The $37 Trillion Question: Understanding the U.S. National Debt

An ever-expanding figure that casts a long shadow over the economic landscape of the United States, the national debt has become a subject of intense debate, concern, and often, confusion. As of early 2025, this colossal figure has surged beyond $36 trillion, a number so vast it can be difficult to comprehend. This is not merely an abstract accounting entry; it represents the total amount of money the U.S. federal government owes to its creditors, an accumulation of borrowing spanning generations. Understanding this monumental debt is crucial, as its trajectory carries profound implications for the nation's economy, its citizens, and its standing in the world.

The journey to a $37 trillion debt has been a long and complex one, marked by wars, economic crises, and fundamental shifts in fiscal policy. The consequences of this growing liability are far-reaching, influencing everything from interest rates on personal loans to the government's ability to fund essential services and respond to future emergencies. This article delves into the heart of the U.S. national debt, exploring its historical roots, its intricate components, the forces driving its growth, and the pressing question of what can be done to address this defining economic challenge of our time.

A Journey Through Time: The Historical Evolution of U.S. Debt

The concept of a national debt is not a recent phenomenon; it is as old as the United States itself. The nation was born in debt, with the first Treasury Secretary, Alexander Hamilton, arguing that assuming the states' Revolutionary War debts was a crucial step toward establishing the new federal government's creditworthiness. By 1791, the debts incurred during the war amounted to a significant $75.46 million.

Throughout its history, the U.S. public debt, when measured as a share of its economic output (Gross Domestic Product or GDP), has followed a discernible pattern: it has typically surged during times of war and economic recession, then receded during periods of peace and prosperity.

Early Years and the Civil War: For over four decades after its founding, the national debt grew, but in a remarkable turn of events, President Andrew Jackson's administration paid off the entire national debt in January 1835—the only time in U.S. history this has been accomplished. This debt-free status was short-lived, however, as the country soon began borrowing again. The American Civil War marked a dramatic escalation in government borrowing, with the debt soaring from a modest $65 million in 1860 to over $1 billion by 1863 and reaching $2.7 billion by the war's end. The World Wars and the Great Depression: The 20th century brought new, unprecedented challenges that reshaped the scale of federal borrowing. Involvement in World War I pushed the debt to around $22 billion. The economic devastation of the Great Depression in the 1930s further increased the debt as tax revenues fell and the government implemented social programs. By the time President Franklin D. Roosevelt took office in 1933, the public debt stood at nearly $20 billion, or 20% of GDP. But it was World War II that caused the most dramatic spike. To finance the war effort, the government's debt ballooned from $51 billion in 1940 to $260 billion after the war, reaching its highest point in American history relative to the economy. Post-War Prosperity and the Rise of Deficits: In the prosperous decades following World War II, the debt-to-GDP ratio steadily declined, hitting a post-war low of 24.6% in 1974. However, beginning in the mid-1970s, a new trend emerged. A combination of factors, including economic shifts and changes in the federal budget process, made deficits more common. The 1980s saw a sharp rise in public debt under President Ronald Reagan, who championed significant tax cuts and increased military spending. This combination led to the debt as a share of GDP increasing from 26.2% in 1980 to 40.9% in 1988.

A brief period of fiscal discipline and economic boom in the 1990s under President Bill Clinton, which included tax increases and decreased military spending, led to budget surpluses and a reduction in the debt held by the public. However, this trend reversed at the turn of the 21st century.

The 21st Century Surge: The last two decades have seen an explosive growth in the national debt. Key events and policies have acted as powerful accelerators:

The Wars in Iraq and Afghanistan: Following the September 11, 2001 attacks, the U.S. embarked on costly military campaigns that were largely financed through borrowing.
Tax Cuts: Significant tax cuts, particularly during the administration of George W. Bush, reduced government revenue.
The 2008 Great Recession: The severe financial crisis led to a sharp decline in tax receipts and a massive increase in government spending on stimulus programs and safety nets.
The COVID-19 Pandemic: The federal government's response to the pandemic involved trillions of dollars in economic relief and aid, causing an unprecedented surge in borrowing in a short period. From fiscal year 2019 to 2021, spending increased by about 50%, largely due to the pandemic response. The budget deficit in fiscal year 2020 reached 16% of GDP, the largest since 1945.

