Speech

The Federal Reserve as a Democratic Institution TheHutchinsonLecture UniversityofDelaware Newark,Delaware April28,1999 For quite some years, I have been fasci- simplyassumethattheFedisagovernmental nated by the issue of what we mean by entity. a “democratic institution,” especially Beforeproceeding,Iwanttoemphasizethat inthecontextofanation’scentralbank. theviewsIexpressherearemineanddonot As you might suspect, my interest in this subject necessarilyreflectofficialpositionsoftheFederal hasincreasedsinceIcametotheFederalReserve ReserveSystem.Ithankmycolleaguesatthe Bank of St. Louis last year. FederalReserveBankofSt.Louisfortheircom- Historically,somecentralbankshaveenjoyed ments,butIretainfullcreditforerrors. considerableindependencefromtheelected nationalgovernment.Leadingexamplesarethe centralbanksoftheUnitedStates,Germanyand DEMOCRATIC Switzerland.Inrecentyears,theUnitedKingdom, ACCOUNTABILITY—THE BASICS Japan,NewZealandandanumberofothercoun- Iamaneconomist,notapoliticalscientist, trieshaveincreasedtheindependenceoftheir andsomyanalysisreflectstheperspectiveofan centralbanksandrequiredgreaterdisclosureof economist.Politicalscientists,however,have centralbankoperationsandplans.Thecharter notwrittenextensivelyontheFederalReserve forthenewEuropeanCentralBank,chargedwith System;Ithinkitfairtosaythatofimportant managingmonetarypolicyfortheeuro,provides U.S.politicalinstitutions,theFederalReserveis forgreatindependence.Evidenceoncentralbank easilythemostneglectedinthepoliticalscience performanceinavarietyofinstitutionalsettings literature.IfIamminingdepositsthatrightfully suggeststhatindependenceimprovesresults; belongtoadifferentdiscipline,itisnotbecause thisevidencehashadmuchtodowithdecisions economistsareimperialists,butbecauseimportant bymanycountriestoincreasetheindependence issueshavenotbeenadequatelyexaminedby oftheircentralbanks. thatotherdiscipline. Doescentralbankindependencemeanthat WhenIstudiedAmericanhistoryinhigh societieshavebackedawayfromdemocratic school,animportanttopicwasthedevelopment controlofthisimportantinstitution,ordoes ofournation’sdemocracy.WhatIespecially independenceinfactincreasedemocraticcontrol? rememberaboutdemocracyfromthosedays, Inourcountry,thequestionis:Justhowdemo- however,arethelessonsmyteacherstaughtabout craticistheFederalReserveSystem? democracyfromourownexerciseofelectingclass Iwillassume,fornow,thatcentralbanking officers.Whenrunningforoffice,westatedour isinherentlyagovernmentalfunction.Federal positionsonschoolmatters.Ourteacherstaught ReserveBanksactuallyhaveamixedpublic/ usthattheessenceofdemocracyisvoting.But, privatestatusunderU.S.law,butgiventhatthe amazinglyenoughwhenyouthinkaboutit,they controllingstatuteistheFederalReserveAct,I alsotaughtusthatitwasunseemlytoactually willignorethepublic/privatecomplicationsand campaignforoffice. 1

FEDERALRESERVE Overtheyears,Icametoappreciatejusthow BoardofGovernorsoftheFederalReserveSystem; wrongthatteachingwas.Votingmeansnothing eachmemberhasa14-yearterm.Atermexpires withoutinformationandthecompetitionofideas. everyotheryear.Amembermayserveonefull Andwhatsortofdemocraticcontroldowereally 14-yearterm,orapartialtermwhenavacancy havethroughtheballotboxwhenthereareonly arisesfollowedbyafull14-yeartermupon twocandidatesbutdozensofissues? reappointmentandSenateconfirmation.Once Weliveinacomplexsociety.Directdemoc- appointed,amembermaynotberemovedbythe