Monetary Accord of 1951

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 otherwise called the Treasury-Federal Reserve Accord. The primary achievement of the accord was the restoration of the Federal Reserve's independence. This agreement prepared for the Fed's part in modern American monetary policy as the country's central bank.

Understanding the Monetary Accord of 1951

In 1951, the Treasury Department and the Fed arrived at an agreement otherwise called the Treasury-Federal Reserve Accord. This accord affected established the groundwork for the modern Federal Reserve.

   The Monetary Accord of 1951 has impacted how the Fed works today. In 1913, the Fed originally acquired the responsibility for setting monetary policy. Utilizing monetary policy, the Fed can control the [money supply](/moneysupply) and influence [interest rates](/interestrate). While certain individuals accept that the Fed is important to streamline variances in the economy, others think that its policies are, as a matter of fact, responsible for win and-fail business cycles. One way or the other, the Fed's policy truly does fundamentally influence the structure and movement of the U.S. economy.

Foundation of the 1951 Accord

The United States entered World War II in 1941. After a year, in 1942, the U.S Treasury requested that the Fed keep interest rates curiously low to keep the securities market stable and allow the government to borrow money at lower interest rates to finance U.S. engagement in the war.

Marriner Eccles was the Fed's chair at that point. He leaned toward financing the war by increasing government rates, as opposed to through low-interest loans to the government. Nonetheless, the earnestness of the war drove Eccles to respect the request of the Treasury Secretary and keep interest rates low. To fund these low-interest loans, the Fed bought large measures of government securities.

By 1947, the war had been over for a considerable length of time, yet inflation was more than 17%. The Fed attempted to limit this inflation, however the pegging of interest rates was currently at war-time levels. Interest rates had not changed in light of the fact that President Truman and the Secretary of the Treasury wanted to safeguard the value of the country's war bonds.

By 1951, the country had entered the Korean war, and inflation moved to more than 21%. The Fed and the Federal Open Market Committee (FMOC) agreed that unpegging interest rates was important to stay away from the continuation of inflation and another depression. They met with President Truman and agreed.

The agreement stated that the Fed would keep on supporting the price of five-year notes for a period, after which the bond market would need to get a sense of ownership with these issues.

Features

• The Fed controls the money supply and influences interest rates.
• The accord restored the Federal Reserve's independence and preparing for the Fed's control of monetary policy as the country's central bank.
• The Monetary Accord of 1951 was an agreement between the U.S. Secretary of the Treasury and the Fed.