Two Centuries of Government Debt

In the century after Alexander Hamilton refunded the debts of the Revolutionary War with a federal debt, the United States only went into debt to pay for its wars. But then in the 1930s the administration of President Roosevelt attempted to get the nation out of the Great Depression with federal borrowings.

When charted in dollars, in Chart 4.01, the total accumulation of federal debt looks huge. Looking back over the last century, the debt back in 1900 doesn’t really register. But by charting accumulated debt as a percent of gross domestic product (GDP) in Chart 4.02, you get a look at government debt compared to the size of the economy at the time.

The federal debt was set up in the 1790s by the first Treasury Secretary, Alexander Hamilton. Experienced in banking, Hamilton stabilized the dollar and refunded the debts incurred by the states in the Revolutionary War by refinancing them as an obligation of the new federal government. The bonds were to be “funded” by federal revenues earmarked for interest payments and repayment of principal. The resulting federal debt stood at 35% of gross domestic product (GDP). By the 1830s the Revolutionary war debt had been paid off—just in time for the Civil War when federal debt climbed back up to 33% of GDP. Still, the Civil War debt was pretty well paid off by the turn of the 20th century.

Total Government Debt since 1900

At the beginning of the 20th century total government debt was equally divided between federal and local debt, totaling less than 20 percent of GDP. State government debt was minimal. After World War I, the federal debt surged to 32% of GDP. But by the mid 1920s federal debt had declined to below 20 percent of GDP with state and local debt rising to 16 percent of GDP.

Chart Key:
- Federal gross debt
- Local gross debt
- State gross debt

Then came the Great Depression, and President Hoover decided to spend his way out of trouble, boosting federal debt to 39.4 percent of GDP in 1933. Debt for state and local governments shot up too, with state debt peaking at over 5 percent of GDP in 1933 and local debt peaking at over 28 percent in 1933. Total government debt in the bottom of the Great Depression in 1933, including federal and state and local debt, amounted to 70 percent of GDP.

After the total government debt peak of 70 percent in 1933, federal debt continued to increase under President Roosevelt, reaching 49 percent of GDP in 1940, while state and local debt declined, with state debt at 3.5 percent GDP in 1940 and local debt down to 16.2 percent GDP in 1940.

But it was in World War II that the US really entered new debt territory. Starting at 45 percent of GDP in 1941 federal debt zoomed, reaching almost 119 percent of GDP in 1946 after the end of the war, with state and local debt adding another 7 percent. For the next 35 years successive governments brought down the debt, but then came President Reagan. He increased the federal debt up to 50 percent of GDP to win the Cold War. President Bush increased the debt to fight a war on terror and bail out the banks. President Obama increased the debt to fund a plan to revive the economy in the aftermath of the Crash of 2008, breaking over 120 percent of GDP, federal, state and local in 2016. Then came COVID. In 2025 total debt -- federal, state, and local -- was estimated at 140.2 percent GDP.

A Century of Deficits

Today’s annual federal deficit, the difference between outlays and revenue in a single year, always seems dangerous and unprecedented. In fact, you need a war to really get a big deficit. The peak deficits came during World War I (17% of GDP in 1919) and World War II (24% in 1945), as the chart shows. The deficits of the Great Depression only came to about five percent of GDP, and the big $1.4 trillion deficit for FY 2009 amounted to 9.8% of GDP. In 2015 the federal deficit had come down to 2.43 percent GDP. In the COVID year 2025 the federal deficit was 6.0 percent GDP.

A Century of Interest Payments

The real risk from government debt is the burden of interest payments. Experts say that when interest payments reach about 12% of GDP then a government will likely default on its debt. Chart 4.05 shows that the US is a long way from that danger zone. The peak period for government interest payments, including federal, state, and local governments, was in the 1980s, when interest rates were still high after the inflationary 1970s. Of course, the numbers don’t show the burden of interest payments from Government Sponsored Enterprises like Fannie Mae and Freddie Mac, and they don't show what the outlays for interest will be after the end of the current “quantitative easing” and “zero interest rate policy.”

Interest payments are expected to increase sharply in the near future as interest rates return to normal. Federal net interest costs in 2015 were at 1.22 percent GDP. In 2025 federal interest payments were 3.3 percent GDP.