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Background on the Accord
Background on the Accord
The Federal Reserve System formally committed to maintaining a low interest rate peg on
government bonds in 1942 after the United States entered World War II. It did so at the
request of the Treasury to allow the federal government to engage in cheaper debt nancing
of the war. To maintain the pegged rate, the Fed was forced to give up control of the size of
its portfolio as well as the money stock. Con ict between the Treasury and the Fed came to
the fore when the Treasury directed the central bank to maintain the peg after the start of
the Korean War in 1950.
President Harry Truman and Secretary of the Treasury John Snyder were both strong
supporters of the low interest rate peg. The President felt that it was his duty to protect
patriotic citizens by not lowering the value of the bonds that they had purchased during the
war. Because bond prices vary inversely with bond interest rates, a rise in interest rates
would have made the same bonds purchased at the lower interest rates worth less on the
government securities market. Unlike Truman and Snyder, the Federal Reserve was focused
on the need to contain in ationary pressures in the economy caused by the intensi cation of
the Korean War. Many on the Board of Governors, including Marriner Eccles, understood
that the forced obligation to maintain the low peg on interest rates produced an excessive
monetary expansion that caused the in ation. A erce debate between the Fed and the
Treasury then ensued as both vied for control over interest rates and U.S. monetary policy.
This website tells the story of how the Federal Reserve and the Department of the Treasury
settled their dispute. The resulting agreement, known as the Treasury-Fed Accord,
eliminated the obligation of the Fed to monetize the debt of the Treasury at a xed rate. This
agreement became essential to the independence of central banking and laid the
foundations for the monetary policy pursued by the Federal Reserve today.
To commemorate the Accord's ftieth anniversary, the Research Department at the Federal
Reserve Bank of Richmond published a special issue of the Economic Quarterly. Included in
this issue are reminiscences from Ralph F. Leach, a Federal Reserve Board of Governors
economist during the Truman Administration. Leach's contributions add previously
unpublished, eyewitness details to the account of the months preceding the Treasury-Fed
Accord. The issue also contains articles that span the twentieth-century history of TreasuryFed relations. Topics include real-bills monetary policy in the 1920s; the often divergent

political forces that shaped the modern Fed; and proposals for two new Treasury-Fed
accords related to credit policy and the kinds of assets the Fed should buy. Contributors
include J. Alfred Broaddus, Jr., Marvin Goodfriend, Robert Hetzel, Thomas Humphrey, and
Je rey Lacker.
Besides providing access to these Economic Quarterly articles, the website also o ers
biographies of signi cant people involved with the dispute and bibliographical information
for further research. We hope you will enjoy exploring the resources o ered at this site and
that in doing so you will learn more about this important period of our monetary history.

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