What Can America's First 250 Years Teach Us?

**Mark Riepe** (0:10)
I'm Mark Riepe, I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
Today's episode airs shortly after Independence Day, 2026, and it's the country's 250th birthday. I hope you had a happy fourth, and in light of this, we're doing something a little different.
For several years, once a week, I would pick a day at random and then do a social media post about an event that happened on that day. The posts were about events that had something to do with economics, financial markets, investing, that sort of thing. I haven't done any since last February because every so often life gets in the way, as well as I've got to do my real job. But for this episode, we dove back into all those old posts and pulled out several that we're going to share. We haven't picked these randomly, but we've grouped them into several themes. And the themes are ones that speak to types of events that come up again and again throughout the history of the country.
These themes may or may not be any more important than any other themes we could have chosen, but I find them to be interesting and I hope you do as well. I'm also not claiming that this is some sort of a definitive economic and financial history of the United States. In almost all cases, these events have many learned tomes written about them and it would be wonderful if you listened to this episode and felt the need to learn more about the events. So let's get going with theme number one.
The first theme is that the debt of the federal government is always a subject of discussion. We're going to start in 1792 George Washington is president, and the ink has barely dried on the Constitution. And already the federal government is running a deficit. In 1792, federal receipts are about $3.7 million, while spending is just over $5 million. So the government borrows by issuing bonds. One of those bonds became known as the Washington Bond, because George Washington bought it as a sign of his confidence in the ability of the new government to pay its debts. At the time, the national debt was about $77 million.
That was roughly a third of the country's total economic output at the time. So from the very beginning, the country is dealing with the same question, how much debt is too much? The answer isn't obvious. A couple of decades later, the question became more urgent. The War of 1812 put serious pressure on the country's finances. In 1811, federal revenue was about $14.4 million. By 1814, it dropped to $11.2 million, largely because trade collapsed, and most federal revenue came from tariffs, another topic that's been hotly debated from the beginning of the country until today. Meanwhile, spending exploded. It went from $8 million a year in 1811 to nearly $35 million at the height of the war.
The difference got financed with debt, and the national debt roughly doubled in a few years. Bond investors began to worry. They fretted not just about whether they would be repaid, but how they would be repaid. After all, in the aftermath of the American Revolution, the federal government dealt with huge deficits by printing more money, and inflation was a big problem. The debt holders in the War of 1812 started demanding payment in gold and silver, but those reserves were limited. Gold holdings fell sharply from hundreds of thousands of dollars to almost nothing. By late 1814, the government was struggling to make payments. One treasury official described the situation bluntly. Payments are not being made on time, and obligations are being dishonored. In my opinion, this is the first and only time that the federal government has defaulted on its debt. Before I jump to the next theme though, here's a quiz about a not so fun fact. When was the last time a US state defaulted on its debt? Remember, Puerto Rico is not a state.
That's enough time. The answer is Arkansas. In 1933, the governor declared the state would not make the required payments due on its highway bonds. It was during the Great Depression, so maybe we give Arkansas a break. But its shaky financial affairs pertaining to highway construction and maintenance were years in the making. The tipping point was in 1931 when revenue to the Highway Commission dropped 10%.
Money was tight, people drove less, bought fewer cars, let their licenses lapse. The state couldn't make payments on its highway bonds, and the state and the creditors unsuccessfully negotiated. And to break the stalemate, the Roosevelt administration got involved. It refused to give Arkansas much needed federal funding until they resolved the dispute. Finally, months later, Arkansas passed legislation and the bondholders won. But gas taxes soared to 6.5 cents a gallon, which is $1.62 in today's dollars. The bottom line is that defaults with it by individuals, companies, municipalities, states or countries are messy. And fortunately, no states have followed in Arkansas's footsteps.