racy—votingoneachandeveryissueinthestyle Presidentbutonlythroughtheimpeachment ofaNewEnglandtownmeeting—isnotfeasible. processdefinedintheConstitution. Inanygivenpoliticalcampaign,wefindthat10 ThePresidentappointsthechairmanofthe or20issuesareactivelydiscussed.Atthefederal BoardofGovernorsfromamongthesevenmemlevel,thegovernmentadministershundredsupon bers.Thechairmanservesafour-yearterm,which hundredsofprogramsofmanydifferentkinds. beginsuponSenateconfirmation.Thechairman Whatwemeanbydemocraticcontroloverthe canbereappointedduringhistermasagovernor. governmentcertainlydoesnotmeanthateachof TwelveFederalReserveBanksarescattered theseprogramsissomehowcontrolledanddisciaroundthecountry.Eachhasapresidentselected plinedbythevotersateachelection.WenecesthroughaprocessIwilldescribeinamoment. sarilyvoteforournationalleadersonthebasis TheReserveBanksareoperationalcentersfor ofahandfulofspecificissuesandageneralized FederalReserveactivitiesinvolvingsuchservices viewaboutthecandidates’qualificationstodirect ashandlingcurrency,clearingchecksandsupertheadministrationofthevastenterpriseof visingbanks. government. Inbroadoutline,eachFederalReserveBank Clearly,then,theissueofdemocraticaccounthasalegalorganizationsimilarinmanyrespects abilityofanyparticularagencydoesnotdepend tothatofanyothercorporation.AReserveBank ontheagencyheadbeingelected.Inourfederal isgovernedbyaboardofdirectors,subjectto system,onlythePresidentoftheUnitedStatesis generaloversightbytheBoardofGovernorsand electedbytheentireelectorate.ThePresident therequirementsimposedbyCongressinthe appointskeyofficials,mostsubjecttoSenate FederalReserveAct. confirmation.Followingthisstandardpattern, WhenaReserveBankpresidencybecomes thePresidentappoints,andtheSenateconfirms, vacant,theBank’sboardofdirectorsconductsa membersoftheBoardofGovernorsoftheFederal searchandscreenscandidatesintheusualfashion. ReserveSystem. Afterthat,intypicalFederalReservefashion, IsappointmentbythePresidentandconfirmatheprocessgetsalittlemorecomplex.Thelaw tionbytheSenateallwemeanbyademocratic providesforacheckandbalance—theFederal institutionintheUnitedStates?Ithinknot—I ReserveActveststheBank’sboardwithpower amconvincednot—andthatismysubjectthis toappointthepresident,butgivestheBoardof evening. Governorspowertoapprovetheappointment. Thusthelocalboard,withitsmixofpublicand privateinterests,playsamajorrole,butitsdiscre- THE FED’S GOVERNANCE tiontoactiskeptincheckbytheneedtosecure STRUCTURE TODAY approvaloftheappointmentfromtheBoardof I’llbeginbybrieflyoutliningtheFederal Governors.Sufficeittosaythatbothboardstake Reserve’scurrentgovernancestructure.AndI theirrespectiverolesintheprocessveryseriously. askyoutobearwithmeforabouttwofullminutes Onceappointed,aReserveBankpresidentserves ofdetailonwhoappointswhomwhen.The atthepleasureoftheBank’sboardandmaybe Presidentappointsthesevenmembersofthe removedforcausebytheBoardofGovernors. 2

TheFederalReserveasaDemocraticInstitution TheReserveBankpresidentisthechief clearabouttheresponsibilitiesofthatentity.What, executiveofficerandhasthetypicalcorporate exactly,istheFederalReservesupposedtodo? responsibilityofadministeringtheBank’sopera- Centralbankresponsibilitiesarenotthesame tions.TheBankpresidentalsositsontheFederal inallthecountriesoftheworld.Arrangements Reserve’smainpolicymakingbody,theFederal foroperatingthepaymentssystemandsupervising OpenMarketCommittee.Thevotingmembership banksvaryfromonecountrytoanother.Clearly, ofthatcommitteeisthesevenmembersofthe