The Story from the Revolution to the Great Depression
The United States was born in debt. To win the Revolutionary War, the Continental Congress and the individual states borrowed heavily from foreign powers and their own citizens. When George Washington became president in 1789, the young nation was on the verge of financial collapse, with about $79 million in debt (a staggering sum at the time).
Treasury Secretary Alexander Hamilton proposed a radical plan: the new federal government would assume all state debts. This was controversial, but Hamilton's goal was brilliant. By consolidating the debt, he forced the wealthy and powerful to have a direct financial stake in the success of the new national government. It also established the United States' creditworthiness on the world stage, proving the nation would honor its obligations. The debt wasn't just a burden; it was a tool that helped unify the country.
For the next few decades, the U.S. slowly paid down its debt, with a major interruption for the War of 1812. Then came President Andrew Jackson, who held a deep distrust of banks and debt. He made eliminating the national debt a central goal of his presidency.
Through a combination of budget surpluses from land sales and a fierce opposition to spending, Jackson achieved the unthinkable. In January 1835, the U.S. national debt was completely paid off. It is the only time in American history this has ever happened. This debt-free status was brief; an economic crisis known as the Panic of 1837 soon forced the government to begin borrowing again.
The nation's finances were shattered by the Civil War. The cost of funding the Union army was monumental. To pay for the war, President Abraham Lincoln's administration resorted to massive borrowing through the sale of war bonds and, for the first time, the introduction of a federal income tax.
The numbers are staggering. In 1860, the national debt was a manageable $65 million. By 1865, it had exploded to $2.7 billion—an increase of over 4,000%. This transformed the scale of American government finance forever and set a new precedent for massive borrowing during a national crisis.
After the Civil War, the U.S. entered a period of rapid industrial growth. The government slowly paid down the war debt, but a new era of federal spending had begun. Then, in 1917, the U.S. entered World War I. The debt grew from under $3 billion in 1916 to over $25 billion by 1919. After the war, the prosperous "Roaring Twenties" saw the debt reduced again, down to about $16 billion by the time of the 1929 stock market crash.
For the first 150 years of its history, a clear pattern emerges: the U.S. took on massive debt almost exclusively to fight major wars. In times of peace, the focus was always on paying the debt down. The idea of borrowing heavily during peacetime was largely unthinkable. That long-held belief was about to be shattered by the Great Depression.