The Guardian • Issue #2056

A history of US debt

US dollars.

Photo: (CC0).

The US Congress has approved a bill to lift the country’s US$31.4 trillion debt ceiling days before its default. The day after it passed the US House of Representatives, the Senate voted 63-36 for the bill, after some concessions, with the support of 44 Democrats, 17 Republicans and two independents. The left-wing Democrat senators Bernie Sanders, John Fetterman, and Elizabeth Warren voted against what they believed was a right-wing bill.

Republicans complained that the bill would under-fund the military. Senator Lindsey Graham, the South Carolina Republican, called undercutting the military spending “a win for China.” To clear the objections, Senate leaders ensured the deal did not limit US “military capabilities.” Graham said, “It does not fix this bill totally, but it is a march in the right direction.”

The concessions increased Pentagon spending by 3 per cent, to US$886 billion per annum. This is equivalent to the combined military spending of the next ten biggest national defence budgets. Defence accounts for 12 per cent of the US federal budget and a third of the discretionary budget.

After the bill passed the House, Democratic Majority Leader, Chuck Schumer, told the Senate that now “America can breathe a sigh of relief.” This was not the first time the US has narrowly avoided a debt default, which would have had a devastating impact on US citizens and countries around the world. The agreement suspends the spending limit set by Congress until 1st January 2025.

The last time the US came close to default was in 2011. Then the credit agency Standard & Poor downgraded the US’s credit rating to AA+, which has not been reversed. The credit rating agency Fitch gives the USA a AAA rating. The S&P 500 index rose 1 per cent on the bill’s passing.

In April 2023, White House press secretary, Karine Jean-Pierre, said, “In our history, we have never defaulted on our debt or failed to pay our bills.” This is not correct. During the War of Independence, the French spent 1.3 billion livres (£100 million), a massive sum at the time, on supporting the American colonies. The French expected to obtain lucrative trade deals after the war from the new government as repayment. Instead, America made trade deals with Britain. The massive debt caused major economic and political problems that led to a Financial Crisis and the French Revolution in 1789.

Two years after the War of 1812 with Britain, the US Treasury was unable to service its war debts. Treasury Secretary, Alexander J Dallas, admitted that, “a large amount of treasury notes has already been dishonoured.” Later the US refused to repay the debt obligations that Cuba owed Spain, when the US took over the colony as war reparations for the Spanish-American War in 1898.

To help cover the massive costs of World War I, Congress created the debt ceiling with the Second Liberty Bond Act of 1917. This allowed the Treasury to issue bonds and take on new debt without Congressional approval. In 1939 the debt ceiling was applied to federal debt, under the Public Debt Acts.

The Public Debt Act of 1941 raised the aggregate debt limit on all obligations to US$65 billion, consolidating federal borrowing under the US Treasury. The massive costs of World War II required the debt limit to be raised to $300 billion in 1945. In 1979, Dick Gephardt imposed the “Gephardt Rule,” that deemed the debt ceiling be raised when a budget was passed. According to the Wall Street Journal, that year the Treasury missed payments on $122 million in Treasury bills.

Since 1985 the US has failed to pay its full debt obligations to the United Nations. The Senate refused to appropriate the full US contributions, because the UN members had voted contrary to US political and military interests. The US still owes the UN over $2 billion.

In 2008, the US debt was over $10 trillion. In 2011, Republicans in Congress used the debt ceiling as leverage for deficit reduction. This led to a credit downgrade and contributed to the Dow Jones Industrial Average falling 2000 points in August, amongst its worst days on record. The delay in raising the debt ceiling caused the rise in government borrowing costs by $1.3 billion. The Bipartisan Policy Centre calculated that the delay cost the government $18.9 billion over the next ten years.

Today the USA is the world’s most indebted country. According to the US Department of the Treasury, the US owes $6.2 trillion to itself: Mutual funds $3.5 trillion; Commercial banks and credit unions $1.2 trillion; State and local governments $343 billion; Private pension funds $805 billion; Insurance companies $252 billion; State and local government pension funds $343 billion; and US savings bonds $141 billion.

The other $28 trillion in public debt is owed mainly to: Japan $1.2 trillion; China $1.1 trillion; United Kingdom $431.8 billion; Ireland $307 billion; Luxemburg $291 billion; Switzerland $261 billion; Brazil $255 billion; with hundreds of billions to numerous other countries. All has to be repaid.

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