Planet Money - When The U.S. Paid Off The Entire National Debt (Classic)

Episode Date: September 29, 2021

There was one time the U.S. federal government stopped borrowing and paid off every penny of national debt. It did not end well. | Subscribe to our weekly newsletter here.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money, from NPR. Hello and welcome to Planet Money, I'm Alexi Horowitz-Ghazi. Yesterday, Treasury Secretary Janet Yellen sat down in front of members of Congress in Washington, and she said something that sounded pretty scary. She said if Congress doesn't vote to raise the debt ceiling, the U.S. government will run out of money by October 18th. That's right, in less than three weeks, America would go effectively broke if Congress didn't give permission for more government borrowing. More debt.

This would be the first time in its history the U.S. Treasury would not be able to pay its bills. It would default. And the result, Yellen said, if that did happen, would likely be another financial crisis. All of which raises a couple of very important questions. What exactly is the debt ceiling? And why does the U.S. government have to keep raising it or risk financial collapse? So we're pulling today's episode from the vault about a time when America had no debt, paid it all off. And little spoiler, government debt isn't necessarily a bad thing. This episode originally ran in 2011 and was reported by

Robert Smith and Adam Davidson. Coming up after the break. First up, really basic question, what exactly is the national debt? It's key to not think of it as one thing because it's actually a bunch of promises. It's millions and millions of specific promises that the government has made to specific people. The government spends more than it takes in just about every year. That is called a deficit, a yearly deficit. And the government borrows the difference from international financiers, people who know the government inside and out. People like this person. My name is Elsie Smith, and I am seven and three quarters.

I happen to know Elsie Smith. She's a friend of mine. And in fact, she is your daughter, Robert. Yeah, but that's not important right now. What she is is a creditor of the U.S. government. Listen to what she discovered in my drawer. United States saving bond, $50. Why did you loan the government that money? To keep it safe. Yeah, that's absolutely right. You did loan it to them to keep it safe.

And they used your money to buy things, like maybe a rivet on a fighter plane or something. What's a rivet? It's the little thing that holds the plane together. I want my $50 back. Wow. Our international financiers are so fickle. You know, it's funny. Even at seven years old, she somehow, and I didn't tell her this, she somehow managed

to look at this thing, the savings bond, and understand what is most fundamental about government debt. It's safe. It's completely safe. The U.S. has never gone back on its promise. She could get that $50 tomorrow with interest back, if I let her. So to understand what the debt is, you've got to add up all the LCs of the world, all the retirement funds and central banks with lots and lots of treasury bills or savings bonds

in their drawers. And even if you don't have a bond in your drawer, you have effectively lent the money to the government somewhere, like maybe it's your checking account or your savings account. That guaranteed interest that you get, promises, all those different people and institutions that the U.S. government has said, hey, we're going to pay you back, that is the national debt. Today, we're going to explain how we got into this mess, where all this debt came from, what happened when we tried to pay it off, and who came up with this whole debt ceiling idea in the first place. Now, it turns out we've been fighting about the debt since the United States was born. OK, we're going to cue some old timey music here.

Good day and fairly well, Brother Davidson. Fairly well, Elder Smith. OK, we're back in Revolutionary War days, as if you couldn't tell from that spot on impression. This is when the first debate over the national debt started. And it's important to remember that the U.S. debt wasn't something that just happened automatically. In fact, the United States, in its very first few days, made a conscious decision to have a debt, to issue these bonds and promise to pay it back. I spoke with Robert E. Wright. He's a professor of political economy at Augustana College in South Dakota. What really happened is we fought a long and bloody revolution

against the world's greatest superpower and racked up $80 million in debt doing so. Couldn't we have said, sorry, folks, it's a revolution. We're wiping out all the debt. We could have, but thankfully we didn't. And we didn't because of a man named Alexander Hamilton. He was the Secretary of Treasury, the very first one, and he argued that the United States faced a fundamental choice. If we don't take responsibility for the debt, all those farmers that lent us money and the soldiers we didn't pay and the French who lent us money, the rest of the world won't trust us.

They won't lend us money. We won't be able to trade. We'll be stuck. The United States will be stuck living off whatever we grow here in our farms. And back then, the U.S. didn't grow that much. We brought much of our consumables from Europe. You know, the HBO series John Adams did a great job of depicting Hamilton's argument. The future prosperity of this nation rests chiefly in trade. Trade depends, among other things, on the willingness of other nations to lend us money.

And how would you propose to establish international credit? Our first step would be to incur a national debt. The greater the debt, the greater the credit. the greater the credit. And to that end, I have recommended to the president that Congress adopt all the debts incurred by the individual states during the war through a national bank. The idea being that if the states owe Congress money, then other nations will feel more inclined to lend it to us.

Now, Hamilton, who was pro-debt, was fighting with Thomas Jefferson because Thomas Jefferson had a very different view. He felt that debt was extremely dangerous. And when you hear this speech that Jefferson gave, or at least the actor playing him in that HBO series gave, it's a speech that I feel like with very little change could be given today. If the states are indebted to a central authority, it increases the power of the central government. You have it exactly.

