The Treasury-Fed Accord: A New Narrative Account [pdf]

The reason why I posted this article is that it's a fascinating insider's account of how the modern Fed became independent. A TL, DR follows:

Starting in 1942, when US borrowing massively expanded, the Fed made a commitment to keep the short term interest rate at 3/8%. Historically, the Fed was subservient to the Treasury and took instruction from the Treasury about interest rates. This allowed unprecendented war time deficit spending by the Federal government (and inflation was kept in check with war time rationing and price controls).

After the war ended, the price controls were lifted, whereas this Fed commitment to low rates remained in place, resulting in very high post-war inflation (~17%) in 1947.

By the start of more massive deficit spending as a result of the Korean War the Fed began to openly challenge the Treasury and threatened to raise rates. This article describes the series of events, driven by the noted banker Allan Sproul convincing Fed Chaor Mariner Eccles (https://en.wikipedia.org/wiki/Marriner_S._Eccles) to follow an independent path, by which the Fed asserted its right to set interest rates independently of the Treasury.

The following congressional questionining of Eccles by populist Texas Democract Patman describes the political debate:

    Patman: Don’t you think there is some obligation of the 

    Federal Reserve System to protect the public against excessive interest rates?

    Eccles: I think there is a greater obligation to the American public to protect them against the deterioration of the dollar.

    Patman: Who is master, the Federal Reserve or the Treasury? You know, the Treasury came here first.

    Eccles: How do you reconcile the Treasury’s position of saying they want the interest rate low, with the Federal Reserve standing ready to peg the market, and at the same time expect to stop inflation?

    Patman: Will the Federal Reserve System support the Secretary of the Treasury in that effort [to retain the 2 1/2 percent rate] or will it refuse?. . . You are sabotaging the Treasury. I think it ought to be stopped.

    Eccles: [E]ither the Federal Reserve should be recognized as having some independent status, or it should be considered as simply an agency or a bureau of the Treasury. (U.S. Congress 1951, pp. 172–76)

Ultimately the Fed forced a change in rates, but the Treasury countered by installing a new Fed Chair, Marriner S. Eccles (https://en.wikipedia.org/wiki/Marriner_S._Eccles) who was formerly a Treasury secretary. To the suprise of the Treasury, Eccles also raised rates, thus cementing Fed independence.

The story ends, of course, with an independent Fed, and the following gem:

Some years later, Martin happened to encounter Harry Truman on a street in New York City. Truman stared at him, said one word, “traitor,” and then continued.