By George Hall, Associate Professor of Economics

I received the e-mail from the Department Chair asking me to write a post on what I am working on during my sabbatical at the same time my wife handed me this cartoon from a recent issue of The New Yorker.


Sometimes life does imitate art …  I am spending this academic year visiting the New York University Economics Department.  In order to focus solely on research, I needed to find a place with fewer distractions than Brandeis. I figured Greenwich Village would do the trick.  OK, it also helps that my friend and co-author, Tom Sargent, is on the NYU faculty.

Together, Tom and I (with the help of Brandeis Economics majors Alex Bargar, James Chin, and Ainie Tan) are working on a fiscal history of the United States. That is, we want to tell the story of this great nation though the Federal government’s expenditures, tax revenue, and debt.  This may seem like an esoteric topic, but the more history I learn, the more connections I see between the choices made a century or more ago and today’s debates on spending, taxes, and debt. To give you a sense of the work, consider the following.

Today the status quo promised stream of future entitlement payments and tax rates comprising U.S. fiscal policy is often described as unsustainable.  Of course what can’t happen won’t happen, but we do not know today how the political process will adjust those promised expenditures and revenues to render fiscal policy coherent. (We don’t know which promises the political process will keep and which it will break.)  Such fiscal ambiguity is nothing new.

The three decades  after the U.S. Civil War offer a case study of how ambiguities were confronted and resolved by a procession of controversies, improvisations, appeals to principles, and, ultimately, elections.

In the aftermath of the Civil War, the debt-to-GDP ratio exceeded 35 percent.  By today’s standards, this ratio seems quite low, but in the 1860s and 70s the ability of the Federal government to raise tax revenue was still relatively limited.  Tax receipts as a share of GDP at the height of the war barely exceed 5 percent and fell to 3 percent immediately after war. (In the late 1860, debt was roughly 10 times tax receipts.  Today, the quantity of debt held by the public is between 4 and 5 times tax receipts.)  During this period, measured Federal interest payments consumed between one-quarter and one-third of tax receipts.  Who was going to pay off this debt?  Were the taxpayers going to get socked?  Were the entitlement recipients of the day, war veterans and their families, going to see the promises made to them broken?  Or were holders of U.S. bonds going to face the same fate as last year’s holders of Greek bonds?

In those days, the Congress itself designed each Federal security. In 1863, the Congress authorized the Treasury to sell “5-20’s”. They were redeemable in twenty years and callable at par at the government’s discretion in 5 years. Over $1.6 billion of these bonds were sold, ultimately comprising over 60 percent of the total Federal debt.  The 5-20’s promised to pay interest in gold, but were silent about whether the principle would be payable in gold or in the far less valuable greenbacks.  The ambiguity about the currency in terms of which the 5-20’s would be repaid set the stage for a rousing political debate.

Many Democrats at the time argued that fairness dictated that if Union soldiers were paid in greenbacks (the 99%?) , then so should Wall Street (the 1%?) .  In a remarkable quote, President Andrew Johnson stated:

The lessons of the past admonish the lender that it is not well to be over-anxious in exacting from the borrower rigid compliance with the letter of the bond.

Ulysses S. Grant, on the other hand, in his 1868 presidential campaign argued that purchasers of U.S. bonds had been promised to be paid in gold and that the Federal government should honor its promises.  Grant won the election.  Grant kept his promise, and Federal bond holders did exceeding well.

So did the taxpayers or pensioners take it in the shorts?  Well not really.  It turns out that although the debt was refinanced twice during the second half of the 19th century, relatively little of the outstanding debt was paid off.  In 1866 the U.S. debt stood at $2.7 billion. On January 1, 1900, the debt was $2.1 billion.  However during this period, the debt-to-GDP ratio fell from 37 percent to 11 percent.  This decrease was largely due to robust growth in GDP.  Opening up the U.S. West and opening our doors to immigrants solved our fiscal problems back then.  Are these options open to us today?  No and yes, but that is a topic for another day.

Sargent and I are teaching an undergraduate course on the fiscal history of the US at NYU this spring.  Next year, I anticipate bringing this course back to Brandeis.



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