I fear a revolution will have been in vain if a Virginia farmer is to be held in hock to a New York stock jobber who in turn is in hock to a London banker. The opportunities for avarice and corruption would certainly prove irresistible. And this fight between Northeast bankers and the rest of the country, this has been going on for 200 years. It's going on today. Now, Hamilton won out initially. The United States accepted its debt. It promised to pay. But Professor Robert Wright says that most politicians at the time, they felt much more like Jefferson.

OK, fine, Hamilton. We'll pay off our old debt. But let's not make a habit out of this. So what the battle was really about was how quickly to pay off the debt, not whether to pay it off or not. And I have to give full disclosure here. I spoke with Professor Wright, and he told me that he gave his son a unique name. He named his son Alexander Hamilton Was Wright. Oh, come on. He really did.

He really did. And in fact, his son came to him the other day, he told me, and said, shouldn't it be Alexander Hamilton is right? Right, because in his view, of course, Hamilton is right forever. Wow. So for the first 40 years or so of the Republic, we lived in Hamilton's world. The nation had a debt, a manageable debt. Banks and bankers in the Northeast flourished. We did trade with Europe and everybody trusted us. The country grew and pretty soon U.S. debt, debt issued by the U.S. government, was seen as one of the safest investments in the world. This was Alexander Hamilton's dream until one president dared to pay it off. So cue our next

chapter in the amazing life story of the U.S. debt, January 8th, 1835. Can we put on character again? All right, picture it, Adam. All the big political names in Washington, D.C. have gathered to celebrate the president, Andrew Jackson. It was the anniversary of his win at the Battle of New Orleans, but there was bigger news that night. A senator stood up and he raised his glass and he said, gentlemen, the national debt is paid. Huzzah! Huzzah! Historians tell us the huzzahs rose up around the room. Finally, the national debt was zero. It was a big deal. John Steele Gordon thinks so. He writes about financial history and he's the author of the book Hamilton's Blessing, the extraordinary life and times of the national debt. This was another American accomplishment that we had actually paid off our national debt.

No other country had ever done that before. So when Andrew Jackson becomes president, the debt had become sort of this routine thing, and it actually followed the cycles that business textbooks tell you a government debt should. During bad times, during wars like the War of 1812 or during economic slowdowns, the country borrowed, basically borrowing against their future prosperity. And then, sure enough, when the hard times were over and the economy was doing well, the government would pay back the debt that it had borrowed, always maintaining at least some level of debt. But Andrew Jackson did not like this normal, routine picture. For Andrew Jackson, politics was very personal.

He hated not just the federal debt, he hated debt at all. That's H.W. Brands. He's a professor at the University of Texas, and he wrote a biography of Andrew Jackson called His Life and Times. And he tells this great story about Jackson. So before he was president, he was out in the wild west of Tennessee,

and he was quite the land speculator. He would often get paid in land, and he was trading all these things. And he was quite the land speculator. You know, he would often get paid in land and he was trading all these things. And at one point he trades some land for some debt passed on by somebody else. Well, this debt goes bad and Andrew Jackson is left holding the bag. He's got this massive debt, worthless paper notes. And this drove him nuts. In fact, the guy he did the deal with, it went to jail. So when Jackson runs for president, he knows the enemy, banks and the national debt. He called it the national curse. And the voters just ate this up.

Andrew Jackson had an actual plan to get rid of the debt, but he also got very lucky. When he took office, there was around $58 million of debt that the U.S. government owed. And one way that he paid it off, there happened to be a huge real estate bubble going on. And rather than bail out the banks, it turned out that at the time, the U.S. owned a lot of land in the wilderness. They sold it at these inflated bubble prices, which brought in a lot of money, which went to paying off the debt. And Jackson was, I'll give him credit, ruthless on the budget. I mean, he blocked every spending bill he could. Highways, government buildings, it was veto, veto, veto.

So after six years in office, he paid it all off. It was all gone. But Jackson suddenly faced this technical problem that no other president has ever faced, either before or since. What do you do when the government has more money than it needs? What do you do with the surplus? Now, back then there was no income tax. You couldn't just give everybody a refund. There wasn't really a way to return money to the people. And what he decided to do was to divide it among the states according to population. That's the only time that's happened.

So Andrew Jackson gets rid of the debt. All of a sudden the country is running a surplus and we all live economically happily ever after, right? Not exactly. How long did the good times last? It lasted exactly one year. One beautiful year. The state banks apparently went a little crazy with the surplus. They were printing massive amounts of paper money, and that land bubble, I mean, the one that helped Jackson balance the budget, get rid of the debt, the land bubble went out of control. And then like all bubbles, it popped.

