The Political Structure of the Federal Reserve System

Abstract

Public policy is not self-generating; it emerges from institutions. Foremost among the institutions charged with monetary and credit policy formation—an area, like fiscal policy, that has not received from political scientists the attention accorded to micro-economic regulation of particular firms or industries—is the Federal Reserve System. The purpose of this paper is to examine the “fit” of the System's formal structure to (1) the policy functions and the informal policy-forming mechanisms of the “Fed,” and (2) the pattern of interests and values affected by monetary policy. Its thesis is that a substantial gap has developed between these elements.A brief sketch of the formal structure of authority and the historical development of System functions is needed to begin with; this is followed by analysis of the formal and the effective roles of each component of the System along with the internalized interest representation at each level. Then the linkage between the Federal Reserve System and general economic policy is explored. Finally, the conclusion summarizes the findings and suggests briefly how formal structure and policy functions might be brought into closer, more effective alignment.

The Politics of Monetary Policy: A Critical Review

“…A very large proportion of the writing on the Federal Reserve (and central banks in general), including some of the most contemporary writing, is organized around the concept of institutional 'independence'. This ranges from Clifford (1965) and Reagan (1961) to Alesina and Summers (1993) and Cukierman (1992).…”

“…A scholar beginning to study the political aspects of monetary policy and the Federal Reserve in 1975 would have had only a small number of stimulating and useful sources to draw upon. Of those, only one would have been by a political scientist (Reagan, 1961). Work by economists with special interest for political scientists would have included Friedman and Schwartz (1963), Whittlesey (1963), Bach (1950 and1971), Yohe (1966), Canterbury (1967), Borins (1972), and Acheson and Chant (1973).…”

Decentralized central banks: Political ideology and the Federal Reserve System of regional banks

“…Returning to the question posed by Reagan (1961) concerning the functional value of the regional banking system, I argue the Fed does stand to gain from the preservation of the regional banking system. While largely divorced from the monetary policymaking process, the decentralized regional system and its complex appointment procedures facilitate consolidation of an ideologically diverse and politically influential base of elite support for the Fed.…”

“…Writing over a half century ago about the continued existence of the regional banking system and its complex organization and institutional design, Reagan (1961) asked, “what functional value this elaborate structure possesses and whether the Boards would be missed if they were simply abandoned?” This article revisits this question, arguing any effort to assess the role and design of the regional banking system requires looking beyond its direct influence over monetary policy. As a matter of fact, regional banks and their Boards of Directors are no longer directly involved in the conduct and implementation of monetary policy.…”

Coalitions, Power, and the FOMC

“…Concerns about the power and in uence of coalitions lie behind a series of reform proposals over the years. Reagan (1961) was concerned that in the \event of a split within the FRB segment of the committee, however, a solid front by the ve president-members would enable them to determine public policy" (p.67). Others, such as Timberlake (1984) worried that the timing of appointments would make it di cult for an American president to fully implement t h e economic program for which he was elected.…”