War: Who Holds the US Debt and What Does It Mean?
Let’s start with a few explanations about the differences between the national debt, the federal debt and the trade imbalance.
The Federal debt is a financial agreement. It obligates the US to pay for direct services such as social security, federal pensions, Medicare and Medicaid. In other cases it is a fiduciary responsibility between a second party and the government. Where, the focus is the viability or sustainability of a domestic service or an entity. For example the federal government acts as an insurer or safety net. For institutions or industries, banking being the most notable, other such servers are the FDIC, Freddie Mac and Fannie Mae.
Next we have what is commonly referred to as the trade imbalance. It is based on international commerce, the exchange of good and services across national borders. In the past the currencies of nations involved in such business was backed by gold. If a nation had a trade deficit the imbalance would prompt the country in the position to pay to conduct the transaction in gold.
Now we have what is called a fiat system. Nations print their own money. They can mint as much as they want. In each case rather than the currency being backed by gold it is supported instead by the strength of the country’s productive muscle. With a weak economy where the value of the currency does not keep pace with the Gross National Product the debt could turn into inflation and becomes a real concern.
However, for the purpose of this article we are going to focus on a different type of debit instrument. It is most often referred to as the country’s national debt. It is also called the public debt. For the United Sates technically it is an obligation owed by the government to pay the holders of federal indebted bonds.
In the United States the impact of this indebtedness has changed over the country’s history. It is the profound evolution of this change with respect to the size of the debt and who holds these financial instruments that are of modern day concern. The trend regarding these contemporary circumstances may eventually alter America’s standing as the number one economic power in the world.
The following is a chronology of the ever increasing size of the United States’ public debt. The record addresses the holders and their changing profile over time. There is a historical significance to be noted coupled with the likelihood for what makes the numbers rise. It is this recurring trend and subsequent peaks that pose an adverse financial situation where the risk becomes obvious.
To key in on budgetary issues the focus is on the most traumatic times in the country’s history. As we do so the trends will become clear. The first example is the Revolutionary War. For all intent and purposes it started on April 19th, 1775 with the Minute Men at Lexington and Concord engaging the British in battle. The war ended with the resignation of General George Washington on December 23rd, 1783.
Before this point the country struggled with the idea of existing as a monarchy. It settled for becoming a federation of American States with the ratification of the United States Constitution on September 17th 1787. Shortly after, the country recorded its first public debt. It was mainly attributed as a result of the Revolutionary war.
The Articles of Confederation reported this value as $75,463,476 on January 1st 1791. This is not a trivial sum given the historical period and the fact it took the country 45 years to recover. By January of 1835 the debt was finally reduced to $0.00.
Keep in mind the War of 1812 had taken place before the $0.00 recordation. The country had declared war on Great Britain on June 18th 1812. It was a brief war. It ended on February 17th, 1815 with the US ratification of a Peace Treaty.
So from 1787 to 1835 with a two year war in between it took the country roughly 48 years to get on its economic feet. Almost a half a century to recover and it is not unreasonable to conclude that the back to back wars and the burden they posed on such a young country may have had something to do with it.
After a hiatus of 26 years then the Civil War came along. It began in January of 1861. The South seceded from the Union because Abraham Lincoln was elected president. He ran on an anti slavery platform and took a strong position that slavery was bad for the country’s economy. The Southern United States having its commerce based on slavery did not take kindly to this. The war lasted approximately four years and ended sometime between April and May of 1865 with the defeat of the confederate army and the surrender of Jefferson Davis.
Then the Congress through a series of ratification began the Spanish America War in March of 1898, approximately 33 years after the end of the Civil War. The Spanish American war ended with the defeat of Spain in the Philippines on July of 1902.
Then 15 years passed and the United States entered World War I declaring war on Germany on April 6th 1917 after a U boat sank an American vessel. The war ended with a peace conference and the signing of the Treaty of Versailles on January of 1919.
As a result of these three wars there was a dramatic spike in the national debt not only because of the civil war but because of the Spanish American War and World War I. In 1860 leading up to the Civil War the country’s debt was $65 million. Then it reached $1.00 billion in 1863. By the end of the Civil War in 1865 it was at $2.7 billion. So you see where this is going.
