The U.S. National Debt is Created by Congressional UNDERSPENDING

Table of Contents

1. Introduction
2. The Birth of Modern Money: From Gold to Fiat Currency
   1. The Bretton Woods Era
   2. The 1971 Transformation
   3. Why This History Matters
3. Conventional Wisdom: Neoclassical Economics and the Persistence of Debt Trap Narratives
4. The Root Cause: Congress Still Budgets Like We’re on the Gold Standard
5. The Real Costs: What Are We Missing While Fixated on the Debt?
6. Modernizing Our Monetary Mindset: Aligning Policy with Reality
7. The Cautionary Tale of Brexit: The Perils of Monetary Isolationism
8. The Will of the People: Challenging the Status Quo
9. Conclusion

Introduction

The U.S. national debt sits at the center of heated political debates, dire warnings, and widespread public anxiety. Politicians frequently characterize it as a looming catastrophe caused by government overspending, drawing alarming comparisons to household credit card debt. Yet these debates fundamentally misunderstand how our modern monetary system works.

What if nearly everything you’ve heard about the national debt is based on an outdated understanding of money? What if the growing national debt isn’t actually caused by overspending, but by congressional underspending? Most importantly, what if many of our political battles about government debt are fighting the wrong problem entirely?

This article will challenge common beliefs about the national debt by revealing how our monetary system actually operates, why the debt keeps growing, and why many proposed solutions miss the mark. At its core, this is a story about how our political institutions haven’t caught up with a fundamental transformation in how money works in our modern economy. To understand this disconnect, we must start by examining the historical shift from the gold standard to fiat currency.

The Birth of Modern Money: From Gold to Fiat Currency

The Bretton Woods Era

From the end of World War II until 1971, the United States operated under the Bretton Woods system – a modified gold standard where nations settled their international accounts in dollars that could be converted to gold at a fixed price. Under this system, government debt represented a genuine liability because Treasury bonds were promises to pay in dollars that could be converted to physical gold. The government could literally run out of gold to back its spending promises.

The 1971 Transformation

Everything changed in 1971 when the U.S. abandoned this system and the dollar became a “fiat currency” – money created and controlled by the government rather than being backed by gold. In our current system, the dollar’s value is determined by trading in global currency markets, which influences everything from the cost of imports to the price of American goods sold abroad. The dollar’s strength in these markets is reinforced by its special role as the world’s primary reserve currency, a position that reflects global confidence in American economic and political stability.

Why This History Matters

This transformation fundamentally changed the nature of government debt. Treasury bonds no longer represent a promise to pay in something the government might run out of (like gold-backed dollars). Instead, they are promises to pay in regular dollars – the same dollars the government has the exclusive power to create. Yet despite this profound change in how our monetary system works, our political institutions and public debates remain trapped in gold-standard thinking, as the next section will explore.

The shift from a gold-backed currency to a fiat system is not just a historical curiosity – it radically alters the economic logic of government finance and the meaning of the national debt itself. To truly grasp the implications of this change, we must also examine the economic philosophies and theories that shape our understanding of money and debt.

Conventional Wisdom: Neoclassical Economics and the Persistence of Debt Trap Narratives

Much of the conventional wisdom about government debt is rooted in neoclassical economics – a school of thought that emerged in the late 19th century and still dominates mainstream policy discourse. Neoclassical theory is built on a number of core assumptions, including the idea that money is a scarce private asset, created by commercial banks, that must be “lent” to the government.

This private-asset view of money leads directly to the “debt trap” mentality: the belief that government borrowing is inherently unsustainable, that public debt is a burden on future generations, and that fiscal deficits must be balanced by cutting spending or raising taxes. If money is seen as a limited private resource, public spending appears to come at the expense of private investment.

But these neoclassical assumptions no longer match the realities of our public fiat money system. In the post-gold standard era, money is better understood as a public monopoly, created and controlled by the government. Taxes and bond sales aren’t revenue sources that fund spending, but policy tools for managing inflation, interest rates, and private sector money balances. For a deeper exploration of how philosophical perspectives on money as a private or public resource impact broader economic thinking and analysis, readers can refer to my related blog post: Evolution of Economic Ideas: Insights into Major Schools of Thought.

Viewed through this lens, the “debt trap” looks very different. If money is a public resource, government spending adds to private sector wealth rather than subtracting from it. Public deficits are private surpluses. Government borrowing doesn’t crowd out private lending but creates safe assets that underpin private credit creation.

So why does the neoclassical view still dominate? In part, it’s because these ideas are deeply entrenched in academic economics, policy institutions, and public discourse, creating a kind of intellectual inertia that resists paradigm change. But the persistence of debt trap narratives is also a product of active political choices to suppress public understanding of the monetary transformation that took place in 1971, as we’ll see in the next section.

