Working Paper: NBER ID: w27115
Authors: George J. Hall; Thomas J. Sargent
Abstract: From decompositions of U.S. federal fiscal accounts from 1790 to 1988, we describe differences and patterns in how expenditure surges were financed during 8 wars between 1812 and 1975. We also study two insurrections. We use two benchmark theories of optimal taxation and borrowing to frame a narrative of how government decision makers reasoned and learned about how to manage a common set of forces that bedeviled them during all of the wars, forces that included interest rate risks, unknown durations of expenditure surges, government creditors' debt dilution fears, and temptations to use changes in units of account and inflation to restructure debts. Ex post real rates of return on government securities are a big part of our story.
Keywords: No keywords provided
JEL Codes: E52; E62; H56; N41; N42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wartime surges in government expenditures (H56) | debates about financing (H69) |
| debates about financing (H69) | development of theories regarding the optimal mix of debt and taxes (H21) |
| Past experiences (e.g., depreciation of continental currency) (F31) | influenced choices in subsequent conflicts (D74) |
| Issuance of noncallable federal bonds during the Mexican War (H63) | regrets when interest rates fell (E43) |
| Nominal interest rates and inflation (E43) | influenced decisions of policymakers (D72) |
| Composition of financing shifts over time (G32) | more reliance on taxes and less on debt in later wars (H69) |
| Expenditure shocks (H59) | responses of tax collections and government debt (H63) |
| Historical patterns reflect complex interplay of decision-makers' purposes, constraints, and evolving understandings of fiscal policy (E65) | conclusions about financing strategies (G32) |