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What is National Debt?

Updated on December 3, 2011

National debt is the total amount owed by a national government.

A government pays for its programs by taxing or by borrowing.

If it borrows, it adds to the nation's public debt.

Composition of the Debt

In the United States the Department of the Treasury finances the national debt by selling a variety of securities backed by the credit of the U.S. government. Like any borrower, the Treasury undertakes to repay the lenders when the debt matures. Interest is paid periodically on some government debt instruments and at maturity on others. The Treasury issues special obligations to government trust accounts, and it sells as many savings bonds as it can to individual investors. The balance of the Treasury's securities are sold on the open market.

The shortest~term government security is the treasury bill, which matures in 91 days and is sold at a discount. Other short~term securities are certificates of indebtedness, which mature within a year, and notes, which mature within five years. Most corporations and banks buy short~term government securities, or governments, to earn income on their cash reserves.

Long-term government bonds, or treasuries, mature in more than five years. Many financial institutions and individual investors buy treasuries to earn a guaranteed interest on a safe investment.

Refunding

More than half of the U.S. national debt is short-term. It is therefore constantly coming to maturity.

The Treasury can obtain funds to repay its lenders by taxing, by printing money, or by reborrowing. In actual practice it meets most of its monetary obligations by reborrowing, or refunding.

History

In 1792 the federal government assumed the debts that the states had incurred during the American Revolution. Ever since, war has been the major cause for increases in the national debt. Throughout the 19th century and the early 20th century the U.S. government tried to retire the public debt after each war. Congress held interest rates to 2 1/2 percent and placed its first statutory ceiling on the debt during World War I.

In the 1930's the United States borrowed for a new reason. It borrowed to finance recovery and relief from economic depression. By 1945 the costs of World War II brought the debt to 279 billion dollars. Retiring a national debt of this size could have had grave repercussions on the American credit structure and on economic growth. Congress therefore relaxed its restrictions on interest rates and allowed the Treasury to follow a more flexible monetary policy. American productivity has more than kept pace with increases in the national debt. Since the end of World War II the national debt has increased only slightly whereas gross national product has more than doubled.

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    • vrdm profile image

      Deacon Martin 

      5 years ago from Bristol, UK

      To whom is the national debt owed?

    working

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