though,theessentialcentralbankresponsibility BoardofGovernorsandfiveofthetwelveReserve iscontrolovermonetarypolicy.Whilesome Bankpresidents.ThepresidentoftheFederal countriescanoperatetheirmonetarysystemby ReserveBankofNewYorkisalwaysavoting tyingtheircurrenciescloselytotheU.S.dollar member,andtheotherfourvotingmembersserve orsomeothercurrency,U.S.monetarypolicyis onarotatingbasisfromamongtheothereleven nottiedtoanexternalstandard.Before1933,the ReserveBanks.Inmycase,forexample,thevote FederalReservedidconductmonetarypolicyby rotateseverythreeyearsamongthepresidentsof adheringtoanexternalstandard—thegoldstantheFederalReserveBanksofSt.Louis,Dallas, dard.Now,theU.S.dollarispurefiatmoney, andAtlanta. whosepurchasingpowerisdeterminedbythe WheredotheReserveBankboardsofdirectors Fed’sdecisionsandtheirinteractionswiththe comefrom?Eachboardconsistsofninemembers. U.S.andworldeconomies. Aboardmemberservesforathree-yearterm, TheFederalReserve’sprimeresponsibilityis whichcanberenewedforanadditionalthree- tomaintainthepurchasingpoweroftheU.S.dolyearterm.Sixoftheninemembersareelected larandthestabilityoftheaggregateU.S.econbythememberbankswithintheFederalReserve omy.Tomaintainthepurchasingpowerofthe dollar,theFedmustregulatethesupplyofdol- District;theotherthreearepublicmembersreclarssothatitmatchesthedemandfordollarsat ommendedbythelocalFederalReserveBank astablepricelevel,oralowandsteadyrateof andappointedbytheBoardofGovernorsin inflationforthosewhoprefertoputthepolicy Washington.Theboardofdirector’schairman goalthatway. anddeputychairmanaredrawnfromthethree TheFederalReserve,workingcloselywith publicmembersandnamedbytheBoardof partsofthegovernmentliketheU.S.Treasuryand Governors. theFederalDepositInsuranceCorporation,is Stillwithme?Ihopeso.Thegovernance responsibleforsafeguardingthebankingsystem structureIhavejustdescribedis,Ibelieve,a andensuringthesmoothandreliableoperation sourceofgreatstrengthfortheFederalReserve ofthepaymentssystem.TheFeddistributescur- Systemandasourceofheighteneddemocratic rencytothebanksastheyrequireittomeettheir accountabilitycomparedtoanarrangementin depositors’needs.TheFedpullssuspectedcounwhich,forexample,thecentralbankisacabinet terfeitbillsoutofcirculationandturnsthemover departmentorsubsidiaryunitoftheTreasury.I totheSecretServiceforverificationandinvestithoughtthatbeforeIcametotheSt.LouisFed, gation.MostofusforgethowimportantthisfuncandIthinkitnow.TheissueIwanttoexploreis tionis;thinkofhowchaoticyoureverydaylife whythisarrangement—whichappearstobefar wouldbeifyoucouldnotacceptasamatterof removedfromourusualmodelofdemocratic coursethatthepapermoneyyouuseisreliable accountability—isinfactsosuccessful. andnotsubjecttorefusalbecauseoffearofcounterfeitbills?Extendingthisresponsibility,theFed overseesthebankingsystemsothatdeposits THE FED’S JOB canbeusedreliablyandpaymentscanbemade Toanalyzethebestformofpoliticalorganiza- cheaplyandonschedulethroughpapercheck tionforanygovernmentalentity,weneedtobe andelectronicfundstransfermechanisms.In 3

