Research Highlights Article
September 11, 2026
The US debt-to-GDP ratio since 1946
A reexamination of how America shed its post-World War II debt.
Source: Nick Jene
As the United States emerged from World War II, the federal public debt surpassed 100 percent of GDP, but by 1974 that figure had fallen to 23 percent. A number of prominent economists have suggested that the economy expanded faster than the real interest rate on the debt until the wartime burden faded into irrelevance.
In a paper in the American Economic Journal: Macroeconomics, authors Julien Acalin* and Laurence Ball revisit this question and find that very little of America’s post–World War II debt burden was reduced through economic growth alone. Looking closely at the postwar data, they argue that the decline in debt resulted from historical contingencies rather than a natural economic tendency.
“There were some special tricks involved in that episode that are probably not going to be repeated, which means we probably shouldn't count on growing out of debt,” Ball told the AEA in an interview.
The authors identify three factors that are crucial for understanding America's debt dynamics in the twentieth century: the government’s primary surpluses—the United States paid off part of the World War II debt by imposing taxes greater than government spending—and two overlooked distortions.
The distortion effect is even bigger than the effect of the primary surpluses—it’s massive. Basically you took out about 40 percentage points of the debt-to-GDP ratio just through these distortions in interest rates.
Julien Acalin
The first distortion is the Federal Reserve's interest rate peg adopted in 1942, at the Treasury’s request, to contain the costs of financing the war. The peg capped yields on government bonds at low levels—ranging from 0.375 percent for Treasury bills to 2.5 percent for 30-year bonds—and lasted until the 1951 Fed–Treasury Accord.
The second distortion is surprise inflation. Most of the US government's debts are nominal—meaning that repayment is fixed in dollar terms regardless of what happens to prices. If prices in the overall economy rise more than creditors are expecting, then there is an erosion of the real value of debt.
To assess the impact of these distortions, the authors constructed counterfactual real interest rates, the rates that would have prevailed without the peg and without inflation surprises. For debt issued after 1951, they used surveys of one-year and ten-year inflation expectations, and then adjusted real interest rates as though investors had correctly foreseen future inflation. For debt issued under the peg, they assumed that the undistorted real rate matched the market rate observed in the decade after 1951.
Of the roughly 80 percentage point decline in the debt-to-GDP ratio from 1946 to 1974, primary surpluses accounted for about 30 points. Of the remainder attributed to the gap between interest rates and growth rates, only one quarter reflected the undistorted difference, and the other three quarters resulted from interest-rate distortions.
“The distortion effect is even bigger than the effect of the primary surpluses—it’s massive,” Acalin said. “Basically you took out about 40 percentage points of the debt-to-GDP ratio just through these distortions in interest rates.”
In the authors’ main counterfactual—which stripped out surpluses and distortions, leaving only the decline attributable to growth—debt fell to just 74 percent in 1974 rather than 23 percent, then drifted upward. Over the full 76 years of observations, the natural tendency to grow out of the debt reduced the debt-to-GDP ratio by 22 percentage points.
Debt-to-GDP counterfactuals
The chart below shows the path of the debt-to-GDP ratio in actual history (blue line) and three counterfactual scenarios: a counterfactual in which the primary surplus is set to zero (yellow dotted line), a counterfactual in which interest rate distortions are set to zero (yellow dashed line), and a combined counterfactual in which both are set to zero (solid red line).
The implications of these findings could be significant. The authors argue that these distortions rested on conditions that are unlikely to recur. The wartime peg was sustained in part by price controls, which suppressed inflation. Postwar inflation surprises brought down the debt-to-GDP ratio in part because the government had issued long maturity bonds, giving inflation years to erode their value. Today, however, the average maturity of the debt is far shorter, so any inflation surprises are quickly repriced as the government rolls over new short-term debt. And, finally, given the Federal Reserve's independence and commitment to low inflation, deliberate erosion is unlikely to occur.
With the interest rate and growth rate roughly balanced in recent years, and the Congressional Budget Office projecting persistent primary deficits, the mechanisms that reduced debt over the course of the twentieth century no longer seem applicable. The historical analogy, the authors conclude, is a poor guide to the present. Growth alone will not resolve a debt burden that now exceeds its postwar peak.
*Disclaimer: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board or its management.
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“Did the United States Really Grow Out of Its World War II Debt?” appears in the July 2026 issue of the American Economic Journal: Macroeconomics.