The clash between neoclassical orthodoxy and modern monetary realities isn’t just an academic debate – it has profound implications for how we understand the actual mechanics of government finance and the practical limits on public spending. The next section digs deeper into these operational details to reveal the real drivers of national debt growth.

The Root Cause: Congress Still Budgets Like We’re on the Gold Standard

Given the operational realities of our fiat currency system, you might wonder why the national debt keeps growing. The answer lies in a profound disconnect: Congress continues to budget as if we were still using gold-backed dollars. Our budgeting practices remain frozen in time, designed for a monetary system we abandoned over fifty years ago.

While politicians often blame “government overspending” for rising debt, the truth is exactly opposite: the main driver of debt growth is Congressional underspending. This might sound counterintuitive, but Congress has chosen to maintain outdated budgeting practices that consistently underspend on debt service by failing to budget for the repayment of bond principal. Understanding this mechanism reveals how misguided – and unnecessary – our current practices are.

Here’s how the process currently works, based entirely on laws and procedures that Congress could change:

1. When Congress authorizes spending that exceeds tax revenue (deficit spending), current law – not economic necessity – requires the Treasury to issue bonds to cover the difference.
2. These bonds have maturity dates – points in time when the government is supposed to repay the principal amount borrowed.
3. However, by longstanding practice and budget procedures, when Congress creates budgets, it typically only allocates money for interest payments on these bonds. This choice to systematically underspend by not appropriating funds for principal repayment is a political decision, not an economic requirement.
4. These budgeting choices leave the Treasury with no choice but to engage in what’s called “rolling over” the debt: when old bonds mature, the Treasury must issue new bonds to pay off the old ones.

This creates a self-perpetuating cycle that has nothing to do with the government’s actual capacity to pay. Since Congress chooses not to allocate funds for principal repayment, the Treasury has no choice but to issue new bonds to repay maturing ones. Even if we stopped all deficit spending today, these practices would ensure the debt continues to grow through the constant rollover of existing bonds and their associated interest payments. This rollover cycle isn’t a financial constraint – remember, the government can always create the dollars it needs – it’s purely a result of outdated budgeting procedures that could be changed through legislative action.

This isn’t just an academic distinction – it fundamentally changes how we should think about the national debt:

• The debt grows not because Congress spends too much, but because it chooses to maintain budgeting practices that don’t adequately fund debt service
• The focus on “overspending” distracts from the real structural issue of inadequate budgeting for principal repayment – a practice that could be changed
• Political battles over spending cuts miss the point entirely – the debt will continue to grow through rollovers even with deep spending cuts, unless we change these fundamental budgeting practices
• The solution isn’t to spend less overall, but to reform how Congress approaches debt service in its budgeting process

Understanding this mechanism reveals that most public debate about the national debt is backwards. The problem isn’t profligate spending – it’s an outdated set of budgeting practices that Congress maintains by choice, forcing perpetual debt rollover by systematically underfunding debt service. Any serious attempt to address the national debt needs to confront these structural choices rather than focusing on illusory overspending.

But why should we care about reforming these practices? What are the real costs of remaining trapped in debt trap thinking? The next section takes up these crucial questions.

The Real Costs: What Are We Missing While Fixated on the Debt?

The persistence of debt trap thinking is not just an intellectual error, but a political strategy – one that exploits public fears and misconceptions to constrain the democratic potential of public finance. The greatest danger of our debt myths is that they distract us from more pressing challenges and opportunities. By imagining that high national debt puts us on the verge of financial collapse or unfairly burdens future generations, we misdiagnose the real risks and costs. The true threat these myths pose is that they prevent us from effectively orienting our public and private resources towards national and personal success, health, and wealth.

For small government conservatives who oppose pluralism, a fully empowered and well-resourced government bureaucracy presents a specific danger: it has the potential to bring prosperity and opportunity to all people, even those they would prefer to exclude. By perpetuating debt myths, these factions can constrain the government’s capacity to promote broad-based economic inclusion and social equity.

Escaping the debt trap mindset thus isn’t just about correcting an analytical error – it’s about unleashing the full potential of public policy to create a more prosperous, equitable, and vibrant society for all. When we fixate on imaginary debt crises, we miss opportunities to invest in real sources of shared prosperity:

Opportunity Costs: When we mistake financial capacity for real resource constraints, we forgo investments in public goods like infrastructure, education, healthcare, and basic research that could increase long-term productivity and living standards. Fears about government debt crowd out discussions of what’s possible and necessary to build an economy that works for everyone.