FEDERALRESERVE short,anessentialpartoftheinfrastructureofa todailylifeareorganizedinamarketeconomy moderneconomyisthecompletereliabilityof withoutthegovernmenttakingprimaryresponthepaymentsmechanismandsettlementsystem. sibility.Forexample,theproductionanddistri- Everyonemustbeabletomakeandreceivepay- butionoffood,thoughinfluencedbygovernment mentsreliably.Suchreliabilityisasimportantto policies,isleftalmostentirelytothemarket. everydaylifeasareliablesupplyofelectricity. Thefactisthatwedonotrelyongovernmentto OveraperiodofmanyyearstheFederal putfoodonthetable,andthereisnoreasonto Reservehasdevelopedextensiveexpertisein believethatthegovernmentcouldproducea operatingthepaymentssystem.Therearemany cheaperandmorewholesomefoodsupplythan fascinatingissuesinthisarea,suchasthecontin- themarketeconomydoes. uingtransitionfrompaper-basedpaymentsto Economistshavetraditionallyviewedconelectronicpayments.Thereareissuesofefficiency trolandregulationasaninherentlygovernmental andcost.Withtheoddexceptionofcurrentcon- function.However,afeweconomistshaveargued cernsovertheY2Kissue,however,theseissues thatthegovernmentshouldexitthemoneybusidon’toccupythefrontpagesofnewspapers,or nessandleavethecreationandmanagementof eventhefrontpagesofbusinesssectionsof moneyentirelytotheprivatemarket.Thissubnewspapers. jectisfascinatinginitsownright,buttodayI Themostimportantbankregulatoryissuestill merelywanttostatemyconvictionthatthetraoutstanding—onethatcouldhitthefrontpages— ditionalanalysisiscorrect—thecreationand concernstheproblemof“toobigtofail.”Thisis controlofmoneyshouldremainagovernmental theissueofhowbesttoapproachtheproblemof responsibility. verylargebankingorganizationswhosefailure Why,briefly,ismoneyagovernmentresponcouldbehighlydisruptivetotheeconomy.Ifsuch sibility?Thecruxofthematterisnotthatmoney firmsareproppedupbythegovernment,thenthe isespeciallyimportant—foodisalsoimportant, spurtoefficiencyandproperevaluationofrisk buttheproductionanddistributionoffoodworks thatarisesfromtheriskoffailureisremoved. wellintheprivatecompetitivemarketeconomy. Althoughthepaymentssystemandbanking Thecreationanddistributionofmoneyinvolves issuesareimportant,theydonotroutinelyappear important“externaleffects,”aseconomistscall inthedailynews.Whatisregularlyinthenews them,thatpreventamarketsolutionfromworking isgeneralmonetarypolicy.Becauseoftheimpor- satisfactorily.LetmeillustratethispointbyrefertanceoftheFed’spolicyresponsibilities—acentral ringonceagaintocounterfeitmoney.Itishard bank’scontrolofmoneycreationandinterest toseehowacompetitivemarketsystemwould rateshavelargeeffectsontherateofinflation worktoremovecounterfeitbillsfromcirculation. Anyonewhoinadvertentlyacceptsacounterfeit andtheoverallstabilityoftheeconomy—these billhasanincentivetopassthebillalongtosomeissuesoftenappearinthepoliticaldebate.Given oneelseratherthanremoveitfromcirculation. thatmonetarypolicydecisionshavesuchpro- Removingthecounterfeitprovidesabenefittothe foundeffectsonsociety,itisperfectlynatural societyasawhole,butatacosttotheindividual. andfullyappropriatethatwedebatethewaywe Marketexchangesworkwellwhenbothparties exercisepoliticalcontroloverthecentralbank. benefit.WhenIbuyapplesataroadsidestand, thefarmerandIbothbenefitfromthetransaction. WhenIremovecounterfeitcurrencyfromcircu- ARE CENTRAL BANK FUNCTIONS lation,societybenefits,butIlose.Forthisreason, INHERENTLY PUBLIC? itisoptimalforsocietytoprovideagovernment Ihavesofartakenforgrantedthatcentral agencytoassumeresponsibilityformonitoring bankfunctionsareinherentlypublic.Weshould thequalityofthecurrencyandremovingcounrecognize,however,thatmanyactivitiesessential terfeitandunfitbillsforeveryone’sbenefit.The 4

