How Much Debt Is Too Much? What History Shows

A nation burdened by an excessive amount of public debt can face serious challenges over the long run. But how much is excessive? In this blog post, I’ll discuss what history might show us about a nation’s ability to sustain relatively high levels of indebtedness.

Relative Debt Levels in the U.S. and U.K.

The figure below shows public debt relative to gross domestic product in both the U.S. and the United Kingdom.

The figure is interesting because of the time span for which we have British data. The Bank of England put this data set together, and it should not be surprising that data pertaining to the British Empire are available for long periods of time. There are, of course, many difficulties in putting together time series going back 300 years, and the interested reader should explore the Bank of England’s presentation of its data set. (See additional information from FRED.) In terms of this particular U.S. time series, the data end in 2019, so the impact of pandemic-induced borrowing hasn’t yet appeared.

Debt-to-GDP and Wars

The figure lends a historical perspective to the discussion about the size of public debt. A first observation is that for both the U.S. and the U.K., the end of World War II was a time of high debt-to-GDP ratio. The differences in the ratios were remarkable, though. In 1946, public debt in the U.S. amounted to about 120% of GDP. In the U.K., it was 260%.

A second observation is that the debt-to-GDP ratio has been high (relative to nowadays) in the U.K. before. The 18th century was a period of remarkable growth in the debt-to-GDP ratio, from less than 20% of GDP to almost 200% in the early 1820s. In a working paper, economists Jaume Ventura and Hans-Joachim Voth noted that during this period of expansion of the British Empire, the U.K. was at war for 2 out of every 3 years. Most of these wars were fought abroad.

The development of the Royal Navy as a key instrument of military power was expensive, yet the U.K. outspent the rest of the world in that respect: In 1815, at the end of the Napoleonic wars, it had 126 ships of the line (a type of warship that dominated naval warfare from the 17th to the 19th century) while the combined fleets of France, Spain, Denmark, the Netherlands and Russia totaled 89.Rodger, N.A.M. The Command of the Ocean: A Naval History of Britain, 1649-1815. Penguin, 2006.

Debt-to-GDP and the Industrial Revolution

A third observation is as follows: Consider the maximum debt-to-GDP reached by the U.S. at the end of WW II: 120%—which, it should be noted, is close to the current debt-to-GDP. In the U.K., the 120% threshold was first crossed in the 1780s, and the debt-to-GDP ratio remained above 120% until the 1850s. This period is well known to historians because it is often viewed as the period of the Industrial Revolution. (Ventura and Voth date the classic period of the British Industrial Revolution from 1760 to 1850.)

Therefore, if history is any guide, it cannot be asserted that rising (before the 1780s) or high (from the 1780s to 1850) debt-to-GDP ratio prevented economic growth in the U.K. One can ask whether the Industrial Revolution was hampered or facilitated by public debt, but such question is far beyond the scope of this blog post.

Debt-to-GDP and Servicing the Debt

How costly was it for the British government to service this debt—that is, to pay the interest associated with the debt? The next figure shows the yield on “consols,” which are long-term bonds issued by the British government.

It is interesting to note that at the peaks of the debt-to-GDP ratios (the end of the Napoleonic wars and the end of WW II), the British government did not need to offer abnormally large yields to attract lenders. In other words, investors did not assess that the debt of the British government was so high as to create a default risk that they would accept only if compensated with higher yields. David Andolfatto’s article in the Regional Economist, “Does the National Debt Matter?,” discusses the issue of debt sustainability here.

Questions about public debt, its role and its magnitude, are pervasive in both public and academic discussions. Knowledge of how public debt relates to other variables of interest such as growth should be part of the background knowledge for these discussions.

Notes and References

1. Rodger, N.A.M. The Command of the Ocean: A Naval History of Britain, 1649-1815. Penguin, 2006.