The history of financing America, in six crisis episodes

The Civil War forced Washington to borrow at an unprecedented scale. Federal debt rose from about $65 million in 1860 to roughly $2.7 billion in 1865, approximately doubling annually over that span. By comparison, U.S. public debt has compounded at a 6.6% annual rate since 1946, according to Morgan Stanley. To absorb the new issuance, Washington wrote rules creating a new class of buyers. The National Banking Acts required federally chartered banks to back their currency with U.S. bonds. Financier Jay Cooke found buyers too, selling debt nationwide through banks, sub-agents, advertising and patriotic appeals. Cooke's 6% "five-twenties" were callable after five years and due in 20, with interest paid in gold; his three-year "7-30" notes paid 7.30%, yielding $3.65 a year and marketed as a penny a day for a $50 investment. The campaigns helped turn federal debt into a mass retail product. Financing World War II required both cheap borrowing and the restraint of civilian spending to stem inflation. So Washington turned to war bonds. Through voluntary payroll plans, about 27 million Americans were regularly buying them by June 1943. By the war's end, war bonds had financed roughly half of the wartime debt. The Fed reinforced this system by subordinating monetary policy to Treasury financing. Beginning in April 1942, it pegged Treasury-bill rates at 0.375% and effectively capped long-term Treasury yields at 2.5% through open-market purchases. This kept government borrowing costs low but added to inflationary pressure. Once wartime controls were lifted, the price pressures they had been suppressing broke loose, fueling a sharp postwar inflation that made the peg impossible to sustain. It finally gave way with the Treasury–Fed Accord of March 1951. Concerns over America's fiscal outlook are mounting. Long-dated Treasury yields are at their highest levels since 2007, while the national debt has surpassed $40 trillion. It is not the first time Washington has faced an imposing financing challenge. Treasury Secretary Scott Bessent says the U.S. can grow out of the debt. But history suggests that when the Treasury cannot rely on the usual mix of investors, instruments and market conditions, it has also created new methods to raise funds. Here are six financing challenges Washington tackled and how it overcame them. By February 1895, recession, gold exports and fears of a shift to silver had driven the Treasury's gold reserve down to $41.3 million, far below its politically vital $100 million benchmark. Public bond sales had bought only temporary relief. With no central bank, President Grover Cleveland enlisted two private financiers, J.P. Morgan and August Belmont Jr., to lead a syndicate that agreed to supply more than $65 million in gold, much of it from Europe, and help stop further withdrawals. In return, the syndicate received about $62 million in 30-year, 4% Treasury bonds. The deal stabilized the reserve but made Morgan and Belmont symbols of Wall Street's sway over public policy, energizing an already growing populist revolt. By the early 1960s, foreign dollar claims were outpacing U.S. gold reserves, threatening confidence in the dollar's convertibility into gold. Washington wanted to stem capital outflows without choking domestic growth. Operation Twist aimed for both: the Fed sold short-term bills and bought long-term Treasuries, raising short rates to support the dollar while holding down long rates for investment. Treasury reinforced the strategy with foreign-currency "Roosa bonds," sold to foreign central banks and insulated from dollar devaluation. Operation Twist was revived in 2011 to 2012 to help boost the economic recovery after the 2007 to 2009 financial crisis. Until the early 1970s, Treasury sold notes and bonds at terms it set in advance. But rising inflation and interest-rate volatility in the late 1960s made this fixed-price system risky, and left the Treasury vulnerable to overpaying investors or missing market demand. To let the market set the price, Treasury began auctioning coupon-bearing debt in 1970, initially setting the coupon while investors bid on price. By mid-1973, auctions had replaced the older fixed-price methods for notes and bonds. In 1974, Treasury introduced yield-based auctions for some coupon securities, allowing auction results to determine both the price and coupon rate. This reform shifted price discovery to investors, laying the foundation for today's Treasury market. The dollar came under renewed pressure in 1978, prompting the Carter administration to mount an unusually forceful defense, including the sale of U.S. government debt denominated in foreign currencies. On November 1, 1978, Carter unveiled a coordinated support program with West Germany, Japan and Switzerland, assembling the equivalent of up to $30 billion in foreign-currency resources for intervention. The package included expanded swap lines, a U.S. reserve-tranche drawing at the IMF, sales of Special Drawing Rights and foreign-currency borrowing. Central to the effort were "Carter bonds," denominated in Deutsche marks and Swiss francs and sold in German and Swiss markets, which raised foreign cash that could be used to buy dollars to help support the U.S. currency.

The history of financing America, in six crisis episodes

Create new buyers and enlist savers

Fiscal pressures are mounting again

Call in Wall Street and do the twist

Let the market set the price and defend the dollar

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