Balanced Budgets and Depressions

By Thayer, Frederick C. | The American Journal of Economics and Sociology, April 1996 | Go to article overview

Balanced Budgets and Depressions


Thayer, Frederick C., The American Journal of Economics and Sociology


Since 1791, the earliest data available, the national debt has been increased in 112 years, decreased in 93 years. 57 of those balanced-budget, debt-reduction years have been concentrated in six sustained periods of varying length. Also since 1791, there have been six significant economic depressions among the innumerable "business cycles." Each sustained period of budget-balancing was immediately followed by a significant depression. There are as yet no exceptions to this historical pattern.

This is the record of six depressions:

1. 1817-21: in five years, the national debt was reduced by 29 percent, to $90 million. A depression began in 1819.

2. 1823-36: in 14 years, the debt was reduced by 99.7 percent, to $38,000. A depression began in 1837.

3. 1852-57: in six years, the debt was reduced by 59 percent, to $28.7 million. A depression began in 1857.

4. 1867-73: in seven years, the debt was reduced by 27 percent, to $2.2 billion. A depression began in 1873.

5. 1880-93: in 14 years, the debt was reduced by 57 percent, to $1 billion. A depression began in 1893.

6. 1920-30: in 11 years, the debt was reduced by 36 percent, to $16.2 billion. A depression began in 1929.

There has been no sustained period of budget-balancing since 1920-30, and no new depression, the longest such period in our history.

The question is whether this consistent pattern of balance the budget-reduce the national debt-have a big depression is anything other than a set of coincidences. According to economic myths, none of these sequences should have occurred at all. How on earth, for example, could we virtually wipe out the national debt in the mid-1830s, then fall immediately into one of the six recognized collapses in our history? Those who write about the desirability of reducing the national debt frequently praise Andrew Jackson for his vigorous pursuit of such a goal, but do not mention "depression" in the same breath. It is helpful to the maintenance of economic myth to say little about depressions in textbooks, thus making it easy to avoid looking at connections considered impossible anyway.

The mutual finger-pointing now underway is aimed at the 1996 elections, Democrats and Republicans each blaming the other for the agreed disaster of high deficits and debt. Yet the deficits of the 1930s and recent years were trivial, relative to GNP, when compared with the wartime deficits of the 1940s that ended the Great Depression. …

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