There was a huge crash and the beginning of the longest depression in American history. It actually lasted six years before the economy began to grow again. Now, we're not saying every time you pay off the debt, you're instantly going to cause a massive depression. But there was a clear lesson here. No matter how much you hate the debt, eliminating it does not guarantee that you're going to have good times. Even in the early 1800s, the economy was far too complex for that. And it turns out that having the debt come back was pretty useful for the United States. There was, after all, a civil war to pay for and a bunch of other economic downturns. The 1900s were full of them.

And it looked like there was no end to the amount of debt the country could take on. But that's not the end of the story. We'll have that after the break. The final chapter in our story, Chapter 3, politicians could not kill the debt monster. But they decided, well, maybe we can tame it a little. You see, debt in the United States was not just getting bigger. It was getting more complex. Up until World War I, Congress had to approve every little bit of borrowing.

Susan Irving is with the Government Accountability Office. I mean, you know, I want to borrow money to build X. And so Treasury would go to Congress, and they would literally approve the form of the security, the purpose of the security, you know, what the duration was going to be, what the interest rate was going to be. So this could take all day long. You could say bridges, post offices, a canal through Panama. Right. Well, if you look at the Early Appropriations Acts, they're completely earmarked. I mean, you look at Early Appropriations Acts, so much for shooing

the horses for the Department of X. I mean, you look at early Appropriations Act, so much for shooing the horses for the Department of X. I mean, really. Very detailed control. It is so hard to imagine just Congress, who are not finance professionals, sitting there and every single thing the government wants to buy. They have to decide how much debt to issue, what the interest rate would be. Will it be a five-year bond at 3.8 percent or a 10-year bond at 4.2%? It's so hard to imagine. And what's actually shocking is that for over a century, they were able to do this. They were able to keep it together. But by World War I, it was just too much stuff. It was

too complicated. If you think about the number of decisions that go on during a war, you know, suddenly if they're going to have to approve every single one, you decisions that go on during a war, you know, suddenly, if they're going to have to approve every single one, you're coming in not once a year, not once every two years. You're coming in sort of constantly, oh, now we need to borrow up to so much to build up more tanks. You know, and you think, really? At some point, the sheer volume of transactions overwhelms and begins to drive out the ability to do thoughtful discussions about big policy. And Congress loves to do thoughtful discussions of big policy. So they delegated. They delegated the authority. They told the Treasury Department in 1917 and

in various acts after that, that, you know, why don't you all figure out how much borrowing we need and how you're going to do it? But Congress doesn't just give the executive branch lots and lots of power. They do not. No. So they say, OK, we're going to give you this job of figuring out what bonds and what duration and what interest rate and all that stuff. But we're not letting you go nuts. We're going to have a ceiling.

You can only borrow up to this amount, an upper limit. And if you need to do more, if you need to borrow more money, come back and see us and we'll decide whether or not to raise the debt ceiling. But there's something crucial to understand here. Nothing gets bought by the federal government unless Congress says so. I mean, it's in the Constitution. The power of the purse rests with Congress. So the debt limit doesn't actually limit the spending. That would be unconstitutional to limit the spending. It's a safety check. You know, I think of it as this big game of mother may I, you know, that old kids game. Congress says to the Treasury Department, we want to buy a tank.

And Treasury looks at it and it brings up the debt limit. And the Treasury Department has to come back to Congress and say, mother, may I buy a tank and raise the debt limit? And Congress votes and says, yes, you may. But what's so ridiculous is all the Treasury is asking approval to do is spend the money that Congress has told them to spend. In other words, Congress says, go spend this money. And then acts all huffy that spending the money Congress approved is going to get us over the debt ceiling. It's so maddening. And it's something that pretty much no other country goes through. They don't go through this whole rigmarole. They simply approve

spending, and by implication, the borrowing is just implicitly approved as well. But in part, that's because there isn't this separation between the executive branch, like the Treasury Department, and the legislative branch, like the Congress. So the debt ceiling turns out to be not so much something to slow the debt, but it's a sign of good old American distrust. It's a way for one branch to basically give the hard work to somebody else, but say, I don't really trust you. So in a sense, the debt ceiling was a success. Congress did not have to spend all of its time worrying about bond issues and durations

and interest rates. And actually, the Treasury used this new freedom to come up with the sort of economy we see today, all these efficient forms of issuing various lengths of debt and using the market to determine the interest rate that's paid on the bonds. All these things basically make it easier for the government and cheaper for the government to get money. But the debt ceiling did not do its fundamental mission. It did not in any way contain the growth in our national debt.

Every year, sometimes more than once a year, the Treasury Department has come to Congress and said, Mother, may I increase the debt ceiling so that I can borrow the money to buy the things that you already told me to buy? And Congress would say, yes, may I increase the debt ceiling so that I can borrow the money to buy the things that you already told me to buy? And Congress would say, yes, you may. And then the debt goes up during the depression, during World War II. And then starting about 50 years ago, the debt explodes. And what happened is it no longer went through a cycle. The debt goes up during bad times and goes down as paid off during good times. Just administration after administration, Democrat after Republican, after Democrat, after Republican. The debt just gets bigger and bigger during good times and during bad ones.

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