The agreement between The Federal Reserve and US treasury during the year 19951, that re-asserted the independence of The Federal Reserve and made it free from any sort of treasury intervention is known as ‘Accord’. The Accord was a resolution to the major conflict between the Treasury and the Fed over World War II financing.
After he United States entered the Word War II in December, 1941, during 1942, on the suggestion of the Treasury Department, the Federal Reserve committed on maintaining a low interest rate peg of 3/8 percent on the short term treasury bills. The objective of this low interest peg was to stabilize the US security market and provide the government with low cost debt financing for the War.
However, the ill effect of low interest peg was witnesses when large amount of purchase of government security, significantly increased the money supply in USA. As a result, by the of the end War, US was forced to face with high inflation. For instance, during 1946-1947, the CPI Index in US was 17.6 percent and during 1947-48 it reached 9.5 percent.
Thus, unlike the Treasury and President Truman, who were in support of low interest peg, the Federal Reserve was more concerned with growing inflation. The tension between the Fed and Treasury intensified, when during 1950, the United States joined the Korean War. With continued support of Treasury and President to the low interest peg, CPI inflation reached 21 percent during February 1951 and Federal Reserve had decided to oppose the monetary suggestions of the Treasury.
Finally, on March 4th, 1951, The Treasury and Fed agreed over an Accord, which granted full independence to the Federal Reserve, free from any political pressure.
