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Fiscal Dominance and US Monetary: 1940–1975

This narrative investigates the frictions that existed between the Federal Reserve’s monetary policies and the US Treasury’s debt-management operations from the onset of the Second World War through the end of the Federal Reserve’s even-keel actions in mid-1975. The analysis suggests that three factors can help explain why the Federal Reserve compromised the attainment of its statutorily mandated monetary-policy objectives for debt-management reasons: 1) the existence of an existential threat, 2) the fear that to do otherwise would create instability in the banking sector, and 3) the vulnerability of Treasury financing operations to monetary-policy actions that existed when the Treasury did not auction its debts.

Keywords: Federal Reserve, US Treasury, monetary policy, debt management, bills only, even-keel.
JEL classification: N, E02, E5, E6.

Suggested citation: Humpage, Owen F., “Fiscal Dominance and US Monetary: 1940–1975,” Federal Reserve Bank of Cleveland, Working Paper no. 16-32.

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