Interview with E Gerald Corrigan
President of the Federal Reserve Bank of Minneapolis,
Interview conducted by James E. Fogerty
Minnesota Historical Society
October 23, 1992
JEF: Today I am interviewing E. Gerald Corrigan, President, Federal Reserve Bank of New York and former President, Federal Reserve Bank of Minneapolis. The interview is taking place at the Federal Reserve Bank of Minneapolis [250 Marquette Avenue].
Just two quick questions on where you were born. Are you a native Midwesterner? Are you an Easterner?
EGC: I was born in Waterbury, Connecticut. I went to college at Fairfield University in Connecticut, did all of my graduate work at Fordham University in New York City, went to work at the New York Fed right out of graduate school in 1968.
JEF: So your first job in the Federal Reserve System was in New York.
JEF: And you came from there to—
EGC: I went to Washington in 1979 with Paul Volcker when he was named chairman of the Federal Reserve Board. He was president of the New York Fed then, and when he was named chairman, I went to Washington with him. I spent about a year with him there and then came from Washington to Minneapolis in August of 1980, and was here through the end of 1984.
JEF: What did you think about coming to Minneapolis at that particular time?
EGC: I don't remember that I had any really specific thoughts. I knew a lot of the people at the bank even then, and I did know something of the kind of culture of the bank. I had known Hugh Galusha 1 and, like most people, I had a very high regard for him. So it was obviously an attractive opportunity. I certainly felt that. I also felt that it would be a rare opportunity to get away from the East Coast, if I can put it that way, and learn some things about parts of the country that I otherwise had no exposure to at all. That certainly proved to be the case.
JEF: You were handpicked for this job here in Minneapolis. Did you come into the bank with a kind of an agenda, either for the bank or with regard to your role within the Federal Reserve System generally?
EGC: First of all, I don't know if I was handpicked or not. Steve Keating 2 was chairman of the board then, and Steve was the person who I had the most interaction with in the deliberative process. I liked Steve very, very much. I don't think I had any conception whatsoever in terms of an agenda for the bank. I certainly did have one in the broader setting of the Federal Reserve. That was a very, very difficult period, of course. Interest rates were sky high. The economy was in very tough shape, and I knew full well that getting those economic problems behind us was going to be a difficult, if not painful, process. I was acutely aware of that. And, of course, there were some parts of the economy, especially the agricultural sector in this area, that were even in tougher shape. So that kind of thing was very much on my mind. But I don't think I had any agenda as such.
JEF: There weren't any particular things you felt that you'd been sent out here to do within this region?
EGC: No. Steve did make it quite clear to me that he and the other directors cared a lot about the role of the bank in the community and the particular role that they associated with the president as a kind of figurehead in the community. That turned out to be a lot of fun. The fondest of my many fond memories about my association with the bank was the various road shows that we would do all over the district. Even in that time of very high interest rates when the environment was tough, that was fun. As a matter of fact, there are people from various parts of the district with whom I became friends then that I'm still friends with and still maintain relationships with.
JEF: You had been born in the East, educated in the East, had worked in the East. Did you feel coming out here to a sprawling rural district like this that you had a lot to learn?
EGC: Oh, yes. Oh, yes. Again, that was one of the things that was attractive to me about it. I don't remember who did all the arrangements, but one of the things that was done for me very early on was to visit a few big farms and ranches and things like that, which was a real eye-opener. There's no question about that.
JEF: You mentioned that Mr. Keating, when he was talking with you before you came here, mentioned some roles that he hoped the bank could play in this district to perhaps strengthen or change its role.
EGC: It wasn't a question of changing; I think it was more a question of building on an existing role. I think one of the very, very distinguishing characteristics of the Federal Reserve Bank of Minneapolis relative to the other Reserve banks is that its role in the community, as a part of the community, runs pretty deep. And I think what Steve was talking about is preserving and building on that rather than anything new or different. Again, I really do think that this bank, certainly more than most of the other Reserve banks, does have a deeper set of roots, if you will, in the community broadly defined.
JEF: Do you think that's because the area is fairly lightly populated and does not have a lot of big commercial banks?
EGC: Well, if that were the case, you'd say the same thing about St. Louis or Kansas City or Richmond, and I don't think it's quite the same. I think there's more to it than that. Some of it, I think, just reflects this community in particular—around the Twin Cities especially. It's universally viewed as almost a model in terms of the nature of the relationship between the business community at large and the society at large, and I think to some extent the bank's rather unique position is partly an outgrowth of that. It's a wonderful trait, and you don't find it too many places. But it is different. So I think to some extent the bank is a reflection of that. But, again, it's also true that those traits had been carefully developed. I can't go back before Galusha, but certainly Galusha, had an awful lot to do with creating that institutional culture.
