12:01am

Fri April 15, 2011
Planet Money

When The U.S. Paid Off The Entire National Debt (And Why It Didn't Last)

On Jan. 8, 1835, all the big political names in Washington gathered to celebrate what President Andrew Jackson had just accomplished. A senator rose to make the big announcement: "Gentlemen ... the national debt ... is PAID."

That was the one time in U.S. history when the country was debt free. It lasted exactly one year.

By 1837, the country would be in panic and headed into a massive depression. We'll get to that, but first let's figure out how Andrew Jackson did the impossible.

It helps to remember that debt was always a choice for America. After the revolution, the founding fathers debated whether or not to just wipe clean all those financial promises made during the war.

Deciding to default "would have ruined our credit and would have left the economy on a very agricultural, subsistence basis," says Robert E. Wright, a professor at Augustana College in South Dakota.

So the U.S. agreed early on to consolidate the debts of all the states — $75 million.

During the good times, the country tried to pay down the debt. Then there would be another war, and the debt would go up again. The politicians never liked the debt.

"What the battle was really about was how quickly to pay off the national debt, not whether to pay it off or not," Wright says.

But, just like today, it wasn't easy for politicians to slash spending — until Andrew Jackson came along.

"For Andrew Jackson, politics was very personal," says H.W. Brands, an Andrew Jackson biographer at the University of Texas. "He hated not just the federal debt. He hated debt at all."

Before he was president, Jackson was a land speculator in Tennessee. He learned to hate debt when a land deal went bad and left him with massive debt and some worthless paper notes.

So when Jackson ran for president, he knew his enemy: banks and the national debt. He called it the national curse. People ate it up.

In Jackson's mind, debt was "a moral failing," Brands says. "And the idea you could somehow acquire stuff through debt almost seemed like black magic."

So Jackson decided to pay off the debt.

To do that, he took advantage of a huge real-estate bubble that was raging in the Western U.S. The federal government owned a lot of Western land — and Jackson started selling it off.

He was also ruthless on the budget. He blocked every spending bill he could.

"He vetoed, for example, programs to build national highways," Brands says. "He considered these to be unconstitutional in the first place, but bad policy in the second place."

When Jackson took office, the national debt was about $58 million. Six years later, it was all gone. Paid off. And the government was actually running a surplus, taking in more money than it was spending.

That created a new problem: What to do with all that surplus money?

Jackson had already killed off the national bank (which he hated more than debt). So he couldn't put the money there. He decided to divide the money among the states.

But, according to economic historian John Steele Gordon, the party didn't last for long.

The state banks went a little crazy. They were printing massive amounts of money. The land bubble was out of control.

Andrew Jackson tried to slow everything down by requiring that all government land sales needed to be done with gold or silver. Bad idea.

"It was a huge crash, and the beginning of the longest depression in American history," Gordon says. "It actually lasted six years before the economy began to grow again."

During the depression, the government started borrowing money again.

No one says that paying off the debt caused the depression. The bubble was going to pop sometime. But the result was that we had to kiss a debt-free U.S. goodbye. The country never came close again.

Note: This post was expanded at 10:15 a.m. to replace an earlier, much shorter post. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

RENEE MONTAGNE, host:

You know, politicians have been fighting over the U.S. debt since the United States was born. This country has always owed money to someone, except for one year: 1835, the only time in U.S. history the government has been completely debt-free.

Robert Smith from NPR's Planet Money team tells the story.

ROBRT SMITH: Let's start with the happiest day: January 8th, 1835. All the big political names in Washington, D.C. had gathered to celebrate the president, Andrew Jackson.

A senator stands up and he gives the news: Gentlemen, the national debt is paid. Historians tell us there was quite a huzzah.

Mr. JOHN STEELE GORDON (Author, "Hamilton's Blessing: the Extraordinary Life and Times of the National Debt"): It was a big deal.

SMITH: John Steele Gordon writes about financial history.

Mr. GORDON: This was another American accomplishment, that we had actually paid off our national debt. No other country had ever done that before.

SMITH: So Andrew Jackson gets rid of the debt. All of a sudden, the country's running a surplus. And we all live economically happily ever after, right?

Mr. GORDON: Not exactly.

SMITH: How long did the good times last?

Mr. GORDON: It lasted exactly one year.

SMITH: By 1837, the country would be in panic and headed into a massive depression - but we'll get to that.

First, let's figure out how Andrew Jackson did the impossible. It helps to remember that debt was always a choice for America. After the revolution, the founding fathers debated whether or not to just wipe clean all those financial promises made during the war.

Robert E. Wright, a professor at Augustana College in South Dakota, argues that they made the right choice by avoided default.

Professor ROBERT E. WRIGHT (Augustana College): It would have ruined our credit and would have left the economy on a very agricultural-subsistence basis.

SMITH: So the United States agreed early on to consolidate all the debts of all the states: $75 million. The U.S. would try to pay down the money it owed during the good times, then it would fight another war, and the debt would go up again. The politicians never liked it.

Mr. WRIGHT: So what the battle was really about was how quickly to pay off the debt, not whether to pay it off or not.

SMITH: But just like today, it wasn't easy for politicians to slash spending -until Andrew Jackson.

Professor H.W. BRANDS (University of Texas): For Andrew Jackson, politics was very personal. He hated not just the federal debt. He hated debt at all.

SMITH: H.W. Brands is a professor at the University of Texas. He tells the story of how Jackson, out in the Wild West of Tennessee, had been quite a land speculator, until a deal gone bad left him with massive debt and some worthless paper notes. So when Jackson ran for president, he knew his enemy: banks and the national debt. He called it the national curse. People ate it up.

Mr. BRANDS: Debt was considered a moral failing, and the idea that you could somehow acquire stuff through debt almost seemed like black magic.

SMITH: But Andrew Jackson had some magic of his own. There was a huge real estate bubble going on, and the U.S. had a lot of land in the wilderness. So they did a brisk business selling it off. Jackson was ruthless on the budget. He blocked every spending bill he could.

Mr. BRANDS: He vetoed, for example, programs to build national highways. He considered these to be unconstitutional in the first place, but bad policy in the second place.

SMITH: Jackson took office with around $58 million of national debt. Six years later, it was all gone, paid off. But Jackson now faced a problem that no other president has ever had: what to do with all that surplus money. Jackson had already killed off the National Bank, something he hated more than debt, so he couldn't put the money in there.

Mr. GORDON: And what he decided to do was to divide it among the states, according to the population. This is the only time that's happened.

SMITH: But John Steele Gordon says the party did not last very long. The state banks went a little crazy. They were printing massive amounts of money. The land bubble was out of control. Andrew Jackson tried to slow everything down by requiring that all land sales needed to be done with gold or silver. Bad idea.

Mr. GORDON: There was a huge crash and the beginning of the longest depression in American history. It actually lasted six years before the economy began to grow again.

SMITH: Now, no one's saying paying off the debt caused the depression. The bubble was going to pop sometime, and Andrew Jackson just wasn't savvy enough to do it gently. But the result was that we had to kiss a debt-free USA goodbye. The country never came close again.

Robert Smith, NPR News, New York.

(Soundbite of music)

MONTAGNE: You're listening to MORNING EDITION, from NPR News. Transcript provided by NPR, Copyright National Public Radio.