US Federal Debts and Taxes

1775-2024

George Hall and Thomas Sargent
Brandeis University and Hoover Institution

Progress Report

Project with George Hall, Jonathan Payne, Balint Szoke

(and Julia and Python and Pandas)

  • Collect data on promised pay outs, prices, and quantities of US government notes and bonds and on federal government expenditures and tax collections from 1775 to 2024

  • Interpret them in light of

    • Government budget constraints

    • Arrow-Hicks asset pricing theory

    • Barro and Lucas-Stokey tax smoothing models

18th Century Britain

UK18th


Figure 1. Govt spending and Taxes collected

US 1776 - 2023

USall23


Figure 2. Govt spending and Taxes collected

US 1776 - 2023

USall


Figure 3. Gross and Net-of-Interest Deficits

Data Assembly

US Federal Debt 1776 - 1960: Quantities and Prices, github 2018

(with George Hall and Jonathan Payne and Balint Szoke)

http://​www.​tomsargent.​com/​research/​ReadMe_​Pub.​pdf

  • Pay out streams, prices, and quantities of every bond US Congress issued 1775-1940

  • Organize with Python and Pandas

  • Share on github

US bonds Outstanding

ourdata


Figure 4. 

Accounting Framework

Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics , AEJ Macro, 2011; (with George Hall)

https://​www.​aeaweb.​org/​articles?​id=​10.​1257/​mac.​3.​3.​192

  • Government accounts don't answer questions macroeconomic theory wants
  • Therefore, we use government budget constraint and Arrow-Hicks price formulas to construct

    • values of government debts

    • returns on government debts

Properly accounting for interest payments

  • Exercise 28.1 of Recursive Macroeconomic Theory, fifth edition

    • Why deficits in Italy and Brazil were once extraordinary proportions of GDP

Official and economic interest

hproff


Figure 5. 

Market and par values

g5


Figure 6. 1775-2020

Par Value Debt-GDP by Owners

g4


Figure 7. 1775-2023

Other Applications

States' Rights and Responsibilities

United States Then, Europe Now, JPE 2012

https://​mfidev.​uchicago.​edu/​files/​Sargent_​Sweden_​11.​pdf

  • Evidence and interpretations coincide with Jonathan A. Rodden's

    • Hamilton's Paradox: the Promise and Peril of Fiscal Federalism, University of Cambridge, 2006
  • Murray Rothbard's perspective

    • Conceived in Liberty, volume 5: the New Republic, 1784-1791, Mises Institute, 2019.

Who bails out whom?

United States Then, Europe Now, JPE 2012

https://​mfidev.​uchicago.​edu/​files/​Sargent_​Sweden_​11.​pdf

  • Who controls power of the purse?

    • 13 states?
    • Confederate or Federal Congress?
  • War finance

    • money
    • bonds
  • Strings attached?

  • Haircuts

Credible Policies

United States Then, Europe Now, JPE 2012

https://​mfidev.​uchicago.​edu/​files/​Sargent_​Sweden_​11.​pdf

  • Reputational lessons for money and bonds
    • poisoning paper money
    • August 17, 1787 debate
    • Fudenberg-Kreps audience-specific reputations?

Sustaining Reputations

Fiscal Discriminations in Three Wars, JME, 2014

(with George Hall)

https://​www.​sciencedirect.​com/​science/​article/​pii/​S0304393213001220

  • Inflationary finance and post-war returns

  • James Madison and War of 1812

  • Civil War Ulysses S. Grant versus Andrew Johnson

    • Money versus bonds
    • greenbacks, legal tender, and gold
    • 5-20 bonds
    • creating then resolving ambiguity

Price levels – two wars

g2


Figure 8. 

Cumulative real returns after two wars

g3


Figure 9. 

Unanticipated Consequences

Complications for the United States from International Credits: 1913-1940, IMF, 2019 (with George Hall)

https://​www.​elibrary.​imf.​org/​view/​IMF071/​28327-​9781513511795/​28327-​9781513511795/​ch01.​xml?​lang=​en

  • Before 1914, the US was a net debtor to foreigners.

  • In 1887 Henry Carter Adams forecast that US economic growth and falling returns on US securities would eventually transform the US into a net foreign creditor.

  • Adams said that would unleash political forces for the US to abandon its isolationist foreign policy

Unanticipated Consequences, 2

Complications paper is about how Adams' forecast came true

Unanticipated Consequences, 3

  • Irving Fisher and price level targetting

  • Franklin Roosevelt's bombshell message to London Economic conference

    • Roosevelt as Chicago economist

      • permanent versus temporary

      • price stability

      • HANK

Bombshell Message, 07/03/1933

I would regard it as a catastrophe amounting to a world tragedy if the great Conference of Nations, called to bring about a more real and permanent financial stability and a greater prosperity to the masses of all Nations, should, in advance of any serious effort to consider these broader problems, allow itself to be diverted by the proposal of a purely artificial and temporary experiment affecting the monetary exchange of a few Nations only.

