US Dollar: Long-run erosion and debt risks – Commerzbank

Commerzbank economists Bernd Weidensteiner and Christoph Balz review 250 years of US economic history, highlighting how persistent inflation has eroded the value of the Dollar and how federal debt has surged back to World War II highs. They stress that earlier episodes of post‑war consolidation contrast with the current renewed rise in the debt‑to‑GDP ratio.

Inflation and fiscal trends shape Dollar

"In terms of price trends, U.S. history can be divided into two parts. Until the early 20th century, there were occasional major episodes of inflation, most of which were linked to wars (such as the U.S. Civil War of 1861–65). However, these were always followed by longer periods of falling prices, so that the overall price level in 1900 was no higher than it had been in 1800 (Chart 6)."

"The U.S. managed to maintain price stability without a central bank; the Fed was not established until 1912. Since the 1930s, prices in the U.S. have been rising steadily. By 2025, the Consumer Price Index had risen to 18 times its 1925 level."

"There were no longer any deflationary phases, but there were periods of very high inflation even outside of wartime (such as the 1970s and the early 2020s)."

"A similarly two-pronged trend can also be observed in government finances. The government debt-to-GDP ratio remained very low throughout the 19th century. The debt incurred during the Civil War is the exception; in fact, the debt-to-GDP ratio fell again after 1865 (Chart 7)."

"The Great Depression and World War II caused government debt to skyrocket in the 20th century. However, the U.S. managed to rapidly reduce its government debt-to-GDP ratio after 1945. Solid fiscal policy came to an end under President Reagan, however, even though President Clinton succeeded in temporarily consolidating the debt once again in the 1990s."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)