TheFederalReserveasaDemocraticInstitution Fedchargescounterfeitbillsbacktothebanks ningmanyelectoralcycles.Yes,wedoseecities thatsendthemtotheFed,butthisprocedureis thatpavestreetsandpickuptrashjustbeforea partoftheenforcementmechanismandfarfrom mayoralelection.ButIadmitthatIstraightenup voluntaryonthepartofthebanks. myhouseandraketheyardjustbeforeaparty! Thissameprincipleappliestomanyother Inotethatsomeanalystsaccusecorporationsof centralbankactivities.Thegovernmentalfunc- shortsightedbehaviorintryingtopumpupneartionprovidesbenefitsforthesocietyasawhole termearnings.Inshort,althoughallofussuffer thatprivatemarketparticipantsdonothavethe fromtimetotimefromacompressedhorizonthat incentivetoperform. paystoolittleattentiontothelong-termconsequencesofourbehavior,Idonotbelievethat shorthorizonsareaninherentfeatureofgovern- ISSUES OF POLITICAL mentbehavior.Whenvotersandtheirelected representativesunderstandtheneedforalong ACCOUNTABILITY horizon,Ibelievethatourpoliticalprocesscan Ihavearguedthatcentralbankresponsibilities deliverthecorrectpolicies. areinherentlygovernmental.How,then,should weorganizepoliticalcontroloverthecentralbank? The Time-Consistency Problem Thepatterninmanycountrieshistorically I’llillustratethenatureofthetime-consistency wasforthecentralbankgovernortoreporttothe problembyusinganexampledirectlyrelevant treasuryorfinanceministryandforthegovernor tomonetarypolicy.Supposeagovernmentwere toserveatthepleasureoftheheadofgovernment. topromiseeveryonethatthecentralbankwould ThatwasneverthepatternintheUnitedStates. pursueapermanentpolicyconsistentwithzero Fromitsestablishmentin1913,theFederal inflation.Ifthegovernmentweresuccessfulin Reservewasanindependentagencynotsubject convincingpeoplethattheinflationratewould totight,everydaycontrolbythePresidentorthe bezero,thenlong-termbondrateswouldfallto SecretaryoftheTreasury. alevelconsistentwiththatexpectation.Suppose WhatIwanttodonowisanalyzethreeconthatinterestratewouldbe3percent.Thegovernsiderationsthatarerelevanttotheissueofhow mentcouldthenissue100-yearbondsandretire besttoorganizepoliticalcontroloverthecentral allitsshort-termdebt.Bydoingso,thegovernbank.Thesethreeissuesconcernthelengthofthe mentwouldlockinthe3percentinterestratefor politicalhorizon,thetimeconsistencyproblem averylongtime. andtheadvantagesofsingle-purposeagencies. Havingrefinanceditsdebtthisway,thegovernmentmightbesubjecttothetemptationto Length of the Political Horizon permitacertainamountofinflation.With5per- Weoftenhearpeoplesaythatonereasonfor centinflation,therealinterestpaidonthebonds centralbankindependenceisthatthepolitical wouldbeminus2percent—the3percentmoney processinherentlyhasashorthorizon,extending interestwouldnotevencovertheinflationrate. atbesttothedateofthenextnationalelection,or Inthemarket,theinterestrateonnewdebtmight perhapsthenextpresidentialelection.Iamnot havetoriseto8percent—5percenttocoverthe convincedbythisargument.Myobservationis inflationand3percenttoreflecttherealrateof thatthepoliticalprocessisoften,butnotalways, interest.Clearly,itcouldwellbeintheinterest shortsighted.Oursocietyinfactmakesenormous ofthegovernmenttocreateinflationonceallof investmentsinthefuturethroughgovernment. itsdebthadbeenlockedupin100-yearbonds Governmenttaxessupportschools,highways, at3percent.Suchapolicyissaidtobe“timenationalparks,adefenseestablishmentandmany inconsistent”;whatisoptimalgivenwhathas otheractivitiesthathavepayoffsoveryearsspan- alreadytakenplaceandgiventheexpectations 5

