Why did Truman fire MacArthur?

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In a nutshell, MacArthur was fired for continual interference in the politics of the USA rather than applying himself as a better military officer.

After brilliant offensives in Korea and the capture of Pyonyang it appeared the Korean war was finished but the Chinese attacked the UN Forces, crossing the Yalu river with Four infantry armies, three artillery divisions, an anti - aircraft regiment and 260,000 men. The UN forces were forced to retreat and a standoff was achieved at the 38th parallel.
The U.S., during a lull in the fighting, announced that negotiations might be possible with both sides separated by the 38th parallel. As usual MacArthur rejected the idea of a negotiated settlement. MacArthur continued to make statements that were contrary to the official position of Washington, and specifically Truman. The arrogant MacArthur had derailed the U.S. initiative by daring China to continue the war. The Pentagon received his message, which infuriated many high ranking officials. Acheson said that MacArthur had "shot his mouth off" for the last time. The next morning Truman awakened to the news of MacArthur's "sabotage". At that moment he could no longer tolerate his insubordination. Truman had considered firing MacArthur many times previous to this, but this was the last straw. Actually the order of Dec. 6 which MacArthur had disobeyed was explicit enough to warrant court-martial proceedings. MacArthur's statements were causing consternation in Washington as was his insulting personal letter to Ridgway. His advice letter to the House of Representatives again infuriated everyone. The British Government called the letter the "most dangerous" of an "apparently unending series of indiscretions". They claimed it was another irresponsible statement without the authorization of the U.S. or any U.N. member government. The Foreign Secretary complained that MacArthur wanted a war with China, and his leadership could no longer be tolerated. In reality, MacArthur did want to invade China, but in a dangerous way. He suggested using nuclear weapons against them if he was allowed to invade.On Apr. 6 a meeting was held with Truman to determine how to get rid of MacArthur. Truman insisted "I'm going to fire him right now". MacArthur was ordered to turnover his command at once to Lt. General Ridgway. General Bradley warned Truman that if MacArthur heard about the orders before they reached him officially he might resign with an arrogant flair. Truman exclaimed "He isn't going to resign on me, I want him fired". MacArthur's dismissal was announced on late night radio:
"With deep regret I have concluded that General of the Army Douglas MacArthur is unable to give his wholehearted support to the policies of the U.S. Government and of the U.N. in matters pertaining to his official duties. In view of the specific responsibilities imposed upon me by the Constitution of the U.S. and the added responsibilities entrusted to me by the U.N. I have decided that I must make a change in command in the Far East. I have, therefore, relieved General MacArthur of his command and have designated Lt. Gen. Matthew Ridgway as his successor". MacArthur accepted the unsurprising news impassively. He said that he had never disobeyed orders, and that his dismissal was a plot in Washington to weaken the American position in the Far East.

Fundamentally, the reason that MacAurther was fired was that he broke the longstanding U.S. tradition that military officers DON'T try to dictate political decisions to their civilian superiors. In effect, MacAurther was interfering in political matters by making his pronouncements - that is, he was trying to make political policy, rather than execute policy decided upon by the civilian command. Truman was entirely correct in firing him, and only MacAurther's public popularity prevented a court-martial (which, frankly, was entirely warranted, given the situation).
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