JEF: Did you have any conceptions, do you think, about this area or the Twin Cities or the bank before you came that were borne out, or perhaps changed, when you actually moved here, lived here, and worked with the people here?
EGC: I don't know if I had any preconceptions that I, at least, can remember. The one thing I can say is that based on having lived here and worked here for over four years, I certainly do consider it to be, by my standards, the most livable major metropolitan area that I'm aware of in the country. It's really a very delightful place. I guess I kind of knew something about that beforehand, but that impression is indelible. It's just part of me now.
JEF: Can you give me, as you look back on it, kind of a snapshot of your impressions of this bank when you came, and of its staff?
EGC: I can't, because first of all, as I said, I knew most of the senior people before I got here. So it wasn't as if I was walking in without a pretty good sense of the people and the institution and its traditions. So I don't think I could be much help to you in that kind of a question.
JEF: What do you think the bank was known for at that time? Some of the Federal Reserve banks are known for expertise in particular areas. When you came here, how would you characterize this bank?
EGC: Well, I can think of two or three things that stick in my mind—one we've already talked about. I knew the bank had a rich tradition as a part of the community. That we've already mentioned. It also had, and I think still has, a legitimate reputation for some of the more scholarly research that has been done here for many, many years. As I said, I think that tradition lives on, and rightly so.
I also knew, and this gets into personalities as much as anything else, that several of the people here, most notably Len Fernelius, were the architects of a lot of the top communication systems and things have been pioneered by the Federal Reserve with so much success. But, again, I had worked on a number of Federal Reserve System projects over the years with Tom Gainor, with Len, with Mel Burstein. So, as I said, those were the areas where I think the bank did have, and does have, that kind of special niche.
JEF: Did you have particular research interests of your own that you tried to build up within the bank or encourage within the bank?
EGC: I don't think so. There was some very interesting work that had been going on. I don't think I ever had in mind reinventing the wheel in terms of research. As you know, shortly after I came here, the fellow who at the time was director of research left and went to Washington, and I brought Gary Stern out here as his successor. Gary basically ran the research effort the whole time I was here. He probably came only six months or so after I had come. They had some damn good young people. Some of them are still around. You know, Preston [Miller] is still there. I know there are probably some of the others who are still here. They also had—I guess they still have, too—that interesting connection with the university, the real think tank guys, and they were fun.
JEF: Was that something you tried to promote, too?
EGC: Oh, yes. I mean, it was great fun just to sit around with those guys and brainstorm ideas and things. It was a lot of fun.
JEF: Did you think that was an aspect of this Federal Reserve Bank's place in interrelationships with other organizations that maybe isn't true in some of the other districts?
EGC: No, I don't think you could go that far. As I said, some of the personalities, particularly with the university connection in mind, were quite unique. There's no question that the bank has had for many, many years a legitimate reputation for very scholarly research work. I don't think there's much more you can say. The only thing I was saying is that quite apart from the research work itself, I always thought it was just a hell of a lot of fun to sit around with these guys and just brainstorm things, give and take.
JEF: And see where it went.
JEF: Do you feel there were any particularly key management issues when you arrived here that you found you wanted to pursue that faced the bank in terms of its own operations, its place within the system, or that faced the System at the time that you as the president of the bank were able to address?
EGC: The big issue at that time was not so much an issue that was unique to the Federal Reserve Bank of Minneapolis. The big issue was that the 1980 banking legislation required the Federal Reserve to begin pricing all of its banking services, its check clearing, wire transfer, and all the rest of it. This was an absolutely enormous transition that had to be made. As it turned out, I was also chairman of the Federal Reserve System committee that was trying to engineer that on a systemwide basis as well as in the context of the bank.
That was clearly the major management issue of the day, and it got done very well. Again, the people here, including Len Fernelius and Tom Gainor, both were very much involved, not just again with the effort at the bank, but with the systemwide effort. And I think it was a great success story.
JEF: You think that was a good move? You think it was an appropriate move?
EGC: Oh, yes. It's like a lot of things, it probably didn't come about for exactly the right reasons in the legislative process, but in terms of creating even further incentives for us to run the Federal Reserve with the highest possible degree of efficiency and all the rest of it, I think it was a very big plus in terms of incentives and giving people more purpose in what they were doing and why they were doing it. So I think it was a big, big plus.
JEF: What about that? That's an interesting point. What about the natural tension that there seems to be between the Federal Reserve as a government agency and this emphasis on making a profit?
