War finance is in the Federal Reserve’s DNA. As Ron Paul astutely noted, “It is no coincidence that the century of total war coincided with the century of central banking.” The Fed itself acknowledges that its primary objective during WWI and WWII was to finance the massive spending during these wars.

Consider this FOMC memo from 2016:

Financing the Great War required an enormous increase in Treasury issuance. The Federal Reserve adopted a policy designed to keep long-term Treasury borrowing rates low. To achieve this objective, the Federal Reserve used existing facilities in new ways…

And the Board of Governors’ annual report from 1943:

At the time the United States entered [WWII] in December 1941, the Board of Governors issued a statement to the effect that the Federal Reserve System was prepared to use its powers to assure at all times an ample supply of funds for financing the war effort and to exert its influence toward maintaining conditions in the United States Government security market satisfactory from the standpoint of the Government’s requirements.

The government’s ability to expropriate resources from the private market economy would have been severely limited if it had to rely on direct taxation. Money printing, however, allows the government to impose a more subtle tax on the population. Higher taxes are visible and immediately painful, but the effects of money printing are delayed and more difficult to see.

But the official narrative of the Fed’s history says that the Fed achieved independence with the Treasury-Fed Accord of 1951. The narrative goes this way: after WWII, the Fed decided that it wanted to break free from the Treasury’s arm twisting. The Fed “had to keep buying securities even if the members of the Federal Open Market Committee (FOMC) might have preferred a different monetary policy.” When the US entered the Korean War, Fed officials were worried that another expensive world war was on the horizon, and so they took some baby steps toward independence by allowing interest rates to rise. After a series of public statements that reflected conflict between the Treasury and the Fed, representatives from both institutions met a few times to come to an agreement about their respective roles and authority.

One of the meetings was organized by President Truman himself. But this meeting resulted in conflicting reports about what the two sides had agreed to. Truman said, “I was given assurance at this meeting that the Federal Reserve Board would support the Treasury’s plans for the financing of the action in Korea. This assurance was given entirely voluntarily.” Marriner Eccles—who had been removed from his position as Fed Chair by Truman in 1948 but remained on the Board—leaked a different account of the meeting to the press. But then James Vardaman (also on the Board) said that Eccles had not consulted the committee before releasing his statement. Vardaman said “that the Committee knowingly left the President with a false impression.” Truman also participated in the underhanded tactics with “newspaper leaks to discredit Chairman McCabe.” Truman even told McCabe that if the Fed didn’t maintain the low rates, then the Fed would be doing “exactly what Mr. Stalin wants.”

Other meetings had similar consequences: conflicting reports about who agreed to what. The President and his Treasury were pressuring the Fed to commit to maintaining low interest rates on government debt. On February 19, 1951, Fed Chair Thomas McCabe announced that the Fed “was no longer willing to maintain the existing situation in the Government security market.”

The famous Accord was reached in a meeting in early March 1951 without the key players in the events leading up to it. The Treasury Secretary was in the hospital, so the Assistant Secretary—William McChesney Martin—represented the Treasury. The Fed was represented by Winfield Riefler, Robert Rouse, and Woodlief Thomas (absent: Eccles and McCabe).

This meeting is a bit of a mystery. While both the Treasury and the Fed released statements saying that there was now “full accord,” the details are hazy. The Fed agreed to certain temporary rate pegs and the Treasury agreed to replace their 2 ½ marketable bonds with 2 ¾ non-marketable bonds (meaning the Fed wouldn’t have to buy them). Other accounts explain that “the Fed promised to raise its discount rate only with the Treasury’s permission, which was unlikely to be given except under ‘very compelling circumstances.’”

McCabe either realized he had lost or was pressured out of his position. Within a couple weeks of the accord, he “sent in a bitter letter of resignation, but resubmitted a bland version when asked to do so by the White House.” Truman appointed William McChesney Martin as Fed Chair. Eccles retired in June. According to Hertzel and Leach, “the initial reaction both among Board staff and on Wall Street to Martin’s appointment was that the Fed had won the battle but lost the war. That is, the Fed had broken free from the Treasury, but then the Treasury had recaptured it by installing its own man.”

The official narrative says that Martin helped the Fed flex its newfound independence in the following years, but this is not clear. For example, in a congressional hearing after the accord, Senator Paul Douglas pried for details. Allan Sproul, the President of the Federal Reserve Bank of New York, said:

As I say, I do not like the implication which one of your witnesses left that this was a battle that the Federal Reserve won, and while it may have won a battle, that the Government always wins the wars. I say there is no battle between the Government and the central bank. It was a conflict, a difference of opinion, between the Treasury and the Federal Reserve System, both of them representing the Government, and you can call it a triumph of reason, if you want to, but not the winning of a battle.

And then when Douglas questioned Treasury Secretary Snyder, this exchange took place:

Douglas: Who is to determine the interest rate?

Snyder: Well, that matter is always discussed very carefully, sir.

Douglas: Who is to make the final decision on it?

Snyder: There is only one place that it can finally be made by law, and that is in the Treasury Department.

Douglas: When the Treasury makes the decision, therefore, is the Federal Reserve Board supposed to purchase a sufficient number of bonds so that the issue can be a success at the interest rates determined by the Treasury?

Snyder: I think we can work out cooperation.

Douglas: Cooperation is a beautiful word, but it is like an overcoat, it covers quite a range of reality.

Indeed, “cooperation” and “coordination” were frequently used by Treasury and Fed officials after the accord, almost like a group of criminals who had agreed on a common story before talking to the police.

The new Fed Chair also toed this line. Douglas asked Martin about how the Fed and the Treasury would deal with a “conflict of wills,” to which Martin responded: “All I can say at the moment is we would sit around the table and hammer it out.”

In a 1955 interview with US News and World Report, Martin said:

• “We can never omit the needs of the Treasury from our considerations…”
• “In war, ordinary rules go out the window.”
• “We have a responsibility for seeing that money and credit is co-ordinated with the other Government activities.”
• “Q: Do you have any obligation to help them finance the deficit? A: We do. Q: How do you derive that duty? A: Well, because we are a part of the Government…”
• “The Federal Reserve Board to me is clearly a part of the Government.”

George Selgin concludes that, “Martin proved a pushover when it came to resisting government influence.” And, after reviewing monetary policy changes from 1951 to 1977, Weintraub concludes: “it may be reasonably urged that the dominant guiding force behind monetary policy is the President. […] The historical records show that in each administration monetary policy fitted harmoniously with the President’s economic and financial objectives and plans.”

It’s clear that the Fed did not achieve independence with the Treasury-Fed Accord of 1951. While at least one or two Fed officials tried to pursue a policy slightly at odds with what Truman and his Treasury wanted during the Korean War, the outcome was that these thorny Fed officials exited and a man from the Treasury was appointed Fed Chair. Some Fed officials (maybe a majority) were happy to play the role of the Treasury’s money printer. To this day, the Fed is independent in rhetoric alone. It is always ready to impose the inflation tax on behalf of the government.