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

This paper examines the effects of primary budget surpluses, surprise inflation, and pegged interest rates before the Fed-Treasury Accord of 1951 on the US public debt/GDP ratio. We find that with the primary budget balance and without distortions in real interest rates caused by surprise inflation and the pre-Accord peg, debt/GDP would have declined only from 106 percent in 1946 to 74 percent in 1974, not to 23 percent as in actual history. Our findings imply that, over the last 76 years, only a small amount of debt reduction has been achieved through growth rates that exceed undistorted interest rates. (JEL E23, E31, E43, E65, H61, H63, N12)