FEDERALRESERVE createdbythepromisetocreatezeroinflationis thebestcompromise. notoptimalasarepeatedmatterfromthebegin- Becausethegovernmentfacesanenormous ning.Shouldeveryonebeawarethatthegovern- numberofissuesatanyonetime,eachelected mentisgoingtofollowapolicyof5percent officialmustcraftcompromisepositionsand inflation,thenthegovernmentcouldneverhave decidewhichissuesneedtocomeoutwhichway. issuedthe100-yearbondsata3percentinterest Anelectedofficialunderstandsfullwellthata rateinthefirstplace. votewillcostsupportamongsomeconstituents Inademocraticsociety,wecertainlywant andgainsupportamongothers.Anofficialneeds politicalarrangementsthatencourageactionsthat tosupportpositionsinsuchawayastoconstruct areoptimalwhenfollowedconsistentlyovertime. acoalitionamongvoterssufficienttogather Someofthecharacteristicsofgovernmentthatwe enoughvotesatthenextelectiontoremainin expecttobemaintainedconsistentlyovertime office. areincorporatedintheConstitutionitself.These Forthevoters,animportantadvantageofa provisionsbindalladministrations,whenever single-purposeagencyisthatthevoterneednot elected,andhelptoavoidthetime-inconsistency tradeoffviewsonthatagencyagainstviewson problem. policiesfollowedbyotheragenciesorareasof Therewasatimeinourhistorywhenadher- governmentalresponsibility.Unlikeamemberof encetothegoldstandardhadthecharacteristic Congresswhomayfindhimselftradingoffvarious ofaconstitution-likeprovision.Intheend,the policyconcernsthathavenoinherentrelationto goldstandarddidnotprovetobeasatisfactory eachother,asingle-purposeagencycanbejudged monetarysystemandthecountryabandonedthat bythevotersagainstitssingleresponsibility.The arrangement.However,wehavenotputinplace FederalReserveapproximatesasingle-purpose aconstitutionalorconstitution-likemonetary agency.TheFedistheonlyagencythatisresponstandardtoreplacethegoldstandard.Wecon- siblefortheaveragerateofinflationinthe tinuetobefacedwiththepossibilitythatany economyoverthelongrun;ofcourse,short-run particularadministrationmayfinditinitsshort- fluctuationsininflationarebeyondtheFed’s runinteresttopursuemonetarypoliciesthatare control,butthelong-runtrendofinflationisthe notinthecountry’slong-runinterest.Thisfactis Fed’sresponsibilityandtheelectoratecanand animportantunderpinningofthecaseforadegree shouldjudgetheFedonitsperformanceinthat ofcentralbankindependencefromtheadminis- regard. trationinpower.Itmakesnodifferencewhether Thisclearfocusofresponsibilityhasagreat theadministrationisDemocratorRepublican,for advantageinademocraticsociety.Inmyopinion, everyadministrationissubjecttothesameundertheFederalReserve’ssubstantialindependence lyingrealitiesthatpoliciesdesignedfortheshortfromthepoliticalprocessrealizesthatadvantage runmaynotbeoptimalforthelongrun. tothemaximumpossibleextentandisanelement ofgreatstrengthinU.S.politicalarrangements. Advantages of Single-Purpose Agencies Ifsomethinggoeswrongwiththeinflationrate, Animportantproblemvotersfaceinchoosing theelectorateknowswhoisresponsibleandcan betweentwocandidatesisthatthenumberof identifythenatureoftheappropriateresponse. issuesonwhichthecandidatesdiffermaybe ThePresidentcanappointdifferentleadership quitelarge.Thevoteforaparticularcandidateis totheFederalReservebyexercisinghispowerof alwaysacompromise,nomatterhowsuperbly appointmenteverytwoyearswhenatermonthe qualifiedacandidateis.Eachofushassurely BoardofGovernorsexpires.Incontrast,ifthe hadtheexperienceofbeingenthusiasticabouta FederalReserveweresetupasacabinetdepartcandidatebutunderstandingthatonsomeissues mentalongthelinesoftheTreasuryDepartment, thecandidatedoesnotreflectourownviews.We voterswouldhavetojudgetheseverityofthe votebasedonourviewastowhichcandidateis inflationproblemagainstallotherdimensionsof 6