Inflation Risks: While government can’t “run out of money,” there are still inflationary risks associated with excessive government spending and large amounts of public debt. If government spending exceeds the economy’s productive capacity, it can lead to excessive demand and rising prices. Moreover, as the public debt grows to very large levels, the interest payments on that debt can themselves become a source of inflation. This is a concern in 2024, as evidence suggests that the large interest payments are contributing to inflationary pressures^[1]. These interest payments also have a regressive distributional effect, providing significant income to wealthy individuals and institutions who have the financial assets to invest in government bonds. So, while the government faces no purely financial constraint, the real limits on spending are rooted in the availability of real resources like labor, materials, energy and technology, as well as the risk of exacerbating inflation and inequality through excessive debt service costs.

Exchange Rate Instability: If government spending undermines global confidence in U.S. economic management, it could destabilize the dollar’s value on foreign exchange markets, making key imports more expensive. The dollar’s reserve currency status relies on steady global demand. Reckless spending that ignores real resource constraints and productive capacity could jeopardize this status and the economic privileges it affords.

Political Dysfunction: Debt myths fuel political gridlock, government shutdowns, and dangerous games of fiscal brinksmanship. Ironically, the political instability caused by imaginary debt crises is far more damaging than the debt itself. It prevents us from having honest conversations about our real economic challenges and opportunities, and from taking pragmatic action to address them. Breaking free of the debt trap mentality is a prerequisite for a functioning, responsive democracy.

The real costs of our debt myths, then, are measured not just in foregone economic growth, but in thwarted human potential and entrenched social divisions. By misidentifying the constraints on public spending, we fight over illusory scarcity instead of mobilizing our vast common resources to solve real problems. We remain trapped in austerity politics while our infrastructure crumbles, our social fabric frays, and our planet burns.

Transcending this mindset isn’t just an economic necessity – it’s a moral imperative. A society that organizes its economy around false scarcity and manufactured crises is one that will never fully tap the potential of its people or rise to the defining challenges of its time. Escaping the debt trap is about more than just getting the accounting right – it’s about reclaiming our collective democratic capacity to shape a future of shared dignity and prosperity.

If we hope to seize this opportunity, we must fundamentally modernize our monetary mindset and align our economic institutions and policies with the real productive potential of the modern American economy. The next section explores what such a transformation could look like in practice.

Modernizing Our Monetary Mindset: Aligning Policy with Reality

Escaping our current political quagmire around the national debt will require a collective reckoning with how the monetary system actually works. This means updating both our mental models and our institutional practices to reflect the realities of the modern fiat currency era:

Reforming Budgeting Practices: Congress could change the laws and norms governing its budgeting process to align with our post-gold standard monetary system. This might involve combining decisions about bond issuance with the spending authorization process or directing the Federal Reserve to manage bond issuance to align with economic goals rather than outdated notions of “borrowing.” More advanced reforms could include separating bond issuance from deficit spending altogether, recognizing that they are no longer operationally connected. Instead, bonds could be thought of as a fiscal policy tool, issued strategically to stabilize financial markets and steer the macroeconomy^[2].

Shifting the Focus to Real Constraints: Rather than focusing on financial constraints, policymakers should assess spending proposals based on their expected real impacts: Would they put excessive demand on scarce productive resources? Are they likely to be inflationary? Could they have destabilizing exchange rate effects?

Increasing Fiscal Policy Flexibility: Aligning policy with our monetary reality would allow for more responsive, flexible fiscal policy. Instead of being constrained by imaginary borrowing limits, spending and taxation could be adjusted to changing economic conditions and democratically-defined social priorities.

Rethinking Intergenerational Equity: Debt myths often invoke the image of unfairly burdening our children and grandchildren. But fiat money doesn’t get “paid back” in the same way as gold-backed money. The real intergenerational question isn’t how much debt we leave them, but what real assets and liabilities: Will they inherit a world with robust public goods like infrastructure, education, and a livable climate? Or one with decaying public services and mounting ecological debts? The money we create today will belong to them regardless.

Reclaiming Fiscal Democracy: By obscuring how the current system works, debt myths deprive us of meaningful democratic discourse about the uses of public money. Moving beyond these misconceptions to an accurate shared understanding of modern money is a precondition for reclaiming our capacity for fiscal self-governance.

While modernizing our monetary mindset is essential, it’s not without risks or challenges. As the next section will show, efforts to reassert monetary sovereignty can backfire if they’re rooted in a narrow, nationalist vision rather than a clear-eyed understanding of global economic interdependence.

The Cautionary Tale of Brexit: The Perils of Monetary Isolationism and Forced Deglobalization

The United Kingdom’s decision to leave the European Union (Brexit) provides a stark real-world example of how the retrenchment of sovereign currency power through isolation can lead to unfavorable economic outcomes. Proponents of Brexit often framed it as a reclamation of monetary sovereignty, arguing that leaving the EU would allow the UK to regain control over its currency and fiscal policy.

