Independent within—not of—Government: The Emergence of the Federal Reserve as a Modern Central Bank

Independence is the hallmark of modern central banks, but independence is a mutable and fragile concept, because the governments to whom central banks are ultimately responsible can have objectives that take precedence over price stability. This paper traces the Federal Reserve’s emergence as a modern central bank beginning with its abandonment of monetary policy for debt-management operations during the Second World War and through the controversies that led to the Treasury-Federal Reserve accord in 1951. The accord, however, did not end the Federal Reserve’s search for independence. After the accord, the Federal Reserve’s view of responsibilities "within" government led it to policies—even keel and foreign exchange operations—that complicated the System’s ability to conduct monetary policy.