Monetary policy in the United States since 1950 has involved the abdication of fairly traditional powers by the authorities and a retreat to an orthodoxy reminiscent of the earlier years of this century. In the course of this retreat the monetary (and fiscal) authorities have sought to reduce federal debt to a quasi-private character, while, in contrast, the government has elevated vast amounts of private debt to a quasi-federal status. It will be argued here that in the light of the changing institutional environment, the drive to monetary orthodoxy plus an undue preoccupation with inflation are in large measure responsible for making exasperatingly difficult the maintenance of orderly Treasury finances and may be self-defeating with respect to the control of inflation.
For our purposes, modern Federal Reserve policy has its roots in the bond support policy of the Second World War. Actions taken after the War until 1950 showed an attitude of increasing restiveness with that policy and involved “chipping away” at individual items in the policy. With the outbreak of the Korean War in 1950, Federal Reserve relations with the Treasury, which sought to maintain a “pegged” market, reached a low point. In March, 1951, came the famous Accord, with virtually unconditional surrender by the Treasury in matters of the level and structure of interest rates. In 1952 came the revival of large-scale discounting and the fostering of its use by the authorities.