TheFederalReserveasaDemocraticInstitution thePresident’sresponsibility. ofaccountabilityinademocraticsociety.Indeed, Ialsobelievethattheregionalfocusofthe withoutthese,themethodfornaminganagency appointmentprocessofReserveBankpresidents headmeanslittle. reinforcescentralbankindependence.Itisimpor- Woulditmakesenseforthenationalelectorate tanttorealizethattheReserveBankpresidentis tovotedirectlytochoosethechairmanofthe chosenthrougharegionalprocessbutisnotpar- FederalReserveSystemand10or20otherkey ticularlyaregionalrepresentative.ReserveBank agencyheads?Idon’tthinkso.Ibelievethatthe presidentsallunderstandthatmonetarypolicy currentmethodofselectingFedleadershipworks isanationalmatter;wedonothaveregional well.TheBoardofGovernorsheadstheFederal ReserveSystem,andtheboard’smembersare monetarypolicies.Myownexampleisinstructive. appointedbythePresidentandconfirmedbythe IhadnotiestotheEighthFederalReserveDistrict, Senate.TheregionalFederalReserveBankshave exceptforanintellectualkinshipreflectingmy leadershipselectedbylocalboardsofdirectors owneducationattheUniversityofChicagoand drawnfromthecommunitiesallovertheUnited theimportanceofChicago-schooleconomicsat States.ThediversityofmethodstochooseFed theFederalReserveBankofSt.Louissincethe leadershipprovides,Ibelieve,adiversityofviews late1950s.Theappointmentprocessthrough andservesasagreatsourceofstrengthforthe ReserveBankboardsofdirectorsratherthan centralbankintheUnitedStates. throughpoliticalprocessesinWashingtonor TheFederalReserve,Ibelieve,ranksfarupin statecapitalsbuttressesthenonpoliticaland ournation’slistofagenciesintermsofresponindependentstatusoftheFederalReserve. sivenessandopenness.TheFedisclosetothe constituentsitservesbyvirtueofnumerous meetingsofadvisoryboardsandprogramsoutin INTERNAL DEBATE AND PUBLIC theFederalReserveDistricts.Itravelextensively INFORMATION throughouttheEighthFederalReserveDistrict, meetingwithgroupsofbankers,businessand Iamsurethatyouagreethatthehighschool communityleaders,newspapereditorsand viewofdemocracyIdescribedatthebeginning electedofficials.Wehavefrequentmeetingsof ofthislectureisextremelyincomplete.Itis,of advisorygroupsatthemainofficeinSt.Louis. course,essentialthatwebeabletovoteforour OurthreeBranchesinMemphis,Louisvilleand leadersholdingelectiveoffice,butfarfromade- LittleRockhavemanycontactswiththeirlocal quatetosimplyvoteforthegoodguysandagainst communities.TheFedprovidesnumerouspubthebums.Everyoneofushasexperiencedtremenlicationsaimedatbothprofessionalaudiences dousfrustrationintryingtodealwithgovernment andcommunityandlayaudiences. agencies.Theseagencies,Iemphasize,areestab- Inaddition,membersofouroperatingstaff lishedbylawswrittenbyourelectedrepresentaincheckclearing,electronicpaymentsandcurtivesandadministeredbyelectedexecutive rency-handlingoperationsmeetfrequentlywith officers—thePresident,agovernor,amayor.All thoseforwhomtheyprovideservices.Banksupertoooftenwefindsuchagenciestobeunresponvisorsandexaminersmeetfrequentlywithbanks sivetoourinquiriesandsecretiveabouttheir notonlyinthecontextofbankexamsthemselves processes. butinmoregeneralcontexts. Whatmakesforahigh-performinggovernment AnelementofReserveBankaccountability agency?Ibelievethatwewanteachagencytobe notwellunderstoodbythegeneralpublic,or responsivetothoseforwhomtheagencyprovides evenbypublicfinanceexperts,stemsfromthe services.Wewanttheagencytobeopentocriti- MonetaryControlActof1980.ThatActrequires cism.Wewanttheagencytoexplainitspolicies theFedtochargeformanyofitsservicesatcost. andpractices.Theseareessentialcharacteristics FederalReserveBankscompetewithprivatefirms 7

