Debt

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DEBT

Individuals, businesses, and governments all incur debts, which are amounts owed to others. Household or consumer debt most commonly resulted from auto loans, home equity lines of credit, credit cards, and personal loans.

During the 1990s consumer debt climbed rapidly, rising 20 percent a year between 1993 and 1996 alone. By the end of 1996 consumers' outstanding credit card debt alone was approaching $500 billion. Given these numbers, it is not surprising that between 1996 and 1997 the number of U.S. citizens filing bankruptcy claims climbed 25 percent—100 percent higher than in 1986.

Large corporations accrued debt in the form of short-term bank loans or longer-term debt like bonds in order to invest in their own futures, use their cash efficiently, or discourage other companies from considering a takeover. U.S. tax law encouraged firms to borrow money by allowing businesses to take tax deductions on the interest payments they make on their debts. When a corporation's debt came due, rather than pay it all off debt was generally rolled over by borrowing new funds—old debt was replaced with new debt.

Like individuals and businesses, governments got into debt when their expenses exceeded their revenues. Throughout U.S. history wars and recessions have been the largest causes of federal debt. The United States began with a $75 million debt that was used to the finance the American Revolution (1775–1783). Since only one quarter of the cost of the American Civil War (1861–1865) was paid using tax revenue, government budget surpluses for several years were used to pay off the $2.7 billion Civil War debt. The next major war, World War I (1914–1918) raised the federal debt to $26 billion, and the tax revenue the government lost because of the Great Depression (1929–1939) raised U.S. debt to $43 billion by 1940. But World War II (1939–1945) expenses dwarfed any public debt in the country's history. Where U.S. debt had never exceeded one third of Gross National Product (GNP) before the war, in 1945 the government's debt exceeded the entire national GNP by 29 percent. For the most part the government remained in debt after the war. It reached crisis proportions in the 1980s, but the government now hopes to retire the debt by 2015 because of cuts in spending and a thriving economy. Although almost all discussions of government debt focused on federal debt, the debt of U.S. state and local governments was also quite large and totaled some $454 trillion by the mid-1980s.