33rd President of the United States (1945-1953)
Harry Truman was the primary advocate for maintaining the interest rate peg on government securities. His conflict with the Federal Reserve arose because although he properly pursued the objectives of "good financing," that is, cheap debt for the government, he overlooked the necessities and benefits of an independent monetary policy controlling inflation.
Harry Truman was born on May 8, 1884, to John Anderson Truman and Martha Ellen Young in the town of Lamar, Missouri. In 1901, he graduated from Independence High School. Although he was a good student, he never received any degree higher than that of a high school diploma.
After graduation, he worked a series of jobs in the Kansas City area before enlisting in the Missouri National Guard in 1905. After 1906, Truman lived on and helped operate the family farm in Grandview with his parents and brother. After he left the National Guard in 1911, his jobs in the Grandview area included road overseer and post-master. In addition, he engaged in several failed business ventures that related to raw materials. Truman reenlisted in the National Guard in 1917 and was sent off to fight in World War I, arriving in France on April 13, 1918. He engaged in combat for about two months before the armistice was signed.
Truman's political career began in 1924 when he ran for an eastern judgeship on the Jackson County Court. However, he lost this election to Henry Rummel. For the next two years, he worked as a membership salesman for the Kansas City Automobile Club. In 1926, he was elected to be a judge on the Jackson County Court, where he presided until 1934. At the end of his second term as a judge, Truman was elected to a Missouri seat in the U.S Senate under the Democratic Party. He would serve for a decade in the Senate during what he would call the "happiest 10 years of my life."1
During World War II, Truman served on many committees connected to the administration of the war effort. He headed the Special Committee to Investigate the National Defense Program that was created to investigate the nation's mobilization effort in hopes of making it more efficient. It was later estimated that the results of this investigation saved the government up to $11 billion.
On July 21, 1944, Truman was nominated for the office of vice-president at the Democratic National Convention in Chicago. He was elected to the vice presidency on November 7 of that same year. Six months later, the death of President Franklin Delano Roosevelt thrust Truman into the White House.
From Truman's perspective, the conflict with the Federal Reserve was as much a matter of fairness as it was of economics. While Secretary of the Treasury John W. Snyder made the argument that releasing the peg on interest rates would hurt the fiscal position of the federal government during a crucial period, Truman wanted the Fed's cooperation on the principle of protecting the small town investor. During World War I, Truman had had a personal experience with buying government debt when he bought Liberty Bonds. He then felt cheated when the interest rate on the Liberty Bonds rose after their issue. The value of the bonds declined with their rise in interest yield. Truman remembered this incident as an insult to his patriotism. Now that he was President, he felt an obligation not to let the price of government bonds decline.2
During the second half of the 1940s, through the Fed's interest rate peg, Truman was able to enforce that principle. In the meantime, the United States was playing an important international role, helping to establish the United Nations while redeveloping Europe and Japan through the Marshall Plan and the Truman Doctrine.
But that brief period of peace ended with the outbreak of the Korean War in June of 1950. Truman felt that the United States had to mobilize quickly to stop the spread of communism, as is clearly expressed in his 1951 State of the Union Address:
The threat of world conquest by Soviet Russia endangers our liberty and endangers the kind of world in which the free spirit of man can survive. This threat is aimed at all people who strive to win or defend their own freedom and national independence. Indeed, the state of our Nation is in great part the state of our friends and allies throughout the world. The gun that points at them points at us, also. The threat is a total threat and the danger is a common danger.3
In November of 1950, the Chinese intensified the war by crossing the Yalu River and pushing American forces back toward the 38th parallel. The Truman Administration faced an extended conflict and a possible world war if the fighting expanded into China or the Soviet Union. Even though many U.S. government expenditures in Korea had been funded by tax increases, Chinese entry meant that the Treasury would have to issue new debt to pay for the war. The Fed quickly foresaw the consequences that would arise if the price of U.S. Treasuries continued to be subject to its control. With annualized inflation running near 20 percent in late 1950, the Fed argued that the low peg on interest rates had to be raised. Truman and Snyder countered that cheap financing was still essential for the fight against the communists. In an attempt to reconcile their differences, Truman, Snyder, and members of the FOMC held a series of meetings. In spite of these efforts, the conflict soon spilled over into Congress and into the press.
The Fed forced a resolution of the issue when in February 1951 it informed the White House that it was no longer willing to support the current situation of pegged interest rates.4 Truman called a meeting with the Chairman of the Board of Governors, Thomas McCabe, Allan Sproul, who was the President of the Federal Reserve Bank of New York, and other government policymakers. In that meeting Truman advocated direct credit controls as an alternative method for slowing inflation. This method would allow interest rates to remain unchanged. But the Fed representatives regarded Truman's alternative as a return to the bureaucracy that tightly controlled and rationed the economy during World War II. They also saw this suggestion as part of an attempt by Truman to keep the Fed under the administration's control.
The dispute was settled on March 3, 1951, with the Treasury-Fed Accord. Chairman McCabe would officially resign from his position just six days after the statement of the Accord was released.5 Truman selected Martin to be the next Chairman of the Board of Governors, and the Senate approved his appointment on March 21. This decision bothered some on the Board of Governors, for prior to his appointment, Martin had been with the Treasury and had in fact negotiated the Accord on behalf of the Treasury. However, Chairman Martin in fact worked to solidify the Fed's independence that had been made possible by the Accord.
Truman's administration ended on January 20, 1953. After attending Eisenhower's inauguration, he left Washington by train and headed back to Independence, Missouri. Even after his retirement from the White House, Harry Truman would continue to be recognized for his contributions to postwar stability. He died on December 26, 1972, at the age of 88.
1 John W. McDonald. May 1984. "10 of Truman's Happiest Years Spent in Senate," Independence Examiner Truman Centennial Edition.
2See Robert L. Hetzel and Ralph F. Leach, "The Treasury-Fed Accord: A New Narrative Account," Federal Reserve Bank of Richmond Economic Quarterly 87 (Winter 2001): 39-40.
3See Truman's State of the Union Address of 1951, www.trumanlibrary.org/whistlestop/tap/1851.htm
4For further details, see Hetzel and Leach (2001, 49-53).
5See Hetzel and Leach (2001, 51-52).