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.

  1. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  2. Fed Funds Futures

    Fed funds futures are contracts that reflect market predictions ...
  3. FED Pass

    A Fed pass happens when the U.S. central bank increases the availability ...
  4. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  5. Open Market Operations - OMO

    Open market operations refer to the buying and selling of government ...
  6. Term Fed Funds

    Term Fed funds refer to funding that a bank raises in the Fed ...
Related Articles
  1. Insights

    How the Federal Reserve Manages Money Supply

    The Federal Reserve was created to help reduce the injuries inflicted during the slumps and was given some powerful tools to affect the supply of money.
  2. Insights

    What are the Federal Reserve Chairman's responsibilities?

    Learn about the duties and responsibilities of the chairman of the Federal Reserve Board, including testifying before Congress and as acting as chair of the FOMC.
  3. Personal Finance

    How the Federal Reserve Affects Your Mortgage

    The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.
  4. Trading

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  5. Insights

    The Federal Reserve

    As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  6. Investing

    The Fed's Tools for Influencing the Economy

    The economy can be volatile when left to its own devices. Find out how the Fed smoothes things out.
  7. Insights

    The Fed's Concerns

    Wall Street traders have voiced doubts about the Fed’s intentions. On the one hand, they note how the minutes of the last Fed meeting expressed concerns about the stock market. Yet on the other, ...
  8. Taxes

    The Link Between The Fed, Money, Debt And Taxes

    Assets on the Fed's balance sheet, money supply level, national debt level and economic production should be maintained in equilibrium.
  1. How Central Banks Influence Money Supply

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. Learn more ... Read Answer >>
  2. What are the implications of a low federal funds rate?

    Find out what a low federal funds rate means for the economy. Discover the effects of monetary policy and how it can impact ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center