America’s worsening fiscal position has revived an old question in Washington: how can the government continue financing itself when traditional investors, borrowing conditions and monetary policy no longer offer an easy solution?
Long-term US Treasury yields are at their highest level since 2007 and the national debt has passed $40 trillion. Treasury Secretary Scott Bessent has argued that the United States can “grow out of the debt”, but the country’s financial history shows that periods of strain have often required significant changes to the way the government raises money.
A review of six episodes, stretching from the Civil War to the late 20th century, shows how successive administrations created new buyers, altered borrowing practices and used the Federal Reserve and foreign governments to protect the Treasury market and the dollar.
How the US financed six financial crises
The Civil War presented the first major test. Federal debt rose from about $65 million in 1860 to roughly $2.7 billion by 1865 as Washington borrowed on an unprecedented scale to fund the Union war effort.
Treasury Secretary Salmon P Chase responded by helping establish a national banking system. Under the National Banking Acts, federally chartered banks were required to hold US government bonds against the currency they issued, creating a dependable new source of demand for Treasury debt.
Financier Jay Cooke widened the market further by selling bonds through banks and local agents, supported by newspaper advertising and patriotic appeals. The Treasury’s own historical records credit Cooke with helping turn government borrowing into a mass retail product, while the Legal Tender Act authorised the issue of federal paper money and additional war bonds.
Nearly three decades later, Washington turned to Wall Street when its gold reserves came under severe pressure. By February 1895, recession, gold exports and fears that the country might move towards silver had reduced the Treasury’s reserve to $41.3 million, well below the politically important $100 million threshold.
With no central bank to provide emergency support, President Grover Cleveland enlisted J.P. Morgan and August Belmont Jr. to organise a private syndicate. The group agreed to supply more than $65 million in gold, much of it sourced from Europe, in return for about $62 million in 30-year Treasury bonds paying 4 per cent.
The arrangement stabilised the reserve, but also fuelled public concern about the influence of powerful financiers over government policy. Morgan and Belmont became symbols of Wall Street’s reach, strengthening an already growing populist backlash.
During the Second World War, the challenge was different. The US needed to borrow cheaply while limiting civilian spending to contain inflation. Washington promoted war bonds through voluntary payroll schemes, and by June 1943 about 27 million Americans were buying them regularly.
By the end of the war, those bonds had financed about half of the wartime debt. The Federal Reserve also held down government borrowing costs, fixing Treasury bill rates at 0.375 per cent from April 1942 and effectively capping long-term Treasury yields at 2.5 per cent through open-market purchases.
The policy helped finance the war but contributed to inflationary pressure after wartime controls were removed. The arrangement finally ended with the Treasury–Federal Reserve Accord in March 1951, restoring greater independence to monetary policy.
In the early 1960s, the focus shifted to the dollar’s convertibility into gold. Foreign claims on US currency were growing faster than the country’s gold reserves, threatening confidence in the system.
Operation Twist attempted to address both the currency pressure and the needs of the domestic economy. The Federal Reserve sold short-term Treasury bills and bought longer-dated government debt, pushing short-term rates higher to support the dollar while restraining long-term borrowing costs.
The Treasury supplemented the operation with foreign-currency “Roosa bonds”, issued to overseas central banks and structured to reduce the risk of losses caused by a fall in the dollar. The Federal Reserve later revived a version of Operation Twist between 2011 and 2012, when it bought longer-term securities and sold shorter-term holdings to support the recovery from the financial crisis.
By the late 1960s and early 1970s, rising inflation and volatile interest rates exposed weaknesses in the way Treasury securities were sold. Washington had traditionally set the terms of notes and bonds in advance, leaving the government vulnerable to paying too much or misjudging demand.
The Treasury introduced a modified auction system in 1970, allowing investors to bid on price even though the interest rate was initially fixed. By the middle of 1973, auctions had replaced the older fixed-price approach for notes and bonds; yield-based auctions followed in 1974, allowing market demand to determine both price and coupon rates.
The Treasury now sells all marketable securities through auctions, a system whose foundations were laid during that period of financial uncertainty.
The final episode came in 1978, when the dollar again faced heavy pressure. The Carter administration announced a co-ordinated support package with West Germany, Japan and Switzerland, assembling the equivalent of up to $30 billion in foreign-currency resources for market intervention.
The programme combined expanded currency swaps, an International Monetary Fund drawing, sales of Special Drawing Rights and foreign-currency borrowing. The Treasury also issued bonds denominated in Deutsche marks and Swiss francs — later known as Carter bonds — in German and Swiss markets.
The proceeds gave the US additional foreign currency with which to buy dollars and defend the value of its currency. The episode underlined a recurring feature of American finance: when established methods fail, Washington has repeatedly changed the institutions, investors or instruments on which it depends.
