Treasury Fed Accord



Allan Sproul (1896-1978)

President of the Federal Reserve Bank of New York (1941-1956)

Allan Sproul was born on March 9, 1896, in San Francisco. He attended high school in the Bay Area and then matriculated at the University of California at Berkeley. World War I disrupted his college education when he enlisted in the Army Air Force and learned to fly bi-planes. He was promoted to officer status and his squadron was sent to Britain in 1918, too late to experience any combat. He returned to California and completed his bachelors degree in pomology, the study of growing fruit, at the College of Agriculture. Sproul applied his degree by working briefly with the California Packing Company, which packaged farm produce, and then as an agricultural adviser for two small banks in Southern California.

Sproul's life and career took a significant turn when a friend recruited him to the Federal Reserve Bank of San Francisco. Sproul accepted a position as the head of the research department at the regional reserve bank. Reminiscing later, he would recall that he did not know what a central bank was. However, given that the Fed had been chartered only seven years before, it was unlikely that even those in the banking industry were entirely aware of what exactly a regional branch of the central bank was supposed to do. Starting in 1920, Allan Sproul compiled and presented economic data concerning the conditions of the twelfth Federal Reserve district. He soon became the assistant to the chairman and secretary of the bank and began to learn how economic policy was formed.1 By 1924, Sproul had himself become secretary of the San Francisco bank. His new position required him to travel across the country to attend monetary policy meetings in Washington. Those occasional journeys would bring another significant change to Sproul's life. While he was in Washington, his abilities came to the attention of two men from New York, Benjamin Strong and George L. Harrison. Strong was the president of the New York Fed and Harrison was his assistant. They offered the Californian the position of secretary of the New York Fed.

So eager was the New York Fed to obtain Sproul's services that it kept the job offer open long after Strong died in 1928. Although Sproul was initially reluctant to accept the offer, he could not resist the action stirring on the East Coast in the wake of the stock market crash of 1929; in 1930 he decided to accept the post in New York.

Joining the New York Fed as secretary on March 1, 1930, Allan Sproul was first assigned to the foreign exchange department. Four years later he became a special assistant to Harrison, who had taken over as president of the bank after Strong's death, and two years after that he ascended to first vice president, a position that eventually required him to take the helm of the open market Trading Desk. When the former manager on the Desk left the Fed for another job in September of 1938, Allan Sproul was placed in charge of open market operations for the entire Federal Reserve System.

On January 1, 1941, only a decade after he had been persuaded to come to New York, Sproul became president of the bank. The man who brought him there, George Harrison, had decided that the shift in power within the System from NY to the Board in Washington had cut into the prominence of the New York Fed beyond his tolerance; he left and was replaced by Sproul. For Sproul, the presidency of the New York Fed was accompanied by the vice-chairmanship of the Federal Open Market Committee. Sproul's appointment coincided with the start of the Fed's policy of supporting the interest rate peg on Treasury debt issuance. This peg was set at 3/8 percent on the three-month securities and 7/8 percent on one-year bills.

As vice-chairman of the FOMC, Sproul worked with Marriner Eccles, who was the chairman of the FOMC. Eccles and Sproul were not in agreement on every monetary policy issue, but they did agree that the rates of 3/8 and 7/8 on two short-term securities were too low given the 2 to 2.5 percent rate being offered on the longer-term bonds. With the yield spread so wide, they felt that the Fed would end up holding an excessive amount of short-term securities when investors and banks exchanged those instruments for longer-term bonds.2

The disagreement between the Treasury and the Fed over the bond spread would soon expand into a wider conflict. With the war's end, the necessity to maintain the rate peg was called into question. In 1948, President Truman declined to reappoint Marriner Eccles as Chairman of the Board of Governors. Although denied the chairmanship, Eccles remained on the Board.

With the outbreak of the Korean War in June 1950, the conflict heated up between the Fed and the Treasury. With the likelihood of new debt issuance on the horizon, Treasury tried to persuade the Fed to continue its maintenance of the interest rate peg. Some members of Congress, like Illinois Senator Paul Douglas, sided with the Fed. Others, like Texas Representative Wright Patman, sided with the President. Sproul, Eccles, and McCabe were the leading members of the FOMC who voiced their concerns over the effect of the interest rate peg on money stock growth and inflation. Eccles labeled his own institution an "engine of inflation."3 Sproul asserted that under current circumstances, the Federal Reserve was being forced to behave as a bureau of the Treasury rather than an independent central bank.4 In early 1951, in the final months of the dispute, Sproul and Chairman McCabe corresponded extensively and also met with President Truman and Treasury Secretary Snyder in an effort to settle the disagreement. Truman advocated other methods of stopping credit and money growth besides raising interest rates. Sproul maintained that the Federal Reserve could only retain monetary control by permitting the market to determine the interest rate. The Fed remained firm in its position, and since the Treasury needed to retain investor confidence in the government securities markets, it decided to settle and negotiated the Accord.5