EGC: Well, we don't really try to earn a profit and I've never thought that the tension was all that great. It goes through its own little peaks and valleys. But I've never been bothered by that. I mean, I think it meant that we had to be very, very, very careful about how we did certain things. But I never viewed that as anything other than a constructive tension. I never viewed it as anything other than that, and I still don't. I do not accept the view, but some people do, that there's something almost wrong with the central bank being in the business of competing, as it were, with private commercial banks for check clearing services. I don't see that there's anything fundamentally wrong there as long as we do it right and play by the rules. I think the Federal Reserve has an absolutely vital role to play in the whole operation of the payment system and all the rest of it, and I think that our efforts, in my mind, unquestionably work to complement and enhance private banks.
Just take this district, for example. I will tell you right now that in some of the remote locations in Montana and elsewhere, they wouldn't have the quality of payment services that they have were it not for the presence of the Federal Reserve. So I don't apologize at all for the Fed's role here. I fundamentally see this tension as a constructive tension, but obviously it means that we have to be, as we have been, very deliberate, very careful, and very conservative in our approach. But that's fine. We should be.
JEF: How much pressure do you think there was, both at the time you were here and since, on the system as a whole to show a profit, however that is construed?
EGC: Well, again, I may be different here, but I don't see that as a big problem either. I've always, I think, taken a more flexible view on that literal point that you make than most others do. But what we try to do, of course, is to approximate the implied rates of return that you would have to achieve were you in the private sector. And it seems to me that that's a very sensible framework within which to do this. You know, there can be cases, and there have been a few and there probably will be others, where experience tends to show that you can't produce that result. I think that where that happens, it can only lead to one conclusion, and that conclusion is you shouldn't be doing that particular task. That's part of the discipline that goes with the process. I've never felt this notion of “make a profit” was a precept that was carved in stone quite the way I think that some people do.
JEF: You don't feel there's any enormous Congressional pressure on the system to do that? It's more an attempt to be accountable and to be efficient?
EGC: There is certainly an attempt to be accountable, but I don't see anything wrong with that. Again, when we first were involved with this in the early eighties, in terms of having literally to start from square zero and build the thing, there was a lot of tension then and a lot of Congressional interest. But basically I think we were able to demonstrate to the Congress and to others, including some of our critics, that not only could we do it, but we're able to do it pretty damn well. You know, all things considered, Congressional interest has actually been relatively limited. But we still are accountable. We do provide the Congress every year with a detailed report and accounting as to what we did, how we did it, and all the rest of it. And, by and large, the Congress and others have pretty much accepted that at face value. So the accountability is clearly there, as it should be. But I don't see that there's any big—I don't see any forest fires here. A little brush fire every now and then, but that's true no matter what you do. That's in the nature of things.
JEF: Do you see any particular new avenues, though? Surely with the emphasis on being accountable, being of value in a banking environment that's changing rapidly, do you see from your vantage point particular new opportunities for the Federal Reserve System in the coming years?
EGC: You mean in this particular area of services or generally?
JEF: Let's talk about in the area of services first.
EGC: I think the very tricky question here is to what extent should, or could, the Federal Reserve really be kind of on the cutting edge of, say, payments technology. Historically we have been, but most of that history occurred in a period in which there were not priced services. Take an aspect of the Fed wire system, for example. The Treasury book entry system was one of the most dynamic innovations ever in the area of payment services and banking services. The Fed clearly was on the cutting edge of that, and even the simple things like check encoding. The Fed is what actually made it happen. But, as I said, most of that occurred before the era of priced services, and one of the questions now is to what extent could, or should, the Fed continue to play that role, and if it does, how does that get financed in the context of this quagmire of pricing and making a profit and all the rest of it. That, I think, is a big question.
There have been some people around here, again including Len Fernelius, for example, who have been very much involved in the technology of, for instance, imaging processing, which has enormous potential in the area of payment-type services. That is a clear example, in my own view, of why we should continue to try to play a role on the side of being in the forefront of innovation. And, frankly, I suspect we will. The expansion of book entry procedures to an ever-widening array of financial instruments is another example. I suspect that replacing the wire systems and all that with satellite communication facilities for payment services and so on is still another one. Those are, I think, all inherently good things, and the Federal Reserve should be in a position to contribute to that process of pushing the horizons of technology in these areas.
JEF: I'd like to talk about that, a couple of those things a little bit more later and get some of your predictions as well. Moving back a moment to when you were here in Minneapolis, you mentioned some of the management issues that you felt were facing not only the bank but the system. Intertwined with some of those, I suspect, are political issues as well as issues that faced the system politically, nationally, and regionally within the Federal Reserve. Do you want to comment on any of those? Because the Fed is inherently a political institution of sorts.