This combination of events has meant that since 2001, the U.S. government has spent nearly a trillion dollars or more than it receives in revenue each year, consistently adding to the national debt.

The Anatomy of the Debt: Public vs. Intragovernmental

To truly understand the national debt, it's essential to break it down into its two main components: debt held by the public and intragovernmental debt.

Debt Held by the Public: This is the portion of the national debt that the Treasury has borrowed from outside lenders through financial markets. It is held by individuals, corporations, state and local governments, the Federal Reserve, and foreign governments. Economists generally consider this the most meaningful measure of debt because it represents the amount the government has borrowed from external sources to finance its activities. As of late 2024, the debt held by the public stood at approximately $29 trillion. Intragovernmental Debt: This is essentially debt that the government owes to itself. It arises when there is a surplus in certain government trust funds, most notably Social Security and federal employee retirement funds. The Treasury borrows these surplus funds to pay for other government operations, and in return, issues special non-marketable Treasury securities to these trust funds. These securities represent an IOU from the Treasury, obligating it to repay the funds with interest in the future so that these programs can pay their beneficiaries. As of late 2024, intragovernmental debt was about $7 trillion.

The sum of these two components—debt held by the public and intragovernmental debt—makes up the total gross national debt.

How Does the Government Borrow Money?

When the federal government's spending exceeds its revenue, it runs a budget deficit. To cover this shortfall, the U.S. Department of the Treasury doesn't go to a bank for a loan in the traditional sense. Instead, it "issues debt" by selling a variety of securities. These securities are essentially loans made by investors to the U.S. government, with a promise of repayment with interest.

The primary instruments used for this borrowing are:

Treasury Bills (T-bills): These are short-term securities that mature in one year or less.
Treasury Notes (T-notes): These are medium-term securities with maturities ranging from two to ten years.
Treasury Bonds (T-bonds): These are long-term investments that mature in 20 or 30 years.
Treasury Inflation-Protected Securities (TIPS): The principal of these bonds adjusts with inflation, protecting investors from a decline in the purchasing power of their money.

These securities are sold to a wide range of buyers, including domestic and foreign investors, central banks, and other government entities. Because they are backed by the "full faith and credit" of the U.S. government, Treasury securities have long been considered one of the safest investments in the world. The process is managed by the Treasury's Bureau of the Fiscal Service, which handles the sale and repayment of these debts.

Who Owns the U.S. Debt? A Global Network of Creditors

A common misconception is that the majority of U.S. debt is owned by foreign countries like China. While foreign ownership is significant, the largest portion of the national debt is actually held by domestic entities within the United States.

As of late 2024, of the approximately $29 trillion in debt held by the public, more than two-thirds was owned by domestic creditors.

Domestic Holders:

The Federal Reserve: The U.S. central bank is one of the largest single holders of federal debt. It buys and sells Treasury securities as a primary tool of monetary policy to influence interest rates and the nation's money supply. The Fed's holdings increased substantially after the 2008 financial crisis and during the COVID-19 pandemic through a policy known as quantitative easing.
Private Investors: This broad category includes a diverse group of American citizens and institutions. It encompasses mutual funds, commercial banks, pension funds, insurance companies, and individual investors who hold Treasury securities as part of their savings and investment portfolios.
State and Local Governments: These entities also invest in U.S. debt, holding significant amounts of Treasury securities.

Foreign Holders:

Foreign ownership of U.S. debt has grown significantly over the past half-century. In 1970, foreign holdings accounted for just 5% of the debt held by the public; by late 2024, that figure had risen to 30%. Foreign investors, both government and private, are drawn to U.S. Treasury securities for their perceived safety and stability.

