WHAT IS '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, often referred to as the Fed. It is sometimes referred to as the Treasury-Federal Reserve Accord. The primary accomplishment of the accord was that it reestablished the Federal Reserve’s independence. This 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 large influence on the way that the Fed functions today. The Fed first acquired responsibility for setting monetary policy in 1913. Through monetary policy, the Fed can manipulate the money supply and affect interest rates. While some people believe that the Fed is necessary to smooth out fluctuations in the economy, others believe that its policies are in fact responsible for business cycle booms and busts. Either way, policy set by the Fed does greatly affect the structure and motion of the U.S. economy.

A history of the Accord

The U.S. entered World War II in 1941. In 1942, the U.S Treasury requested that the Fed keep interest rates particularly low in order to keep the securities market stable and to allow the government to borrow money at low rates in order 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. In order 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 restrict inflation, but interest rates were still pegged at war-time levels. This it 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 rose to over 21 percent. The Fed and the Federal Open Market Committee (FOMC) agreed that unpegging interest rates was a necessary step to avoid continued inflation and another depression. They met with President Truman and shortly thereafter 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.

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