02/22/2014 09:58 am ET Updated Apr 24, 2014

The National Debt

Democrats and Republicans are blitzing us with propaganda about the national debt. My purpose here is not to side with either political party, but to add understating to the subject. Contrary to what many people think, China is not our largest creditor. Our largest creditor is our Social Security Trust Fund. But, if that's the case, are we really in debt? Do we have to pay ourselves back? To understand all of this, let's take a very brief look at history.

Alexander Hamilton, the first United States Treasurer, was also experienced in banking. Each state had accumulated debt in helping finance the Revolutionary War (1775-1783). In 1790, Hamilton instituted a program of repaying the war debt to each of the thirteen states. The payments were from the federal treasury with a certain amount going to each state, earmarking how much was for interest and how much for principal.

For the next one hundred twenty-five years, the primary debt our nation took on was for fighting wars -- the War of 1812, the Civil War, and World War I. In the early years of the country, financing national expenses, including paying war debt, was accomplished by levying internal taxes -- taxes on distilled spirits, carriages, tobacco, refined sugar, corporate bonds and the like. The high cost of the War of 1812 brought about the nation's first sales taxes -- on gold, silverware, jewelry and watches. In 1817, however, Congress did away with all internal taxes, relying on tariffs of imported goods to provide sufficient funds for running the government, and by 1835 the national debt was completely paid off.

But the Civil War put the debt up again -- this time to $2.7 billion, a new high. In 1862, in order to finance the Civil War effort, Congress enacted the nation's first income tax law. In 1868, Congress returned to taxing tobacco and distilled spirits and in 1872 eliminated the income tax. However, income taxes were enacted again in 1894, only to be declared unconstitutional by the Supreme Court a year later.

By 1910, the national debt had been whittled down to $1.2 billion. The sixteenth amendment to the United States Constitution, adopted February 3, 1913, once again changed the tax landscape, this time permanently. It allows the Congress to levy income taxes, something Congress has done consistently since then.

To finance World War I (1914-1918), federal deficits were run up again, this time to $25.5 billion. And again, we began to pay down the national debt down. In 1933 when FDR took office, the national debt had been reduced to just under $20 billion, the majority of which had been for financing wars. During the administration of FDR, financing the New Deal greatly increased the national debt -- by 1936 to $33.7 billion, another new high, and the first time large federal deficits were primarily the result of financing social programs.

Then came World War II (1939-1945), causing our national debt to soar to new spheres, reaching $259 billion in 1945. The next several years were prosperous ones, and when the Korean War (1950-1953) ended, much of the cost of the war had been absorbed by general revenues, and the nation deficit had increased by only $11 billion. But after that, although there were occasional years of a federal surplus, our national debt continued to grow.

In 1965, LBJ funded the Great Society -- creating Medicare, Medicaid and HUD -- and sent 100,000 troops to Vietnam. In 1973 OPEC raised oil prices. President Reagan (1981-1989) expanded the military and ended the Cold War. The first President Bush (1989-1993) fought the Gulf War. The second President Bush (2003-2009) fought the War on Terror and bailed out the banks. And President Obama has continued to fight the War on Terror, as well as funding the economic stimulus program, the Affordable Care Act, and other new social programs.

The result is that the national debt is now roughly $17.3 trillion (that is "t"), and growing daily by around $2.38 billion. The interest we pay on the national debt is staggering. In 2013 the United States paid nearly $414 billion in interest alone.

The national debt is comprised of two components: debt held by the public, that is, other countries, corporations, investment funds, and individuals, and debt owed to other departments or programs within our government, for example, the Social Security Trust Fund, FHA, Federal Savings and Loan Corporation's Resolution Fund, and the Federal Hospital Insurance Trust Fund (Medicare). These internal funds exist for specific budgetary purposes, and must be repaid when they are needed.

The public debt comprises about 71 percent of our national debt, and our internal debt comprises about 29 percent of our national debt. China is our largest public debtor at $1.27 trillion, with Japan a close second at $1.18 billion. But our largest debtor -- public or internal -- is our Social Security Trust Fund at $2.7 trillion, more than what we owe China and Japan combined.

It should be obvious that the United States has dug itself into a deep financial hole and cannot maintain its standard of living or its position as a world leader by continuing to take on debt. We must find ways to live within our means and pay our debts or we will soon be facing the same types of financial crises that some European nations are currently dealing with. Since the founding of this country, we have only been out of debt for a one year period, from mid-1835 to mid-1836. A nation cannot live forever on borrowed money. Sooner or later the debt becomes too large to finance, and the United States is about there.

Democrats and Republicans propose solving this problem in different way: Democrats by raising taxes, especially on the wealthiest Americans, and Republicans by reducing expenditures, especially for social programs. In my opinion, neither alone provides a solution.

With elections later this year, we need to elect candidates who are committed to addressing this situation. Our politicians need to put politics aside and solve this problem.

(Statistical data is from reports issued by the United States Treasury.)