Wireless to the London Conference

I do not relish the thought that insistence on such action should be made an excuse for the continuance of the basic economic errors that underlie so much of the present world-wide depression.

The world will not long be lulled by the specious fallacy of achieving a temporary and probably an artificial stability in foreign exchange on the part of a few large countries only.

Roosevelt's bombshell message

The sound internal economic system of a Nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other Nations.

It is for this reason that reduced cost of Government, adequate Government income, and ability to service Government debts are all so important to ultimate stability.

Wireless 07/03/1933

Let me be frank in saying that the United States seeks the kind of dollar which a generation hence will have the same purchasing and debt-paying power as the dollar value we hope to attain in the near future.

That objective means more to the good of other Nations than a fixed ratio for a month or two in terms of the pound or franc.

Debt Limits

Brief history of US debt limits before 1939, Proceedings National Academy of Sciences, 2018

https://​www.​pnas.​org/​content/​115/​12/​2942.​short

  • No debt limit

    • Instead Congress designed each bond 1775-1921,

    • Bond-specific quantities and purposes
  • Congress delegated design authority to treasury gradually, 1921-1939

    • Standardization and liquidity motives
  • We construct pre-1939 debts limit by adding up bond-by-bond limits

US debt limit

g10


Figure 10. 1939-2018

US debt limit

g11


Figure 11. 1776-1835

US debt limit

g12


Figure 12. 1840-1916

8 + 2

Debt and Taxes in Eight U.S. Wars and Two Insurrections, Handbook of Historical Economics, 2021 (with George Hall)

http://​www.​tomsargent.​com/​research/​war_​compare.​pdf
Fractions of expenditure surges financed by debt and taxes

  • Bond sales
    • Marketing retail or wholesale?
    • Banks or brokers or movie stars?
  • Central bank role?
  • Real returns to bond holders
  • Consequences for price levels

8 + 2

Log Price Levels in Four Wars

g14


Figure 13. Log Price

Log Price Levels in Four More Wars

g140


Figure 14. Log Price

Cumulative Returns after Four Wars

g15


Figure 15. Portfolio Returns

Cumulative Returns after Four More Wars

g150


Figure 16. Portfolio Returns

Gold as Nominal Anchor

Costs of Financing US Federal Debt Under a Gold Standard: 1791-1933, January 2024

(with Jonathan Payne and Balint Szoke and George Hall)

http://​www.​tomsargent.​com/​research/​PSHS.​pdf

Yield Curves

Historical yield curves for US government debt

  • Arrow-Hicks formulas
  • Dynamic Nelson-Siegel model
    • time varying coefficients
    • Hidden Markov formulation (HMM)
  • Bayesian inference
    • Hamiltonian Monte Carlo
    • NUTS
    • Julia (Turing.jl)

Gold Yield Curves

yields on zero coupon bonds

Estimate Nelson-Siegel (1987) $j$-period gold dollar zero-coupon yield curves
\[ y_t^{(j)} = L_{t} + S_{t}\left(\frac{1-\exp(-j\tau)}{j\tau}\right) + C_{t}\left(\frac{1-\exp(-j \tau)}{j\tau} - \exp(-j\tau)\right) \]

Random walk, stochastic volatility models for

level, slope, curvature $ L_t, S_t, C_t $

Long Yields

longyields


Figure 17. 

Short yields

shortyields


Figure 18. 

Long minus short yields

spreads


Figure 19. 

UK and US yields

UKUS


Figure 20. 

Nominal Anchor

nominal_anchor


Figure 21. 

Smoothed Conditional Moments of Inflation

infl_moments


Figure 22. 

Term Spread and Inflation Risk

spread_risk


Figure 23. 

US Budget Surpluses and ex ante Real Bond Yields

budget_bond_yields


Figure 24. 

Output and Inflation

output_inflation


Figure 25. 

Three World Wars

With George Hall

http://​www.​tomsargent.​com/​research/​Three_​Wars.​pdf

  • WWI, WWII, War on COVID-19

  • Common patterns

    • Labor supply shocks
    • Consolidated Government Budget Constraint
    • Fed Balance Sheets
    • Real Returns on portfolio of federal government debts
    • Price level paths after wars

G and T in 3 World Wars

wars3GT


Figure 26. G and T

Post-War Price Paths

wars3price


Figure 27. Price Paths