As of early 2025, the top foreign holders of U.S. debt include:

Japan: Holding over $1.1 trillion in U.S. Treasury securities.
The United Kingdom: Surpassing China to become the second-largest foreign holder.
China: Holding approximately $0.8 trillion. While still a major creditor, China's share of U.S. debt has been declining over the past decade.
The Cayman Islands and Canada: These countries also hold substantial amounts of U.S. debt.

It's important to note that a significant portion of foreign-held debt is owned by private investors, not just governments. In 2024, private foreign investors held about 56% of the foreign-owned debt, with foreign governments holding the remaining 44%.

Measuring the Burden: The Debt-to-GDP Ratio

Simply looking at the raw dollar amount of the national debt, while staggering, doesn't tell the whole story. To get a better sense of the debt's sustainability and its burden on the economy, economists use the debt-to-GDP ratio. This metric compares the total national debt to the country's annual economic output, or Gross Domestic Product (GDP).

A higher debt-to-GDP ratio generally indicates that a country might have more difficulty repaying its debts. The U.S. debt-to-GDP ratio surpassed 100% in 2013 and stood at approximately 124% in 2024. Historically, this ratio has peaked during major crises, such as World War II, before declining. However, the current trajectory is different. Projections from the Congressional Budget Office (CBO) indicate that, under current laws, the debt held by the public is set to rise from 99% of GDP in 2024 to 116% by 2034 and could reach as high as 172% of GDP by 2054.

The Engines of Debt: What's Driving the Growth?

The persistent rise of the national debt is not the result of a single cause but rather a complex interplay of long-term trends and short-term policy decisions. The primary drivers can be categorized as a structural mismatch between government spending and revenues.

1. Increased Government Spending:

Social Security and Medicare: These are the largest drivers of long-term spending growth. As the U.S. population ages, with a growing number of retirees eligible for benefits, the outlays for these mandatory programs are projected to significantly exceed their dedicated revenue streams. The Government Accountability Office (GAO) has projected that payouts for these programs will substantially outpace tax revenues over the next 75 years.
Rising Healthcare Costs: The cost of healthcare in the U.S. is the highest among wealthy nations and continues to climb, putting immense pressure on the budgets for federal health programs like Medicare and Medicaid.
Military Spending: While fluctuating, U.S. military spending remains a significant portion of the federal budget. The wars in the post-9/11 era were major contributors to debt accumulation.
Crisis Response: Emergency spending to combat economic downturns, such as the Great Recession and the COVID-19 pandemic, has led to massive, short-term spikes in borrowing.

2. Reduced Government Revenue:

Tax Cuts: Major legislative tax cuts, which reduce the amount of revenue the government collects, have been a significant factor in the growth of the debt over the past several decades.
Economic Downturns: During recessions, tax revenues naturally fall as individuals and corporations make less money, further widening the gap between spending and income.

3. Rising Interest Costs:

A critical, and self-reinforcing, driver of the debt is the interest paid on the existing debt. As the total debt grows, the amount the government must pay in interest also increases. In 2024, federal interest payments on the national debt surpassed spending on both Medicare and national defense. The CBO projects that net interest payments will more than triple over the coming decade, climbing from 1.3% of GDP in 2014 to a projected 3.0% of GDP in 2024. This creates a vicious cycle: the government must borrow more money just to pay the interest on the money it has already borrowed.

The Ripple Effect: Consequences of a High National Debt

A large and growing national debt poses several significant risks and challenges to the U.S. economy and its citizens.

