The US Civil War

The US Civil War in the 1860s, World War I in 1917, and World War II in the early 1940s all jump out from this figure. These are periods in which the stock of US federal debt soared. During the Civil War, the stock of debt was $64,842,287 in 1860 and peaked at $2,773,236,174 in 1866. The debt level was more than 40 times higher in 1866 than in 1860. In 1915 (after World War I had started but before the United States had entered the war), the stock of debt was $3,058,136,873.16, not much more than the level in 1866. By 1919, the level of the debt was $27,390,970,113.12, an increase of almost 800 percent. During World War II, there was again a significant buildup of the debt. In 1940, the level of debt outstanding was $42,967,531,037.68, or about 42 percent of GDP. By 1946, this had increased by about 527 percent to $269,422,099,173.26. In 1946, the outstanding debt was 121 percent of GDP. There are two other periods that show a significant buildup of the debt relative to GDP. The first is the Great Depression. This buildup was not due to a big increase in borrowing by the government. Rather, it was largely driven by the decline in the level of GDP (the denominator in the ratio). The second is the period from the 1980s to the present. The buildup of the debt in the 1980s was unprecedented in peacetime history. Figure 14.14 “Ratio of US Debt to GDP, 1791–2009” also shows a dramatic asymmetry in the behavior of the debt-to-GDP ratio. Although the increases in this ratio are typically rather sudden, the decreases are much more gradual. Look again at the rapid increase in the debt-to- GDP ratio around the Civil War. After the Civil War ended, the debt-to-GDP ratio decreased but only slowly. As seen in the figure, the debt-to-GDP ratio decreased for about 45 years, from 1870 to 1916. Part of this decrease was due to the growth in GDP over the 45 years, and part was due to a decrease in nominal debt outstanding until around 1900. Why Do Governments Run Deficits? It is evident that during periods of war the debt is higher. What underlies this relationship between wars and deficits? War is certainly expensive.