jackson also ruthlessly vetoed government spending. Together these land sales and fiscal prudence eventually paid off the debt completely. However there then came the problem of what to do with all the surplus money the government now was making, the government had never had a surplus before and did not know what to do with the money. There was no mechanism at this time to give it directly to the citizens so Jackson instead gave it to individual states proportionally off of their population. The situation was good for about a year but the state’s banks went crazy printing paper money out of their surplus and then the land bubble popped leading to the longest depression up to that time. This is a great example of unintended consequences and unacknowledged assumptions as paying off the national debt would seem to make some sense and having a government surplus should be great. As shown by Jackson paying off the debt the assumption that paying off the national debt would be a benefit was not true and the unintended consequences with the government surplus created disruptions in the economy. After this experiment in being debt free the US benefited from having a national debt which helped pay for the Civil War and cushioned various economic downturns. The podcast continues the story of our national debt by explaining one of the reasons we have such a massive debt currently. Up till World War One Congress approved individually every item of debt and the details of that debt down to detailed discussions for purchasing horseshoes for a government department. In World War One the debt needed to finance the war became too complex for Congress who wanted to concentrate on thoughtful big policy discussions, so Congress gave the Treasury Department the job of determining what debt and how much was needed for government spending. However Congress did not give the Executive branch a blank check, instead handing them a debt ceiling which they were not supposed to go over. This debt ceiling is not actually a legal limit on debt as it would be unconstitutional to limit the money spent by Congress and so this debt ceiling has not contained the growth of our national debt. The debt since 50 years ago now no longer follows a cycle of growing during bad times and being paid down in good times but has grown and grown during bad or good economic times. This is another good example of unintended consequences as well as complexity, the legislative branch gave up one of its biggest powers because of how complex the task was becoming and even though it has helped with streamlining and making cheaper acquiring new debt it has also allowed our national debt to break free from a normal cycle where we could pay it down. The podcast speaks well to a host of our unacknowledged assumptions about the national debt as well as the complexity of how the national debt affects the economy and government but perhaps because of this complexity and unacknowledged assumptions leaves unanswered what the consequences might be from our massive current debt.Early in the podcast the hosts played a clip paraphrasing Hamilton’s arguments as “The bigger the debt the better” and from Jackson it would seem that to have no debt is indeed not a good thing and perhaps having a large debt should not cause as much worry as it does but we do seem to have entered uncharted waters with the rate at which our debt has been increasing and when we might reach a point where a bigger debt will end up hurting the American economy.