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Did the United States Really Grow Out of Its World War II Debt?

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  • Julien Acalin
  • Laurence Ball

Abstract

This paper examines the effects of primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951 on the US public debt/GDP ratio. We find that with the primary budget balance and without distortions in real interest rates caused by surprise inflation and the pre-Accord peg, debt/GDP would have declined only from 106 percent in 1946 to 74 percent in 1974, not to 23 percent as in actual history. Our findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.

Suggested Citation

  • Julien Acalin & Laurence Ball, 2026. "Did the United States Really Grow Out of Its World War II Debt?," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(3), pages 112-135, July.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:3:p:112-35
    DOI: 10.1257/mac.20230357
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    References listed on IDEAS

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    1. S. Borağan Aruoba, 2020. "Term Structures of Inflation Expectations and Real Interest Rates," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(3), pages 542-553, July.
    2. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
    3. George J. Hall & Thomas J. Sargent, 2022. "Three world wars: Fiscal–monetary consequences," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 119(18), pages 2200349119-, May.
    4. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    5. George J. Hall & Thomas J. Sargent, 2011. "Interest Rate Risk and Other Determinants of Post-WWII US Government Debt/GDP Dynamics," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 192-214, July.
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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