The United States began its history indebted, owing more than $75 million after the end of the Revolutionary War in 1783. However, the first actual fiscal deficit in the federal ledger was not run until the end of that decade.
A History of Budget Deficits
In September 1789, Alexander Hamilton, then-Secretary of the Treasury, negotiated terms with the Bank of New York and the Bank of North America to borrow $19,608.81 to address shortfalls within the U.S. budget.
The Beginning of Deficit Spending
Hamilton was a strong proponent of a large, powerful federal government, unlike his rival, Thomas Jefferson. He believed that running budget deficits could help the young country establish itself and actively desired to issue government bonds backed by revenue from tariffs. Hamilton’s plan was based on the bonds issued by the Bank of England after its founding in 1694, which allowed Britain to raise more money than the French during their conflicts.
The American government felt empowered to borrow from that point forward, and after the War of 1812, the total government debt exceeded $115 million.
When the Debt Was Actually Paid Off
Andrew Jackson, seventh president of the U.S., felt that running deficits was immoral and carrying debt weakened the nation. By 1835, less than six years after assuming office, Jackson paid off the entire national debt by curtailing government spending and selling off federal lands. This is the only time in U.S history that the country’s total debt was completely paid off.
The Great Depression and Financing Wars
Before 1930, nearly all of the budget deficits run by the American government were the result of wars. The Civil War created huge current account deficits that left the nation owing more than $2.5 billion after 1865. The nature of debts changed after the Great Depression and the rise of Keynesian economics.
The extent to which British economist John Maynard Keynes influenced government spending in the 20th century can hardly be overstated. While both the Hoover and Roosevelt administrations extended public works projects and experimented with fiscal deficits in the face of the Great Depression, it was Keynes who provided the macroeconomic justification for running large budget deficits to stimulate aggregate demand and fight recessions.
The U.S. ran severe budget deficits during the Great Depression and World War II. During the 1940s, spending on the war effort created the largest deficits as a percentage of total gross domestic product, or GDP, in American history. A more restrained spending policy took place during the 1950s and more or less continued until the outset of the Vietnam War and Lyndon Johnson’s Great Society.
Modern Deficit Spending
Since 1970, the federal government has run deficits during every fiscal year for all but four years, from 1998 to 2001. The effect of these cumulative budget shortfalls is debated by political analysts and economists, but their origins are much less controversial.
Ever since the time of Alexander Hamilton, the U.S. government has turned to deficit spending as a means of financing wars, growing federal influence and providing public services without having to raise taxes or cut existing programs.