This essay is based on a decades-long joint project conducted by George Hall and Thomas J. Sargent.
Most Americans view bonds as a safe, straightforward investment. While this may be true, bonds are more than a financial instrument; they also constitute a unique body of evidence in the study of economic history. The manner in which bonds were designed and issued offers an important lens through which to understand the federal government’s policymaking, from the time of the Founding Fathers until today. We used the prices and quantities of bonds issued by the federal government to shed light on aspects of the fiscal and monetary history of the United States.
How the US Government Designs Bonds
From 1775 to 1920, the US Congress designed every bond issued by the US Treasury. For each bond, it specified details such as the date when the bond is to be paid back in full, the amount of interest to be paid, the face value of each bond, and provisions for early repayment by the federal government.
Congress also specified the currency in which interest and face value were promised to be repaid (e.g., gold or silver before the Civil War and “greenbacks”—the first national currency—afterward). Finally, Congress specified the total quantity of each bond that the Treasury was authorized to issue. It usually also specified which items it authorized the Treasury to purchase with the proceeds of bond sales.
Between 1775 and 1920, Congress designed more than two hundred distinct bonds. However, starting in 1920, Congress began delegating bond design to the Treasury.
A Decades-Long Investigation into US Bond History
One goal of our long-standing project is to compile a large dataset consisting of market prices, quantities, and contract features of every bond that the US government has issued since 1775.
When we began our work over fifteen years ago, such data were readily available only since 1920 or so. To begin, we assembled prices, quantities, and contract specifications from government documents and newspapers for every IOU the federal government issued between 1775 and 1960.
Because a government issues bonds when current tax revenues are not sufficiently large to pay for all current expenditures, most of the bonds in our dataset were issued to finance unanticipated temporary or permanent surges in government expenditures, occasionally associated with wars, occasionally with the arrival of opportunities for buying land or building infrastructure (Louisiana, Texas, parts of Mexico, Alaska, and the Panama Canal), or possibly to stop a run on the dollar.
Once we had collected this data, the next step was to interpret it. By examining all the features that Congress or the Treasury had carefully specified for each bond, we gained insights into the goals of and pressures upon the federal government at the juncture at which each bond was issued. In this manner, our idea was to ask specific bonds to “talk to us” and to tell us their “bond autobiographies.”
For example, on the advice of Secretary of Treasury Alexander Hamilton, the first US Congress designed three bonds it used to reschedule debt incurred by the Continental Congress and the Continental Army during the War for Independence. The funds raised by these bonds were also designated to pay the creditors of the thirteen original states, as state legislatures had also issued bonds to finance war expenditures. (The musical Hamilton notwithstanding, all domestic Continental creditors received substantial haircuts.)
What Do Bond “Autobiographies” Tell Us about the Development of US Fiscal and Monetary Policy?
To date, we have completed eight studies analyzing bonds issued during specific episodes in US history and identified the implications of these events on the development of US fiscal and monetary policy.
- In our 2011 paper, we discovered that the US Treasury does not measure the total government debt or the interest payments due in same manner as accountants, regulators, and macroeconomists such as Milton Friedman. This led us to construct our own measures of government debt and interest. In a nutshell, as researchers we have to “mark to market” the bonds to assess their true value.
- In our 2012 paper, examining the rescheduling presided over by Alexander Hamilton led us to interpret the US Constitution as a second American revolution, vis-à-vis the Articles of Confederation. Nationalists and a few Continental government creditors won, while others lost. A consequence of that outcome was that future US Congresses would find it easier to issue bonds on good terms.
- In our 2014 paper, we examined bonds issued during the War of 1812, the Mexican War, and the Civil War and focused on the contending views of Alexander Hamilton and James Madison as to which bondholders to favor when the time came for repayment. Another longstanding debate within policymaking circles concerned whether to grant paper money the status of a legal tender, which had different implications for monetary and fiscal policies when James Madison advocated for it in 1787 than when Ulysses S. Grant did the same in 1869. At play was how to build or poison the reputations of bonds and paper money in the United States.
- In our 2018 paper, we recounted the history of US debt limits and explained why the US Congress did not set an aggregate limit before 1940. The federal government did not need one before then, because when Congress designed each bond, it attached a limit to the amount of that bond that could be issued. This became impractical when it came time to finance World War I; thus, an aggregate debt limit was put into place.
- In our 2019 paper, we discussed how the United States’ shift from being an international net debtor before World War I to being an international net creditor during and after the war steered it away from George Washington’s advice in his Farewell Address to avoid international entanglements.
- In our 2021 paper about eight wars and two insurrections, we analyzed the bonds issued throughout these episodes to explain how Congress and the Treasury experimented, innovated, and gradually democratized bonds in order to help the United States borrow more easily and earlier in wars and other expenditure surges.
- In our 2022 paper on “three World Wars,” we noted that the state of US deficit and inflation in the wake of the federal government’s response to COVID-19 resembled the fiscal conditions following World Wars I and II. This raises the question of whether US creditors will eventually receive the poor returns that they received after the two world wars.
- In our 2024 paper, we utilized our dataset to construct yield curves for US federal bonds when the United States was on a gold standard for most of the period 1790–1933. Describing the role of gold as a “nominal anchor,” the paper shows President Ulysses S. Grant as a pivotal decider in making US debt “as good as gold”—at least until the “American default” of 1933, presided over by President Franklin Roosevelt.
Our dataset is publicly available online. We plan to continue “listening” and transcribing “bond autobiographies” in the process of completing a book on this topic.
View Sargent’s slide deck presentation here.
Thomas J. Sargent is the W.R. Berkley Professor of Economics and Business at New York University and a senior fellow at the Hoover Institution.
This essay is part of the Long-Run Prosperity Research Brief Series. Research briefs highlight research that enhances our understanding of the factors that drive long-run economic growth and examine its policy implications.
