The national debt is the total amount of money the United States Treasury Department has borrowed and currently owes to the federal government's creditors (Sylla). These creditors are mostly comprised of the public, including individuals, corporations, as well as state, local and foreign governments. They also consist of various government trust funds, such as Social Security and Medicare. Additionally, they include the Federal Reserve, mostly in the form of treasury bonds, bills and notes. Currently, the U.S. national debt is estimated to be $8.5 trillion (ZFacts). This ever-growing figure brings with it several social and economic implications. Therefore, the national debt is a frequently debated topic that has over the years produced various schools of thought on how the U.S. government should manage it. In order to understand how the national debt could ultimately affect future generations of the United States and the different ways the government can best deal with it, it is first necessary to discuss its’ history.
The origin of the national debt dates back to the War of Independence. In 1775, the Continental Congress authorized an issue of $2 million of bills of credit called Continentals to finance the war. At the end of 1779, $241.6 million of Continentals had been authorized in addition to several U.S. loan certificates, foreign loans, and state-issued bills of credit. This caused the worst inflation in U.S. history. By 1780 the Continentals became nearly valueless and the loan certificates, foreign loans, and state- issued bills of credit also depreciated greatly in value. Following the end of the war in 1782, Congress authorized commissioners to travel around the country to examine claims against Congress and the Continental army and revalue them in terms of hard money. The revalued debt amounted to approximately $27 million. At that time, the Articles of Confederation did not grant Congress an independent power to raise revenue. Also, the states had debts of their own, so they were reluctant to respond to Congress's requests for revenue. Due to this inability to raise funds, interest payments in the 1780s were dealt with by issuing certificates of interest indebtedness. In 1787, the Constitution solved the revenue problem by granting the new federal government the power to tax. Despite this, by 1790 the indebtedness of the United States had increased to $13.2 million of foreign debt and $40.7 million of domestic debt, while state governments had outstanding debts of $18.3 million (Sylla).
In 1790, Alexander Hamilton was named the first Secretary of the Treasury and submitted a report on the national debt to Congress. In this report, he advised Congress to fund all the government's obligations, including the state debts, into long-term federal securities. Later that year, Hamilton's proposals were adopted and all foreign and domestic debt was funded by federal securities. Hamilton's refunding plan was generous to the government's creditors, who replaced securities selling for as little as fifteen cents on the dollar in 1789. Hamilton justified this by arguing it would restore faith in the government and public credit, attract foreign capital to the United States, and increase the effective stock of money, thereby stimulating the economy. Future economic events proved Hamilton was correct. For example, in 1803 the U.S. government had no difficulty borrowing $11.25 million on short notice from foreign nations to finance the Louisiana Purchase, which doubled the size of the nation. By that time almost sixty percent of the national debt had been purchased by foreigners, who in turn lent money to Americans in return for the government's promises to repay them in the future (Sylla).
The national debt continued to grow in the following decades, largely due to the need for wartime funding. The national debt tripled between 1811 and 1816 during the War of 1812....