Did the U.S. Really Grow out its WWII Debt?


The fall in the U.S. public debt-to-GDP ratio from 106% in 1946 to 23% in 1974 is often attributed to high rates of economic growth. In this paper, we re-examine the roles played by primary surpluses and real interest rate distortions–through both pegged nominal interest rates before the Fed-Treasury Accord of 1951 and surprise inflation in the 1960s and 70s–in driving down the debt ratio. Under our baseline calibration, we estimate that the public debt-to-GDP ratio would only have declined from 106% to 73% over the same period if primary balances had always been equal to zero and there were no real interest rate distortions. Under the same assumptions, we find that the debt-to-GDP ratio would have persistently remained above its pre-war level and reached 91% in 2021. Put differently, the U.S. would not have grown its way out of its WWII debt without interest rate distortions and primary surpluses.

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