Federal Income and Debt

Article 1, Section 8, Clause 19 of the Constitution authorizes Congress to raise revenue through tariffs and the sale of land in the federal domain, while forbidding taxes on personal incomes.

But this plan falls far short of covering the debts owed by the government by the time George Washington begins his first term in office on April 30, 1789. According to the U.S. Office of the Historian, the bulk of this debt involves loans from France to help America fight Britain in the Revolutionary War. The Dutch and Spanish governments also provide resources that need reimbursement. In 1795, the French debt is transferred to American banker James Swann reducing the potential for foreign entanglements in U.S. policies.

The debt level holds around $80million across the administrations of Washington and his successor, John Adams.

18.0 Federal Debt: 1793 – 1801

Thomas Jefferson cuts the debt by about 30% in his second term through sharp reductions in federal spending, and his successor, James Madison, holds that line through his first term.

18.1 Federal Debt: 1805 – 1813

The War of 1812 ushers in severe budgetary shortfalls. The debt reaches $123million in 1817, and Madison is so alarmed that, after closing the First Bank of the United States on philosophical grounds, he charters the Second Bank in 1816 to regain control.

A recession follows the end of the war with debt levels under President James Monroe remaining over $80million. As war-related expenses decline, the liability level drops under the conservative, John Quincy Adams.

18.2 Federal Debt: 1813 – 1825

It is not until 1820 that reliable data on the sources of government revenue become available,
and economics Professor Thomas Hungerford sums it up in his 2006 report to Congress. The facts show that, with the exceptions of 1835-36 and 1855, tariffs account for 90% of the nation’s total income prior to the Civil War.

There are only two exceptions, traceable to land sales. The first in 1835-36 when President Andrew Jackson forces the southeastern tribes to abandon their land, opening it up to white settlers. The second, less dramatic, occurs in 1854-6 after Stephen Douglas’s 1854 Kansas-Nebraska Bill finds pioneers moving further west and speculators buying up possible sites for the Transcontinental Railroad.

18.3 Sources of Federal Income: 1820 to 1865 (millions)

In 1829 ex-General Andrew Jackson sweeps into the White House determined to put an end to currency inflation and the federal debt. He announces his intent in his 1^st Inaugural Address on March 4, 1829:

Of the Topics which shall engage my earliest attention as intimately connected with
the prosperity of our beloved country, is the liquidation of the national debt.

Then later adds: I place economy among the first and most important of virtues, and public debt as the greatest of dangers to be feared….

By his final moments in office in 1837 he has met his debt goal, the only President in American history to do so. His principal weapon lies in opposing almost all increases in government spending, including the issuance of 12 vetoes, more than all five of his predecessors combined.

18.4 Federal Debt: 1829 – 1837

The effect, however, proves temporary, given the Bank Panic caused by Jackson’s Specie Circular, and the recession that follows. Debt expands gradually under Van Buren and Tyler, and then jumps way back up to support President Polk’s war with Mexico.

18.5 Federal Debt: 1841 – 1853

Increased revenue from sales of the new western lands ceded to the U.S. after the war finds the debt reduced substantially during Franklin Pierce’s, but then another recession strikes in 1857 and it skyrockets under James Buchanan.

18.6 Federal Debt: 1857 – 1861

The deficit floodgates open as the Civil War begins to play out.

18.7 Federal Debt: 1862 – 1863 Lincoln

Faced with these deficits, a desperate Lincoln institutes the first personal income tax in the 1861 Revenue Act, requiring payments of 3% on earnings in excess of $800.

18.8 Sources of Federal Income: 1860 to 1865 (millions)

Even this measure fails to cover government expenses, and by 1865, the debt has risen to $2.6 Billion, a level that will continue over the following decade.

18.9 Federal Debt: 1862 – 1865 Lincoln

Modern economists tend to assess the financial risks of the debt by comparing it to a nation’s annual GDP. According to the Cato Institute, the debt to GDP ratio stood at 31% during the 1860’s, but then fell to 3% before World War I. The level spiked to 105% during World War II and again during the Covid pandemic of 2020.

18.10 Recap on U.S. Income and Debt