Debt and Taxes in Eight U.S. Wars and Two Insurrections
From decompositions of U.S. federal fiscal accounts from 1790 to 1988, we describe differences and patterns in how expenditure surges were financed during 8 wars between 1812 and 1975. We also study two insurrections. We use two benchmark theories of optimal taxation and borrowing to frame a narrative of how government decision makers reasoned and learned about how to manage a common set of forces that bedeviled them during all of the wars, forces that included interest rate risks, unknown durations of expenditure surges, government creditors' debt dilution fears, and temptations to use changes in units of account and inflation to restructure debts. Ex post real rates of return on government securities are a big part of our story.
This paper was prepared for the Handbook of Historical Economics edited by Alberto Bisin and Giovanni Federico. We thank William Berkley for supporting our research. Hall thanks the Theodore and Jane Norman Fund for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.