What is a cash Agreement of 1951′
Monetary Agreement of 1951, an agreement was signed between the Minister of the Treasury and the Federal reserve system (FRS). It is also known as the Treasury-Federal reserve Accord.
The main achievement of the agreement was the restoration of the independence of the fed. This Pact set the stage for the role the fed would play in modern American monetary policy of the Central Bank of the country.
Breaking down the monetary Agreement of 1951′
Monetary Agreement of 1951 had a significant impact on the way in which today functions of the fed. In 1913, the fed first acquired responsibility for setting monetary policy. Using monetary policy, the fed can control the money supply and influence the level of interest rates. While some people believe that the fed should smooth out fluctuations in the economy, while others believe that his policies are actually responsible for boom-bust business cycles. In any case, recruitment policy of the fed significantly affect the structure and movement of the US economy.
The Background Of The Agreement Of 1951
USA entered the Second World war in 1941. A year later, in 1942, the American long-term asked the fed to keep interest rates at unprecedented low levels to maintain the securities Market is stable and will allow the government to borrow money at lower interest rates to Finance the US involvement in the war.
Marriner Eccles was the fed Chairman at the time. He advocated the financing of the war by raising taxes, but not at the expense of low-interest loans to the government. However, the urgency of the war led Eccles to honor the request of the Minister of Finance and to keep interest rates low. To Finance these loans at low interest rates, the fed bought large amounts of government securities.
By 1947, the war ended two years, and inflation was more than 17 percent. The fed has tried to limit inflation, but the peg interest rates were still at wartime levels. Interest rates have not changed because President Truman and the Minister of Finance wanted to protect the value of the country’s war bonds.
By 1951, the country joined in the Korean war, and inflation rose more than 21%. The fed and the Federal open market Committee (FMOC) agreed that unpegging the interest rates are a necessary step to avoid further inflation and another depression. They met with President Truman and had reached an agreement.
The agreement stated that the fed will continue to support the price of five-year notes for a period, then the bond market will have to take responsibility for these issues.