The Region

Carter Glass was right: The structure of the Federal Reserve is important

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Gary H. Stern - President, 1985-2009

Published December 1, 1997  |  December 1997 issue

This issue of The Region features an "interview" with Carter Glass, one of the founders of the Federal Reserve. Although somewhat whimsical, the interview covers several matters of current significance, including the payments system, nationwide branch banking and the nature of central banking. At the risk of taking all of this too seriously, it is the last issue on which I intend to focus, admitting at the outset that I may not be the most objective commentator available.

The interview goes to some length to point out that "balance" was a principal concern in the design of the Federal Reserve. And the term balance as applied to the Federal Reserve was used in several ways: balance between government and private interests, between large and small banks, between banking and other business and community interests, between diverse economic regions of the country and, finally, as justification for dispersion of responsibility throughout the Federal Reserve.

A question that naturally arises, 80 plus years after establishment of the Federal Reserve, is: In light of all the technological, legislative and market driven change that has occurred, do these concerns with balance continue to make sense, or do they represent excessively expensive inefficiencies? This question, in turn, raises an even more fundamental issue, namely: What do we value in the structure of the Federal Reserve?

There is a significant distinction between a central bank and a central banking system. The Federal Reserve is clearly the latter—Carter Glass was emphatic in affirming this point, as his numerous speeches, essays, letters and autobiography attest—and, I would argue, appropriately so. The word "system" has at least two connotations. First, as noted above, it implies that decision-making authority is shared among the senior officials who lead the organization; it is a joint effort. And secondly, the phrase "central banking system" implies an institution which, in carrying out its responsibilities, actively participates in the economic life of the nation. The Federal Reserve was not intended to be a think tank, issuing policy proclamations from some distant and isolated mountain top.

Indeed, the Federal Reserve System directly carries out a variety of important functions, including the provision of payments services and neighborhood housing and community reinvestment programs, in addition to its monetary policy and banking supervision responsibilities. While not necessarily high profile, these efforts should not be underrated. For example, the payments system in the United States operates so effectively and efficiently that in fact most people never give it a thought—they simply take it for granted. But it requires considerable resources and coordination, from both the banking system and the Federal Reserve, to make the payments system function as it does. This is not to say that improvements in payments are impossible, but rather to emphasize that changes should avoid disruption of a system which works quite well and with which most are well satisfied. Further, direct involvement in payments has proven valuable to the Federal Reserve in fostering a comprehensive understanding of both how particular markets work and how to restore stability when disruptions occur.

In the conduct of monetary policy, its paramount responsibility, the Federal Reserve calls upon extensive local and regional networks, including Reserve bank directors, advisory council members, and business leaders, for economic intelligence and views on appropriate action. Such contacts provide a hands-on and timely reading of current developments and, moreover, help in the assessment of risks and opportunities.

All of this is to say that the Federal Reserve System is grounded in reality and is, in many ways, part and parcel of the economy it serves. This characteristic is one of the true advantages of our central banking system. It is, to my mind, an integral part of the answer to the question posed earlier, namely: What do we value in the structure of the Federal Reserve?

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