How it started.
The United States national debt—a topic of considerable economic and political debate—is as old as the nation itself. In fact, the origins of the national debt can be traced back to one of the country’s founding fathers, Alexander Hamilton (the guy on the $20 bill), whose story has been popularized in recent years by the hit Broadway musical, Hamilton.
In the post Revolutionary War New York City musical, Hamilton proposes, “If we assume the debts, the union gets a new line of credit.” This line captures Hamilton’s innovative financial strategy as the first U.S. Secretary of the Treasury, when the young country was steeped in war debts ($75 million in 1791 dollars or $2.3 billion in 2023 dollars). Hamilton proposed that the federal government assume individual states’ debts, a move that would centralize fiscal authority, build national credit, and lay the foundation for economic growth.
Hamilton’s plan was not without controversy. In a memorable rap battle in the musical, Thomas Jefferson counters, “Our debts are paid, I’m afraid. Don’t tax the South ’cause we got it made in the shade.” Southern states, having largely paid off their war debts, opposed Hamilton’s plan. The issue was eventually resolved through a compromise in “The Room Where it Happens,” when Southern states led by Madison and Jefferson agreed to Hamilton’s national debt system and, in exchange, the nation’s capital was relocated from New York City to Washington D.C. – then a part of Virginia, a southern state.
How it’s going
Fast forward to today, and the U.S. national debt has grown beyond what Hamilton could have possibly imagined. As of May 2023, the national debt is closing in on $32 trillion. It includes debts held by the public, which are monies owed to individuals, corporations, and foreign governments in the form of Treasury bills, bonds and notes; and intragovernmental holdings which are debts the government owes to its own programs like Social Security and Medicare.
Like in Hamilton’s time, today’s national debt has its defenders and detractors. Some economists argue that carrying a certain amount of debt is beneficial, allowing the government to invest in infrastructure, education, and social services that fuel long-term growth. However, others express concern that excessive debt could lead to higher interest rates, inflation, and decreased governmental flexibility in responding to economic downturns.
Then there’s the debt ceiling
Perhaps one of the most contentious aspects of the national debt is the debt ceiling, a legislatively-imposed limit on how much the federal government can borrow to pay its bills. Created in 1917, the debt ceiling was seen as a way to simplify paying the country’s WWI debts.
Critics argue that the debt ceiling, instead of controlling debt, has often been used as a tool for political brinkmanship depending on the political leadership in the legislative branch (responsible to managing the debt ceiling) and the executive branch (responsible for paying the debts already incurred by past government spending). Supporters argue that the debt ceiling is a way to hold the current administration accountable for spending.
The conflict is almost as old as the debt ceiling itself and yet, to date, the US has never defaulted (i.e. not fulfilled its payment obligations to debt holders for money already spent) on the national debt. While not 100% unanimous (is anything?), most agree that maintaining our “no default” track record is important to the economy and our financial systems.
In the end, the musical Hamilton doesn’t just entertain us with catchy tunes and impressive choreography. It also presents a relevant history lesson. As we grapple with the complexities of the national debt today, we would do well to remember Hamilton’s belief in the nation’s fiscal potential and the importance of compromise in achieving it.