The Federal Reserve-Treasury Accord and the Construction of the Post-War Monetary Regime in the United States

Gerald Epstein and Juliet Schor

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: This previously published, but now out-of-print paper addresses the circumstances surrounding the ‘Federal Reserve - Treasury Accord of 1951. We want to make it available now because of the current intense focus on the role of the Federal Reserve in the financial crisis, which has raised serious questions about its governance. Some critics —particularly those aligned with Congressman Ron Paul — want to "end the Fed." A much better approach, however, is to democratize the Federal Reserve. Democratizing the Fed is not a hypothetical scenario. As our paper discusses, during the Second World War, the Federal Reserve was largely under the control of the U.S. government — particularly the Executive Branch and especially the Treasury Department. In these conditions, Federal Reserve policy was highly coordinated with fiscal policy and contributed significantly to the war effort. Following the Second World War, financial interests and the Fed itself pushed very hard to make it more independent of the elected government, and to make it dependent on and subservient to the financial sector. This is the Federal Reserve we are once again living with today. The paper suggests putting true democratic control of the Federal Reserve back on the policy agenda, rather than protecting its capture by finance, or "ending the fed" and putting the economy back into the straight jacket of a gold standard, which helped throw the world into the Great Depression of the 1930s.

Date: 2011
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