Reduced Public and Private Investment: As the government borrows more, it competes for capital in the nation's financial markets. This can lead to higher interest rates, which "crowds out" private investment in productive assets like factories and technology. Lower investment, in turn, leads to slower economic growth and lower incomes over time. Furthermore, a growing portion of the federal budget must be dedicated to interest payments, leaving less money available for public investments in areas like infrastructure, education, and research.
Upward Pressure on Interest Rates and Inflation: A high national debt can push up interest rates across the economy. This affects consumers by making mortgages, car loans, and credit card debt more expensive. It also increases the government's own borrowing costs. If the government resorts to printing money to service its debt, it can lead to higher inflation, eroding the purchasing power of every American.
Reduced Fiscal Flexibility: A high level of debt restricts the government's ability to respond to future crises. If another major recession, pandemic, or war occurs, the government will have less fiscal space to enact stimulus or emergency spending measures without driving the debt to even more dangerous levels.
Risk of a Fiscal Crisis: While the U.S. is currently seen as a safe borrower, there is a risk that if the debt continues to grow unchecked, investors could lose confidence in the government's ability to repay its obligations. Such a crisis would cause interest rates to spike abruptly, potentially triggering a global financial meltdown and severe economic recession. It would also jeopardize the U.S. dollar's status as the world's reserve currency, which brings significant economic advantages.
Impact on Future Generations: The current borrowing is largely financing current consumption, passing the bill to future generations. They will be the ones to face the consequences, which could include higher taxes, lower government benefits, or a weaker economy.

The Debt Ceiling: A Political Flashpoint

A unique feature of the U.S. fiscal landscape is the debt ceiling. Created by Congress in 1917, it is a legal limit on the total amount of money the federal government can borrow. It is crucial to understand that raising the debt ceiling does not authorize new spending; it simply allows the government to borrow money to pay for obligations that Congress has already approved.

Since its creation, the debt ceiling has been raised or suspended numerous times—78 times since 1960 alone—to avoid a default on U.S. obligations. In recent decades, however, what was once a routine procedural vote has become a source of intense political brinkmanship. Showdowns over raising the debt ceiling have led to government shutdowns and have brought the nation dangerously close to a default, which would have catastrophic consequences for the U.S. and global economies. Some argue the debt ceiling is an ineffective and dangerous tool that should be abolished, while others see it as a necessary point of leverage to force conversations about fiscal responsibility.

The Path Forward: A Labyrinth of Difficult Choices

There is broad agreement among economists that the current trajectory of the U.S. national debt is unsustainable. However, there is fierce political disagreement on how to solve the problem. The debate generally revolves around two main levers: cutting spending and increasing revenue.

Cutting Spending: Proponents of this approach advocate for reducing government outlays. This could involve reforming major entitlement programs like Social Security and Medicare, which are the biggest long-term drivers of the debt, or cutting discretionary spending on defense and other government programs. These options are politically fraught, as they involve changes to popular programs that millions of Americans rely on.
Increasing Revenue: The other side of the equation involves raising taxes. This could take the form of increasing income tax rates, particularly for higher earners and corporations, closing tax loopholes, or implementing new forms of taxation. These proposals are also politically contentious, with opponents arguing they could stifle economic growth.

Most economists and budget experts agree that a sustainable solution will likely require a combination of both approaches. The Congressional Budget Office consistently highlights the structural mismatch between spending commitments and the revenue system's capacity to fund them. Addressing this mismatch will require difficult choices and political compromises that have so far proven elusive.

Conclusion: A Moment of Reckoning

The $37 trillion national debt is more than just a number; it is a barometer of the nation's fiscal health and a legacy that will be passed down to future generations. It is the product of a long history of policy choices, demographic shifts, and unforeseen crises. The path that led here was complex, and the path forward is equally challenging.

Ignoring the rising tide of debt is not a viable option. The consequences—from diminished economic opportunity and higher costs for families to a heightened risk of a severe fiscal crisis—are too significant. The debate over solutions is often polarized, but finding a sustainable fiscal path is a matter of national importance. It will require a frank conversation about priorities, a willingness to make difficult choices, and a commitment to ensuring the long-term economic stability of the United States. The $37 trillion question is not just for economists and politicians; it is a question that affects every American and will shape the nation's future for decades to come.