The 1951 Federal Reserve-Treasury Accord
The Federal Reserve and the Treasury struck a formal agreement in 1942 designed to keep financing for World War II cheap. The Fed would maintain a low interest rate on Treasury bills, effectively giving up the ability to use open-market operations to make adjustments to the economy. However, the Fed relinquished some of its independence, Wellington says.
"If you believe in a strong Federal Reserve, you want the Federal Reserve independent of political pressures," Wellington says. "If the Treasury can say, 'This is what the interest rate should be,' that's basically the executive branch controlling monetary policy."
The president and members of the Fed's board met several times to discuss options, according to FOMC meeting minutes, and the talks ultimately produced the 1951 Treasury-Federal Reserve Accord. The agreement cleared the way for the "modern Federal Reserve," according to a research paper by Robert Hetzel, Richmond Fed senior economist, and Ralph Leach.
Still, the central bank made deals with the Treasury going forward. For example, in 1953, the Fed's Board of Governors implemented a plan to purchase and sell only Treasury bills to influence short-term government securities. It was called a "bills only" policy -- or, thanks to a deodorant commercial at the time, "B.O." to those who didn't like it, according to the paper.