The juxtaposition of high unemployment in the Depression and low unemployment in World War II created an intellectual consensus in favor of Keynesian ideas. Based on the experience after the Civil War and World War I, the widespread expectation existed that deflation would follow the war. Resolution replaced indecision in fall 1950 with the entry of the Chinese into the Korean War and the belief in the imminence of World War III.īoth expectations created by historical experience and the intellectual environment worked against a challenge to the Treasury. The Fed struggled internally about whether to challenge the Treasury over its subservience. As was the case after World War I, the Treasury enforced that rate peg well after the end of the war. Just as it had in World War I, in World War II, the Fed pegged interest rates at a low level in order to facilitate the financing of government debt.
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