The debt stabilized around the $2.7 billion dollar range until 1910 at the advent of World War I. Then following World War I the debt ended up at $22 billion. So from 1810 to 1910, a period of 100 year with a war approximately every 25 years there after; rather than the country building up a surplus it went from a national debt of $0.00 to $22.0 billion.
Following this period American was drawn into World War II when the Japanese bombed Pearl Harbor on December 17th 1941. There was an obvious build up to the war because the national debt rose to $51 billion in the same year. By the time World War II ended American’s national debt was $260 billion. This war notably has two ending dates. The war in Europe ended most commonly with V - E Day which was May 8th 1945. Then Japan surrendered on September 2nd 1945 after the bombing of Hiroshima and Nagasaki.
It is generally thought that World War II mobilized the US economy. Creating a situation where there was almost full employment but the obvious impact on the countries financial situation when looking at the numbers shows a different pecuniary picture, $51 billion in debt at the advent of the war and $260 billion in debt at the end of the war.
So some would argue this debt is not a bad thing but here in lies the hidden concern. The deficit is dangerously high but up until this point, the holders of these indentured bonds, close to 100% of the debt was in the hands of the American public or American institutions. So even though the increase debt is arguably not good for the economy the holders of the debt are the American people. And they would stand to gain from the interest paid on that debt. It also stands to reason since the people are financing the war in a sense the country from a productivity standpoint can claim all these conflicts as affordable wars.
After this period and through the Korean War June 25th 1950 which ended with a signed armistice in July of 1953, something happen, wars stopped being affordable. There might be a moral equivalent in here somewhere but 1950 the debt jumped to 94% of Gross National Product. Up until this point the debt general hovered at or below 50% of GDP. In 1953 this was the equivalent of $257 billion.
Then from 1970 to 1980 it dropped back down to the high or middle 30% range of GDP but in dollars amount more than tripled to $930 billion by 1980. This was the Vietnam era and the price tag for the war. The Vietnam War started on May 13th 1961 when President Kennedy ordered the first troops in. It continued until March of 1973 when President Nixon pulled the troops out. The debt kept pace with the rate of inflation up to 1980.
Then there was the height of the Cold War and the price Reagan’s Administration paid to defeat the Soviet Union. The cost of that hidden war was over $3.2 trillion added to the national debt. This period was between 1981 and 1991. Surprisingly enough during this time American institutions and the American people still held the lion share of the Public Debt.
Which leads us to Desert Storm, the operation started with an air war phase conducting missions over an area called “A No Fly Zone”, on January 17th 1991 and ended with a cease fire on April 11th 1991. For the next 10 years there does not seem to be any dramatic change in the debt. The only exception is that foreign countries during this period started to look towards American bonds as a safe haven.
Then September 11th happen. The Afghan War began on October 7th 2001 when the US military invaded Afghanistan because of the events of September 11th. The war continues to this day.
Of course during this time the country is also was engaged with fighting a war in Iraq. It began March 19th 2003 with a US military action. This war at the time of publication continued but since has ended in the final quarter of 2011. From 2001 to the present the national debts has risen from approximately $6 trillion to $11.2 trillion. The significance about this last number is that foreign countries now hold 28% of this debt with China and Japan by far having the largest stake 24 and 21 percent respectively.
So here what we have, a country that appears to be at war an average of every 15 years. During the cycle its debt tends to triple. Where, the cost is approximately now 80 % of GDP. The price is slowly approaching a point where 30% of the rising debt to fight these wars, is not being borne by its on citizens but those of foreign countries. And if that was not bad enough the cost is being shouldered by countries that may not have complimentary interest but more competing interest. So what does this mean? Roughly speaking it means that America needs to address this trend and focus more on improving its approach towards productivity because as a country it can no longer afford to fight these battles.
The whole historical significance brings to mind the quote and the prediction that war was designed to lead God’s people to repentance. As the biblical text states, “They shall beat their swords into plowshare, and their spears into pruning-hooks: nation shall not lift up sword against nation neither shall they learn war any more." [Isaiah 2:4]