In 2001, Federal Reserve Chairman Alan Greenspan made the startling prediction that public debt would be retired by the end of that decade. His comments were met with skepticism and derision; but before we dismiss the idea of paying off the public debt, we should understand the underlying truth of Greenspan’s comments, and their relevance to the current debt crisis.

Greenspan’s prediction reflected the “Great Moderation” of the 1980s and 1990s. The Budget Enforcement Act of 1990 set the stage for balanced budgets and debt reduction. Tighter limits were imposed on all discretionary spending, and defense spending decreased significantly following the end of the Cold War. In the late 1990s, debt held by the public was reduced by $450 billion. Greenspan noted that this reduction in public debt was accompanied by acceleration in productivity advancements and strong economic growth. Prudent monetary policies pursued by Fed Chairmen Paul Volcker and Greenspan restored price stability.

Greenspan was not alone in predicting reduction and elimination in public debt at that time. The Office of Management and Budget, the Congressional Budget Office, and the Federal Reserve all forecast elimination of debt held by the public. The consensus among economists was that continuation of the Great Moderation in macroeconomic policy would result in elimination of public debt in the long term.

Over the past two decades, however, the U.S. government has virtually abandoned the prudent fiscal and monetary policies pursued during the Great Moderation, upending rosy forecasts of a world without debt. Greenspan was aware of the growing debt crisis facing the nation. Writing after the 2008 financial crisis, he argued that federal spending was out of control, and that the growing unfunded liabilities in entitlement programs were not sustainable. He noted that while inflation and interest rates were subdued, the nation was exposed to the risk of accelerated inflation and sharp discontinuous increases in interest rates.

Greenspan anticipated the pickle we are in today. He wrote, “I do not believe that our lawmakers, or others are aware of the impairment of our fiscal brakes…Fortunately, the very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.” If there is any wishful thinking here, it is his expectation that Congress would respond to the unsustainable growth in debt with a tectonic shift in fiscal policy. We are still waiting for this tectonic shift in fiscal policy. Under current law, public debt is projected to increase to more than double national income in the coming decades.

We have been living with large deficits for so long that for many citizens, public debt is as American as apple pie. But this debt fatigue mentality is in fact a relatively recent phenomenon. Greenspan noted, “In the 1950s, as I remember them, U.S. federal budget deficits were no more politically acceptable than households spending beyond their means.” Greenspan was referring the “Old Time Religion” of balanced budgets that guided U.S. fiscal policy for centuries. The federal government might incur debt in periods of war, but the expectation was that surplus revenue in peacetime would be used to reduce and eliminate public debt.

Many economists today view this “Old Time Religion” of balanced budgets as obsolete, and the idea of a world without debt as a pipedream. Greenspan, on the other hand, argued that financial markets could function quite efficiently without public debt. In fact, at the turn of the century, Fed officials were exploring alternatives to U.S. Treasury securities.

One of the options they could have explored is a sinking fund. Alexander Hamilton, our first Secretary of the Treasury, designed the nation’s first sinking fund. New Treasury notes were issued to replace the debt issued by state and national governments during the Revolutionary War. The new Treasury notes paid a premium interest rate, with a portion of the interest used to retire the national debt. Federal revenues were also earmarked for the sinking fund, and by the Jacksonian period, public debt was eliminated.

With a sinking fund in place, current Treasury Secretary Janet Yellen could eliminate public debt within a generation, just as our first Treasury Secretary, Alexander Hamilton, did. But we should not hold our breath; we now live in a world of debt fatigue, and a world without debt seems impossible. Where is Alan Greenspan when we need him?

Barry Poulson ([email protected]) is a policy advisor with The Heartland Institute.