The political firestorm surrounding the Accord created an uncomfortable environment for Allan Sproul.6 His main concerns were with the proper functioning of monetary policy. The public attention that he received during the controversy was something that he hoped to avoid in the future; however, he was to enter another institutional battle soon after the Accord. The Fed had a new Chairman, William McChesney Martin, Jr.; McCabe and Eccles, with whom Sproul had successfully worked to secure Fed independence, resigned and returned to their home states. The source of this new conflict was the issue of whether the Fed should restrict its open market operations to trading just Treasury bills. This "bills-only" policy was enacted in September of 1953 by the Board of Governors in Washington D.C. Sproul opposed the bills-only policy on the grounds that it closed off other potential channels in the monetary transmission mechanism and thus inhibited the speed with which monetary policy actions could take effect.7 Another aspect of the controversy involved a power rivalry within the Federal Reserve System. As a regional bank in the nation's financial capital, the New York Fed was more influential than other banks in the system. Sproul believed that "bills only" was simply an effort by the Board of Governors in Washington to gain an upper hand over the New York Fed.8

Sproul had little liking for the politics of the struggle that he led against the Board. The conflict was emotionally and physically damaging to Sproul and may have caused the ulcers from which he suffered. At this point in his career, he felt that the rewards were hardly worth the stress. Thus, in a move that surprised many of his colleagues, he resigned his presidency on June 30, 1956, and moved back to California.

The bills only policy that Allan Sproul opposed was eventually abandoned in 1961. At that time, it was deemed ineffective in coordinating interest rates with objectives in the balance-of-payments. After his retirement, Sproul maintained an active life in the banking industry. In particular, he gave many presentations to the Wells Fargo bank. He maintained contact with those who had served with him during his tenure at the New York Fed, including Marriner Eccles, who was also living in California. He continued working until seven weeks before his death on February 21, 1978.


1Today, these nominal positions do not exist within the regional banks. Most of these adjustments came with the Banking Act of 1935. Prior to 1935, men like Benjamin Strong and George Harrison were called "governors" of the Federal Reserve Bank of New York, whereas today they would be called "presidents." Positions within the Board of Governors also evolved with the Banking Act. The Board of Governors itself was called the "Federal Reserve Board." It was seated by four "members," who today would be the equivalent of "governors"; today's "chairman" and "vice-chairman" of the Board of Governors were then called the "governor" and "vice-governor" of the Federal Reserve Board. For more information on the changes produced by the Banking Act of 1935, see Carl H. Moore, The Federal Reserve System: A History of the First 75 Years (North Carolina. McFarland & Company, Inc., 1990) pp. 88-89.

2See Selected Papers of Allan Sproul, ed. Lawrence S. Ritter (New York: Federal Reserve Bank of New York, 1980) p. 7-8.

3Selected Papers of Allan Sproul (1980, 11).

4Robert L. Hetzel and Ralph F. Leach, "The Treasury-Fed Accord: A New Narrative Account," Federal Reserve Bank of Richmond Economic Quarterly 87 (Winter 2001): 44.

5See Hetzel and Leach (2001, 33-55).

6Selected Papers of Allan Sproul (1980, 11).

7See Robert L. Hetzel and Ralph F. Leach, "After the Accord: Reminiscences on the Birth of the Modern Fed," Federal Reserve Bank of Richmond Economic Quarterly 87 (Winter 2001): 57-64.

8The original designers of the Federal Reserve System intended for monetary power to be decentralized, away from Washington. The 12 regional banks located throughout the country were given some discretion with regard to discount rates and banking regulation. However, with its close proximity to Wall Street, the Federal Reserve Bank of New York quickly became the most powerful regional bank within the system. This was in part due to the amount of assets that it had under management, but was also attributed to its control over the Trading Desk.
The Trading Desk comprises a group of traders at the New York Fed who conduct financial transactions on behalf of the entire Federal Reserve System. Today, these transactions are commonly referred to as open market operations, which consist of the purchase or sale of U.S. Treasuries. For a complete discussion of the Trading Desk and open market operations see Ann-Marie Meulendyke, U.S. Monetary Policy & Financial Markets (New York. Federal Reserve Bank of New York, 1998) and Frederic S. Miskin, The Economics of Money, Banking and Financial Markets (New York, Addison Wesley Longman, Inc., 1997).

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