A Brief History of the National Debt

April 30, 2019

Crazy though it sounds, the U.S. national debt is currently more than $21 trillion. Given the amount of things which could be purchased with this sum, the size of our debt seems nearly unfathomable. Just $1 trillion is an extremely large amount of money. If a private citizen were to have a net worth of $1 trillion, that person would dwarf all others on the Forbes list. The U.S. national debt is so large, it now surpasses our national gross domestic product, or GDP. Our current GDP is approximately $19.39 trillion. Even if we devoted our entire national output in a single year toward our debt, the debt still wouldn’t be paid in full. That’s a pretty amazing fact to process. Our debt is truly a force to be reckoned with, something which will require generations to fully resolve.  

In this post, we will briefly touch on the history of the national debt. We will also go over some of the reasons which explain how the U.S. debt has grown to its current level. As we’ll see, the explanation behind the U.S. national debt is complex and involves many factors. The U.S. debt has already caused government shutdowns, budget adjustments, tax alterations and other major events. Hopefully, the debt can be resolved before any other drastic measures have to be taken. 

A Brief History Since 1929 

In 1929, the U.S suffered one of its most devastating stock market downturns. The stock market crash of 1929 created a nation-wide economic depression which lasted throughout the 1930s. During his term in office from 1929-1933, President Herbert Hoover raised taxes to combat declining tax revenues. From 1929 until the mid-1930s, the U.S. national debt steadily grew. In 1929, the U.S. debt was $17 billion, but by 1936 this figure doubled to $34 billion. What’s more, the debt-to-GDP ratio also grew steadily during this time period as well. In 1929, the U.S. debt was just 16% of the national GDP, but by 1936 it was a whopping 40%.  

U.S. debt surpassed national GDP for the first time in 1945 after the end of WWII. The debt-to-GDP ratio reached its highest point, 119%, in 1946. Since that time, the debt-to-GDP ratio has fluctuated greatly, reaching a post-WWII low of 31% in several tax years. Now, as we mentioned, the debt-to-GDP ratio is back to just over 100%. Throughout the years 2019-2021, the debt-to-GDP ratio is projected to hover around 108%. 1982 was the first year in which the U.S. debt surpassed $1 trillion.  

Major Reasons Behind the U.S. Debt 

The U.S. debt has expanded for a variety of reasons. Numerous economic recessions have led to changes in fiscal policy designed to improve economic outcomes. For instance, often the U.S. government has increased in spending in an effort to boost economic productivity. The expectation is that this spending increase will be offset by greater tax revenues from improved economic performance. The U.S. government has also cut taxes at various times to boost economic productivity. Again, the expectation is that reduced tax rates will lead to greater overall tax revenues due to an expansion of the economy altogether. If the economy as a whole grows as a consequence of reduced rates, then this will actually lead to increased tax revenues. This is a basic tenet of so-called “supple-side economics.” Supply-side economics holds that the economic growth stemming from reduced tax rates will have a net positive impact.  

Along with expansionary spending, one other major factor underlying U.S. debt growth is war. The U.S. increased spending significantly after its entry into WWI. The U.S. also ramped up its tax rates in response to this event as well. The top tax rate jumped to over 70% during WWI, prior to WWI the top rate was just 7%. Spending also increased during WWII. America’s other military efforts post-WII have also led to increased spending, including our efforts related to the War on Terror. Between 2001 and 2017, increased military spending for the War on Terror led to an increase of $1.9 trillion to the national debt.  

Budget Deficits Create Long-Term Debts 

There are myriad specific reasons as to why the U.S debt is at its current level. But there is a single, general reason which underlies all others: the government expenses repeatedly exceed its receipts. Simply put, the government is spending more than it receives, forcing it to rack up more and more debt. The main sources of income for our federal government are individual income taxes, corporate income taxes, excise taxes, and payroll and retirement contributions. The federal government’s main expenses are healthcare programs, education, military and defense spending, transportation and benefits programs. The government has expected that economic growth will reduce the debt, but economic growth hasn’t stabilized the debt-to-GDP ratio. It may be the case that the sheer size of the federal government will need to be substantially reduced. This is precisely the kinds of discussions which are currently underway among our political leaders. 

As we’ve seen, the reasons for the U.S. debt are many. Resolving the U.S. debt will certainly not happen overnight. It will require a huge amount of brainpower, elbow grease and perseverance. Here at Mackay, Caswell, & Callahan, P.C., we understand very well how easy it can be to slip into debt. We deal with tax debt issues on a daily basis. From time to time, almost everyone needs assistance with debt issues, including the U.S. government! If you have a tax debt issue, feel free to give one of our top New York City tax attorneys a call today. 

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