Did the United States Really Grow Out of Its World War II Debt?

Thu, 01 Jan 2026 00:00:00 +0000

Research question and motivation. The fall in the US federal debt-held-by-the-public/GDP ratio from a postwar peak of 106% in fiscal year 1946 to a trough of 23% in 1974 is widely cited (Elmendorf-Mankiw, Krugman) as evidence that an economy “grows out of” debt because the GDP growth rate exceeds the interest rate on government debt (r < g). That narrative underpins the modern view (Blanchard 2019; Furman-Summers 2020) that high public debt “may have no fiscal cost.” Acalin and Ball ask how much of the postwar debt decline was genuinely due to growth exceeding undistorted real interest rates, versus three other factors: primary budget surpluses, the Fed’s 1942-1951 interest-rate peg before the Fed-Treasury Accord, and surprise inflation.

Julien Acalin | Macro Paper Warehouse

Did the United States Really Grow Out of Its World War II Debt?