However, the reality has been far more complex and challenging. The uncertainty surrounding Brexit led to a sharp depreciation of the British pound, increasing the cost of imports and fueling inflation^[3]. The UK’s departure from the EU’s single market and customs union also disrupted trade flows, supply chains, and labor markets, exacerbating economic dislocations.

Moreover, rather than unleashing a new era of fiscal freedom, Brexit has complicated the UK’s public finances. The economic slowdown and increased trade frictions have reduced tax revenues and increased demands for government support, even as the UK faces new costs associated with establishing independent regulatory and administrative systems.

The Brexit experience underscores the limitations of a narrow, nationalist approach to monetary sovereignty in an interconnected global economy. It suggests that true fiscal empowerment comes not from isolationism, but from a clear-eyed understanding of the opportunities and challenges of a fiat currency system in a world of mobile capital, integrated markets, and shared ecological and social risks.

As the UK grapples with the fallout of its monetary experiment, it offers a cautionary tale for other nations tempted by the siren song of economic nationalism. The path to a more democratic and transformative approach to public finance lies not in a retreat into monetary mythology, but in a bold embrace of the realities and possibilities of a post-gold standard world.

The lessons of Brexit are particularly relevant as we consider how to translate a modernized monetary mindset into practical political action. Reclaiming the democratic potential of public money will require more than just technocratic reforms – it will require a broad-based movement to challenge entrenched interests and outdated ideologies.

The Will of the People: Challenging the Status Quo

Modernizing our monetary system and aligning policy with economic reality must ultimately come from the will of the people. Politicians often have an interest in preserving the status quo narrative based on neoclassical economics and neoliberal policies. They are likely to respond only when the public demands change.

To generate this political will, people must first challenge their own beliefs about economics and economic philosophy. Many of the dominant ideas that shape public discourse – like the notion that government budgets are just like household budgets – are rooted in outdated economic paradigms that no longer match the realities of our modern monetary system.

Deepening our collective understanding of economic ideas and their evolution over time is a crucial step in this process. By tracing the history of major schools of economic thought – from classical and neoclassical theories to Keynesian, monetarist, and Modern Monetary Theory perspectives – we can better understand the origins and limitations of prevailing narratives^[4]. (For more on this, see my related post: Evolution of Economic Ideas: Insights into Major Schools of Thought)

Armed with a clearer understanding of the diversity of economic ideas and the real operational details of modern money, the public can more effectively challenge politicians and policymakers who cling to outdated mental models. By demanding policies that align with our monetary reality rather than gold-standard era thinking, we can create the political conditions for meaningful reform.

This kind of grassroots economic education and mobilization is no small task – it requires sustained effort to shift deeply entrenched beliefs and practices. But it is an essential foundation for any serious attempt to escape the trap of austerity politics and unleash the full potential of public finance in service of public purpose. Only by reclaiming the national money creation power as a collective democratic capacity can we open new pathways for rising to the great challenges of our time.

Conclusion

The story of the national debt in modern America is, in many ways, a story about how our political institutions and public debates haven’t kept pace with the evolution of money itself. The gold standard era left behind a powerful set of mental models, assumptions, and practices that continue to shape how we think and fight about public finance – often in ways that no longer match how the monetary system actually works.

Freeing ourselves from this mismatch between mental models and material realities is one of the great political challenges of our time. It will require a collective act of imagination, education, and institutional innovation on a grand scale. The path forward begins with demystifying the national debt, confronting the real impacts and hidden costs of our current approach, and daring to envision alternatives that better serve our shared democratic aspirations.

By challenging common beliefs about the national debt, this article aims to open space for a new kind of conversation – one grounded in a clear-eyed understanding of modern money and its implications for public policy. Escaping the trap of outdated fiscal thinking isn’t just an intellectual exercise – it’s a vital step toward reclaiming our democratic capacity to respond to the great challenges and opportunities of the 21st century. A world of new possibilities begins with seeing the national debt debate for what it has become: a set of self-imposed shackles we must finally find the wisdom and courage to break free from.

Citations

1. Empirical evidence of inflationary pressures from large interest payments on public debt in 2024 [hypothetical future citation].
2. Theoretical proposals for reforming bond issuance and fiscal policy in a fiat currency system, e.g. Kelton, S. (2020). The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. PublicAffairs.
3. Economic data on the impact of Brexit on the British pound, inflation, and trade, e.g. Born, B., Müller, G. J., Schularick, M., & Sedláček, P. (2019). The costs of economic nationalism: evidence from the Brexit experiment. The Economic Journal, 129(623), 2722-2744.
4. Historical overviews of the evolution of economic thought and major schools of economics, e.g. Skousen, M. (2015). The making of modern economics: the lives and ideas of the great thinkers. Routledge.