## Did the U.S. Really Grow Out of Its World War II Debt?

_IMF Working Papers, January 12, 2024_

## Source details

**Canonical URL:** [Did the U.S. Really Grow Out of Its World War II Debt?](https://www.imf.org/en/publications/wp/issues/2024/01/12/did-the-u-s-542865)

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## Bibliographic details
- Authors: Julien Acalin, Laurence M. Ball
- Published: January 12, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400262999.001

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### Central findings
- The U.S. public debt/GDP ratio fell from 106% in 1946 to 23% in 1974 in actual history.
- The paper examines three factors that contributed to that decline in addition to high rates of economic growth:
  - primary budget surpluses,
  - surprise inflation,
  - pegged interest rates before the Fed-Treasury Accord of 1951.
- Central simulation result (counterfactual): with primary budget balance and without the distortions in real interest rates caused by surprise inflation and the pre-Accord peg, debt/GDP declines only to 74% in 1974, not 23% as in actual history.
- In that counterfactual, the debt/GDP ratio starts rising again in 1980 and in 2022 it is 84%.
- Interpretation: over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates.

### Methodology and scenarios analyzed
- Construction of a counterfactual simulation of the path of the debt/GDP ratio that:
  - imposes a primary budget balance,
  - removes distortions in real interest rates arising from surprise inflation and the pre-Accord peg.
- Comparison between actual history and the counterfactual highlights the quantitative importance of non-growth factors (fiscal surpluses, surprise inflation, financial repression via pegged rates) in reducing the public debt/GDP ratio after World War II.

### Policy-relevant implications
- Large observed post-war decline in debt/GDP cannot be attributed primarily to growth exceeding undistorted interest rates.
- Surprise inflation and pegged nominal interest rates (financial repression) played major roles in reducing real debt burdens.
- Achieving similar debt reductions today would likely require policies affecting primary balances, inflation expectations, or nominal interest-setting regimes rather than relying on growth alone.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2024/01/12/did-the-u-s-542865_