Kennedy and Bessent's impossible 'twist' mission

Kim Sung-jae

The author is a business administration professor at Furman University and the author of "The Story of Tariffs" (2025). 

In 1959, Yale University professor Robert Triffin warned Congress that the dollar-centered international financial system could collapse. If the United States, issuer of the reserve currency, kept running external deficits, he said, confidence in the dollar would eventually erode.

John F. Kennedy, elected president the following year, faced conflicting goals: reviving a sluggish domestic economy while defending the dollar. His answer was to push short- and long-term interest rates in opposite directions — keeping short-term rates up to discourage capital outflows while lowering long-term rates to stimulate growth.

The Federal Reserve responded by selling short-term securities and buying longer-term bonds. The gap between short- and long-term rates narrowed from 1.53 percentage points when Kennedy took office to 0.11 point. Markets dubbed the policy "Operation Twist," after the popular dance, as the yield curve flattened.

Kennedy also pursued broad tax cuts, expanded public works and increased spending on welfare and the space program. Growth exceeded 6 percent the year after he took office, and solid growth with stable prices continued through much of the 1960s.

The external picture was less favorable. Interest-rate differentials encouraged dollars to flow abroad. Kennedy imposed a tax of up to 15 percent on purchases of foreign stocks and bonds to curb capital outflows. Investors shifted business to London, weakening New York’s competitiveness.

Persistent balance-of-payments deficits, the Vietnam War and continuing gold outflows eventually strained the system. In 1971, President Richard Nixon ended the dollar’s convertibility into gold, effectively terminating the Bretton Woods system.

Kennedy’s twist showed how difficult it is to achieve domestic growth and stability while simultaneously balancing external accounts and defending the dollar. Today, Washington is again seeking both domestic and external objectives through tax cuts, tariffs, investment incentives and market intervention.

Treasury Secretary Scott Bessent has called himself the "house" in the bond market — the casino operator that never loses — while encouraging investors to buy Treasuries. The Treasury has also expanded purchases of longer-dated government debt in what markets call a "Treasury Twist," seeking to restrain yields and preserve confidence in U.S. debt.

Meanwhile, BRICS leaders meeting recently in New Delhi backed greater use of local currencies in trade and payments, reducing reliance on the dollar.

The U.S. domestic economy may look sound, but external confidence in the dollar faces growing pressure. There is no cure-all for domestic and international challenges. Trust never comes without paying a price.