FEDERALRESERVE incheck-clearing;indeed,theFedhasaboutone peopletalktomeaboutinternaldebates,Ialways thirdofthisbusinessandtheprivatemarkettwo saythatyoucanassumethatallofthedebates thirds.Mostgovernmentalagenciesproviding youseeontheoutsidearealsoconductedonthe servicesincompetition,orpotentialcompetition, inside. withtheprivatesectorhavetheirpositionspro- Inshort,theFederalReserveisanextraortectedeitherbygrantsofmonopolypowerorby dinarilyhealthyandproductiveorganization.I substantialsubsidiesthatpermitthegovernment believethattheFed’sdegreeofdemocratic agenciestochargepricesfarbelowcost.The accountabilityisextremelyhigh.TheFedis requirementthattheFedpriceservicesatcost responsive,openandapproachable.Itmaintains imposesamarketdisciplinethatsupplements highstandardsofaccountabilityandintegrity politicalaccountability. initsinternaloperationsandtheseparationof Atthenationallevel,Fedgovernorsarefre- personalfinancialgainfromaccesstoinside quentlyseenonCapitolHillprovidingtestimony information. onawidevarietyofsubjects.Thechairman’s testimonyreceiveswidecoverageinnewspapers andontelevision.Ithinkitisfairtosaythatany- CONCLUDING COMMENT onewhodesirescontactwiththeFedhasmany Forme,thekeyquestionoftheFederal opportunitiestoraisequestionsandcomment Reserve’sdemocraticaccountabilityiswhether onwhattheFeddoes. tightercontrolbyelectedofficialswouldimprove Myobservation,certainlynowandIhonestly thatdemocraticaccountability.Iamconvinced believebeforeIcametotheFederalReserveBank not.Ibelievethatthepresentopennessand ofSt.Louis,isthattheFederalReserveismore healthyinternaldebatewouldnotsurviveintact openthananyotheragencyofgovernment.A iftheFederalReserveweremoretightlycontrolled strikingfeatureoftheFederalReserveSystemis bytheelectednationaladministration.IftheFed thatasubstantialdegreeofdifferenceofopinion wereorganizedasacabinetdepartment,Ibelieve onmonetarypolicyissuesisonopendisplay.The itinevitablethatcertaincompromiseswithmon- FederalOpenMarketCommitteevotingsystem etarypolicywouldbestruckasapartofthenormal providesforformaldissentingviewsandan processofbuildingcoalitions,strikingcomproaccompanyingparagraphintheminutesexplainmisesacrossdifferentareasofgovernment.The ingthereasonforthedissent.Fedpublications factthattheFederalReserveisessentiallyasinglefromtheBoardofGovernorsandtheReserve purposeagencywithasignificantdegreeof Banksoftendisplaydifferencesofviewsonconindependencefromday-to-daypoliticalconsidtroversialmatters.Thepressreferstocertain erationsprovidesforaclearlocusofresponsibility membersoftheFOMCas“hawks”or“doves.”I andaclearagencyobjective. believethatallofusintheFedareengagedina ItisoftensaidthattheFederalReserveis commoneffort,butwearenotbashfulaboutairing independentwithinthegovernment,notindehowourviewsmaydifferonhowtoreachthe pendentofthegovernment.Iamconvincedthat commonobjective.WedohaveprofessionaldiffertheFed’sstructure,farfromimpairingpolitical encesthatmatchdifferencesonmonetarypolicy accountability,enhancesit. amongacademicandbusinessanalysts.When 8