What is the Monetary Accord Of 1951
The Monetary Accord of 1951 was an agreement between the U.S. Secretary of the Treasury and the Federal Reserve Board (the Fed). It is also known as the Treasury-Federal Reserve Accord.
The primary accomplishment of the accord was the reestablishment of the Federal Reserve’s independence. This pact paved the way for the role that the Fed would play in modern American monetary policy as the country’s central bank.
BREAKING DOWN Monetary Accord Of 1951
The Monetary Accord of 1951 has had a significant influence on the way in which the Fed functions today. In 1913, the Fed first acquired the responsibility for setting monetary policy. Using monetary policy, the Fed can manipulate the money supply and influence interest rates. While some people believe that the Fed is necessary to smooth out fluctuations in the economy, others think that its policies are in fact responsible for the boom-and-bust business cycles. Either way, the policy set by the Fed does significantly influence the structure and motion of the U.S. economy.
Background of the 1951 Accord
The U.S. entered World War II in 1941. A year later, in 1942, the U.S Treasury asked the Fed keep interest rates unusually low to keep the securities market stable and to allow the government to borrow money at lower interest rates to finance U.S. engagement in the war.
Marriner Eccles was the Fed’s chairman at the time. He favored financing the war through raising taxes, rather than through low-interest loans to the government. However, the urgency of the war led Eccles to honor the request of the Treasury Secretary and keep interest rates low. To fund these low-interest loans, the Fed bought large amounts of government securities.
By 1947, the war had been over for two years, but inflation was over 17-percent. The Fed tried to limit this inflation, but the pegging of interest rates was still at war-time levels. Interest rates had not changed because President Truman and the Secretary of the Treasury wanted to protect the value of the country’s war bonds.
By 1951, the country had entered the Korean war, and inflation climbed to over 21-percent. The Fed and the Federal Open Market Committee (FMOC) agreed that unpegging interest rates were a necessary step to avoid the continuation of inflation and another depression. They met with President Truman and reached an agreement.
The agreement stated that the Fed would continue to support the price of five-year notes for a period, after which the bond market would have to take on responsibility for these issues.