Scott Bessent and Kevin Warsh may need a Treasury-Fed accord of their own.
The original accord of 1951 ended a war between the Treasury Department and Federal Reserve System over which had control over the nation's monetary policy. Despite President Harry S. Truman's objections, the Fed won its independence.
Yet that freedom has been tested again and again, from Richard Nixon to Ronald Reagan and now Donald Trump.
Last week, Treasury Secretary Bessent announced a surprise doubling of purchases of outstanding long-term maturities to be funded by issuance of short-term bills. Described as "liquidity support," it was seen by market watchers as a backdoor attempt to lower interest rates-a longtime Trump desire.
This appears to run head-on into the objectives of Fed Chairman Warsh, who on Friday in his first major public speech, at the annual central-banker conclave in Jackson Hole, Wyo., made clear that fighting stubborn inflation is his chief concern.
"It is the Fed's job to deliver stable prices. No excuses," Warsh said, delivering what market watchers are seeing as a hawkish view.
If that calls for higher interest rates, it could draw the ire of Trump.
"I cannot remember many calls from presidents or Capitol Hill for the Fed to raise interest rates," wrote Alan Greenspan, Fed chief under four presidents, in his memoir. "In fact, I believe there was none."
It was easier in the pre-accord days, when the Treasury secretary was also de facto Fed chief.
Millionaire banker Andrew Mellon had both fiscal and monetary policy centered in his hands as Treasury chief under three Republican presidents (1921-32), offering tax cuts with one hand and lowering interest rates with the other. The results were the unprecedented economic highs of the Roaring '20s, and the fathomless economic lows of the Great Depression.
Mellon was removed from Treasury shortly before President Herbert Hoover was voted out, and their contributions were remembered by one restroom-wall poet: "Mellon pulled the whistle, Hoover rang the bell, Wall Street gave the signal, and the country went to hell."
The Banking Act of 1935 removed the Treasury secretary from the Fed board, and relative peace reigned through World War II. But their agreement for holding rates low to finance the war effort was shattered by postwar inflation, which reached a 21% annualized rate in February 1951.
The Fed called for a free hand to raise rates. Board members, led by former Chairman Marriner S. Eccles, were publicly critical of the Treasury and its secretary.
It got nasty.
"[A]ccording to Eccles," wrote the Fargo, N.D., Forum on Feb. 1, 1951, "every time Secretary John Snyder pulls new dollars out of his high silk hat, the phonier they become."
The fighting was just as fierce behind the scenes, as Truman leaned on Fed Chairman Thomas McCabe. "I hope the Board will...not allow the bottom to drop from under our securities. If that happens that is exactly what Mr. Stalin wants," the president wrote to McCabe, according to Federal Open Market Committee minutes of Jan. 31, 1951.
In an unprecedented move, Truman called the entire FOMC on the White House carpet. He did most of the talking. The next day, the White House issued a statement insisting, "The Federal Reserve Board has pledged its support to President Truman"-and the war was on.
Eccles released the FOMC's own minutes of the meeting, revealing they had pledged nothing.
The press had a field day with it.
"Truman Honesty an Issue in Top-Level Capital Clash Over U.S. Financial Policy," the Buffalo News wrote on Feb. 7, 1951.
Over the next few weeks, the Treasury-Fed accord was worked out, largely thanks to William McChesney Martin Jr., assistant Treasury secretary, subbing for his hospitalized boss, Snyder of the "high silk hat." The agreement was signed on March 3, 1951. A bland, single sentence was released to the public:
"The Treasury and the Federal Reserve System have reached full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose to assure the successful financing of the Government's requirements and, at the same time, to minimize monetization of the public debt."
The full accord, never publicly released, is said to be equally hazy on specifics. The Fed's independence was confirmed, but it would be up to future presidents and chairs to work out the details.
Some have done better than others. Nixon bullied his Fed chief, Arthur F. Burns, into the low rates that led to the double-digit inflation of the late '70s.
Reagan was wise enough not to mess with Paul Volcker, the chairman he inherited, whose hard medicine caused a painful double-dip recession (1980-82) before taming inflation. Soon it was morning in America.
Fed independence has been accepted as an article of faith since then, at least until Trump. He badgered his first Fed chair, Jerome Powell-"numbskull"-for lower rates, and Warsh may be in for the same.
Warsh would do well to review the history of Martin, the Treasury assistant who helped bring to fruition the 1951 accord. Days after it was signed, Truman forced out Fed Chairman McCabe and replaced him with Martin. It looked like a presidential power play.
But Martin protected Fed independence so well during his long tenure (1951-70) that years later, running into Truman on a New York City street, the former president uttered one word to him: "Traitor."
A Fed chief can hope for no higher praise.
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