The United States, from its beginning in 1790 to the present, has been free of a national debt for only two years, 1834 and 1835. The national debt has grown from $75.5 million in 1790 to $5.8 trillion in 2008. The history of the U.S. national debt as a percent of gross domestic product (GDP) since 1940 is shown in Figure 1 . The national debt reached a high of 108.6% of GDP in 1946. It then began a long decline, reaching a low of 32.5% in 1981. The large budget deficits of the 1980s and 1990s reversed this trend and pushed the percentage to another high of 49.5% in 1993. The federal budget surpluses from FY1998 to FY2001 were used to retire a portion of the publicly held national debt. Between FY1997 and FY2001, the publicly held portion of the debt declined by more than $400 billion. Since FY2002, a return to budget deficits has caused the debt to grow again. When evaluating the burden of the national debt, the gross debt must first be divided into two parts: debt held by the public (including the Federal Reserve), shown in Figure 1 , and the amount held in accounts called federal trust funds, the principal one being for social security. Because trust fund debt is owed to one part of the government to another, it has no effect on the economy, and does not impose any burden. Thus, it will be neglected in the discussion below. The publicly held debt is often subdivided into that portion that is domestically owned and that portion owned by foreigners. U.S. Treasury securities have become increasingly popular among foreigners. At the end of FY2009, more than half of the privately held federal debt (which excludes debt held in government trust funds and by the Federal Reserve) was owned by foreigners. The need to finance wars has been the major reason for the growth of a national debt. In common with other major countries, the United States has rarely financed the surge in wartime expenditures exclusively by raising taxes. A large part of wartime expenditures have been bond financed. During the Civil War, from mid-1861 to mid-1865, the national debt grew from about $65 million to $2.7 billion. Between mid-1916 and mid-1919, the increased debt associated with World War I, grew from $1.2 billion to $25.5 billion. And from mid-1941 to mid-1946, the debt associated with World War II, rose from $49 billion to $269 billion. Thus, it has been a common practice of American public finance to increase the national debt during wartime and then reduce the debt, at least as a percentage of GDP, during times of peace. This pattern was broken during the 1980s and early 1990s when the national debt grew both absolutely and relative to GDP. Recently debt has again grown in wartime; however, the recent increase in the debt has greatly exceeded the cost of the war. Growth of the national debt has also occurred during periods of economic contraction. Is a national debt a burden on a country? If it is, what is the nature of the burden? Who bears this burden? Questions such as these have perplexed economists at least since the days of Adam Smith. Great Britain in his day had accumulated a large national debt fighting the Seven Years War (the French and Indian War) and was about to add a further considerable sum suppressing the rebellion in its American colonies. Interestingly, mainstream macroeconomics views the burden of a national debt, not in terms of the debt per se, but in terms of government budget deficits that are the cause of the debt and its growth. Thus, the burden that a national debt imposes on a country is due to the government's budget deficits. To see clearly the nature of this burden and who bears it, assume that the country's resources are fully employed and that capital (or saving) cannot flow internationally between countries. Also assume that this country now engages in a war with a neighbor and that the increased expenditures associated with the war lead to a budget deficit that is financed by issuing bonds. The increase in government expenditures increases aggregate demand. In a fully employed economy, in addition to raising prices, the increase in demand will lead to a rise in interest rates. The increase in interest rates is the means by which the government obtains the additional resources to fight the war for the increase will discourage interest-sensitive spending by the private sector. This is primarily business spending for capital goods such as plant, equipment, and structures and spending by households for homes, automobiles, appliances and the like. Thus, the budget deficit "crowds out" private capital and the burden of the growing national debt represented by the bonds issued to finance the war, is the decrease in the private capital stock of the country. The level of output is determined by the capital stock, labor force, and productivity levels. Since the private capital stock inherited by future generations will be smaller, it implies that the level of output enjoyed by them will be lower. The lower level of output is thus the ultimate burden of the debt and it is a burden that is largely shifted forwarded to future generations. It might be thought that a high degree of international capital mobility could moderate the burden of the debt because foreign saving could supplement domestic resources such that the private capital stock need not diminish. Suppose, for example, that as interest rates tended to rise in response to the increased expenditures, foreign capital (or foreign saving) was attracted in sufficient volume to keep domestic interest rates from rising. This would keep the domestic capital stock unchanged. Would this mean that there was no burden from a national debt? Unfortunately, this is not the case. Although it is true that the private capital stock inherited by future generations will remain unchanged, a portion of it will now be owned by foreigners. And the rewards from that capital will not flow to Americans, but will have to be transferred abroad. Thus, having foreigners supply some or all of the resources for the war effort, as in this example, does not avoid the burden of the debt. Future generations will still have a lower level of income available to them. In the preceding discussion, the budget deficit was financed by issuing interest-bearing debt or bonds. The government, however, has available another means for financing its budget deficit. Rather than borrowing the wherewithal it could simply print money (currency) and pay its bills. Might not this method of finance reduce or eliminate the burden the national debt places on future generations? Although the simple answer is basically yes, the explanation is more complicated. Financing a budget deficit in a fully employed economy by issuing money is inflationary. And inflation is a form of taxation. It is tax on the existing stock of money held by the public in the sense that it reduces the purchasing power of that money. It is by reducing the wealth and purchasing power of the private sector that inflation enables the government to obtain the additional resources to finance the war. Inflation (taxation) thus crowds out private spending, some of which may be spending on capital goods. The majority of that spending, however, is likely to be on current consumption. Because it is, the burden of these additional government expenditures, used in the example above, are almost exclusively borne by the current generation. The private capital stock inherited by future generations is unlikely to be diminished and, hence, they will not suffer much of a decrease in their standard of living. Thus, financing a budget deficit by substituting non-interest-bearing debt (money) for interest-bearing debt (bonds) does not eliminate the burden of the debt; it largely shifts the main burden from future generations to the present generation. The preceding analysis is framed in terms of a fully employed economy that experiences an increase in aggregate demand due to an increase in government expenditures. This increase in demand requires an increase in real interest rates to decrease or crowd out private sector spending. Yet there are circumstances under which a government budget deficit can arise or increase with little or no crowding out. Suppose, for example, that the United States economy is, as it is now, in a recession and either expenditures are increased or taxes cut in an effort to "jump start" an expansion. It is possible in these circumstances for a budget deficit to grow without increasing interest rates. The reason being that the increase in income generated by the increase in demand generates additional saving for financing the deficit. The additional resources represented by the saving make it possible to maintain an undiminished private capital stock in the face of a rising budget deficit. Thus, debt issued during a recession imposes a smaller burden than an equivalent amount issued during an economic expansion; if the recession is serious enough the burden is negligible. The accumulation of a national debt means that the government budget will contain as an expenditure item the interest payable on that debt. Does this impose a burden on future generations whose taxes will be used for debt service? In the traditional view, the answer depends on whether the debt is internally or externally held. For an internally held debt, the payment of interest is an income transfer from taxpayer to bond holder. In the simple case, if they are the same person, they are left neither poorer nor richer. If they are not the same person, then while the taxpayer is left with less income, the bond owner has a larger income. As a group, however, they are neither richer nor poorer by the payment of interest. The payment of interest is not an additional burden of an internally held debt. That burden, as noted above, is the lower level of output (income) enjoyed by future generations who inherit a reduced private capital stock. When the national debt is externally held, the payment of interest abroad is a transfer of income from Americans to foreigners. This is not a separate burden from the national debt, however. As noted above, when a national debt is sold abroad, the private capital stock passed on to future generations need not be diminished.