Free A History of the Federal Reserve, Volume 2 by Allan H. Meltzer Page A

political influences often weakened. Insistence on independence from political pressures was not impossible but required more courage than was usually present.

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    A New Beginning, 1951–60
    You certainly have the advantage over me of being closer to the market, but it may not be an unmixed advantage. The ticker may loom too large in your perspective and what from the point of view of the national economy are molehills may . . . appear to you as mighty mountains.
    —Letter, Viner to Sproul, in Sproul papers, Correspondence, S–W 1940–1955,
January 9, 1948
    The March 1951 Accord with the Treasury opened a new era in Federal Reserve history. Once again, the Federal Reserve could claim to be independent, as its founders intended. It could raise interest rates without prior approval or consultation with the Treasury, at first only within the transitional limits set for the year by the Accord. 1
    The new arrangement reopened issues that had remained dormant. What did independence mean in practice? What goals should an independent central bank pursue? How could it reconcile independence with continued responsibility for the success of Treasury debt management operations? By what means could it efficiently achieve its goals? What guiding principles should govern practice? How should it organize and operate to carry out its functions?
    1. Volume 1, chapter 7 discusses the details of the Treasury–Federal Reserve Accord of March 1951. The Accord ended a nine-year period during which the Federal Reserve consulted the Treasury before changing interest rates. In practice, the Treasury exercised a veto over interest rate changes. The Accord permitted the Federal Reserve to let the rate on longterm government bonds exceed 2.5 percent and let short-term rates rise to the discount rate. The Federal Reserve agreed to maintain orderly markets and shared responsibility for success of debt management operations with the Treasury. In practice this responsibility led the Federal Reserve to adopt an “even keel” policy of maintaining interest rates during periods of Treasury borrowing. This permitted money growth to increase especially when budget deficits rose in the late 1960s. The remaining provisions are in volume 1, 711–12.

    The Federal Reserve had not faced these issues since the 1920s. The Federal Reserve Act, as amended and amplified by other legislation, left much scope for interpretation. The old procedures developed under the gold exchange standard reflected very different organizational and economic arrangements. The Banking Act of 1935 shifted power from the federal reserve banks to the Board of Governors, eliminated the semiautonomous nature of the reserve banks and moved control of open market operations from the reserve banks to an open market committee on which the Board had seven of twelve votes. It did little to clarify the system’s mandate. The 1944 Bretton Woods Agreement established a fixed but adjustable exchange rate regime, although most currencies other than the dollar remained inconvertible until 1959. The United States’ relatively large stock of gold was more than ample to satisfy any likely demand at the time, and, in truth, administration policy favored some redistribution of foreign exchange and gold holdings abroad. Of greatest importance subsequently, the Employment Act of 1946 committed the country to maximum employment and purchasing power but did not further define these terms. When passing the Employment Act, Congress did not explain how to reconcile its domestic employment goal with the Bretton Woods Agreement and with the political and military obligations the United States soon accepted as part of the cold war with the Soviet Union and its allies.
    Domestic policy dominated international concerns during most of this period. The Federal Reserve recognized that international economic policy was principally a Treasury function, not their primary responsibility.
    Under the Employment Act,