EGC: I think the biggest change that we've seen, and some of it does go directly back to that period in 1980, '81, '82, is that the Federal Reserve has become a much more visible institution than it once was. That, by the way, is true of central banks throughout the world; it's not unique to the United States. But clearly to the average person, the Federal Reserve is now perceived as a very important institution. The public at large perhaps doesn't always have a very detailed grasp of exactly why that's true, but they know it's true. That, I believe, has brought with it a greater degree of accountability, which I think is fine. But I think it's also brought with it a much greater need on our part to be able to better articulate to the public at large not just what we're doing, but why we're doing it.
This is another area that just pops into my mind where I think this bank has done a terrific job over the years. They've done some incredibly pioneering things here in this whole area of economic education, even targeted at grade schools and secondary schools. Incredibly creative stuff. That's one example of what I have in mind. But, again, in terms of the bank, the other thing that we've talked about already is that its roots in the community is a big, big, big plus in terms of being able to better articulate, not just what we do, but why we do it.
It is also true that in the context of this higher visibility, we have an inherently difficult task. I think it could be said if a central bank anyplace finds itself riding the crest of popularity, it probably means that it's not doing the right thing. That isn't the nature of it. But my sense of it is that the institutional credibility of the Federal Reserve has held up quite well, and I think that among many, many people, including the man and woman on the street, it's one of the few instrumentalities of government that has maintained a genuine element of credibility. Now, that's not to say that everybody always agrees with everything we do, but I think there is a recognition that the place has a lot of integrity. In a way, it calls them as it sees them, even when that involves things that are not particularly tasteful.
JEF: Making unpopular decisions.
EGC: Right. I think that's one of the reasons why so many people like to work at the Federal Reserve. I think it's very prevalent here. You know, you can get a feel for it here when you talk to the guards or the people in the cafeteria. There is that sense that the institution is important, it does matter, and it has that sense of purpose, of integrity. People like that. I think it's fundamentally the reason why the Federal Reserve as a whole, including this bank, is as successful in attracting and retaining the quality of people that it has. That's a big plus.
JEF: While you were in Minnesota, in the Ninth District, did you feel in this area here that there were any marked differences between the regions—the country politically seems to be different. I mean, California has a different political mind set insofar as it has any, and New York perhaps more than Alabama. Did you feel that the system is subject to national political feelings, pressures, and priorities? Did you feel there were any within the district, this rather rural, somewhat conservative, rather populist at times district brought its own pressures with it for certain actions, positions, etc., or not?
EGC: I don't think so. One of the things that struck me, especially during that period when we were going through twenty percent interest rates and so on, was how pervasive the view was in the district, even for the farmers and others who were having a rough time, that the inflationary process had gotten out of control, and had to be fixed. What always surprised me was how much support there was for fixing it, even though the process of fixing it was very painful.
I remember Kathy Balkman [Erickson]. She doesn't go by that name anymore. But Kathy and I—I think it was in the summer of 1980 or 1981—were up on the Iron Range. We had a meeting up there with all of the labor leaders. These are tough guys, and they were not very happy. But even there, there was some pretty tough give and take, questions and answers and discussions, but even in that setting, there was some recognition that there really was not an alternative. I really do distinctly remember that.
Another time I recall we had a meeting out in Huron, South Dakota, I think it was, with some of these very, very activist farmer groups. And, again, these guys were really up against it. These were very aggressive people. But there, too, as difficult as some of those discussions were, they were not difficult to the point where you didn't walk away feeling that it was (A) a very good thing to have done, and (B) that there was some genuine understanding on their part as to what the story was. That is, as you can see, a very dominant impression.
As someone new to the area, I was always kind of surprised. You mentioned populism. Hell, we're all populists in this country. That I didn't find terribly different. But what I always found ironic, interesting—I'm not sure what the right word is—that this area as a whole is dominated by what by most standards would be fairly liberal politics, but in a context in which, as individuals, everybody is very conservative, certainly in financial terms. Those are the things that always seemed to me to be almost a contradiction: that, you know, very liberal, by most standards and definitions, political philosophy, side by side with this very conservative financial philosophy and practice. I still don't quite know how I reconcile those two things, but it's very much a characteristic of the entire area.
JEF: Did you travel quite a bit when you were president of the Reserve?
EGC: Oh, yes.
JEF: You enjoyed that part of the work?
EGC: Oh, it was great fun. It really was one of the things that I have fond memories of. Every year we did a road show in one of the states in the district. These things went two-and-a-half, three days, which were hosted, if you will, by a director who was from North Dakota or Montana or wherever. Those things were really terrific. They would always arrange for you to visit factories or farms or whatever that were unique to the area, and over the course of two-and-a-half days or so you would probably meet with three or four different groups of people each day, starting with breakfasts. You really got to see, meet, and, in some cases, know a lot of people on their turf. That was great fun and incredibly informative, too. I never knew what pitchfork fondue was until we experienced that up in—I think it was South Dakota—in the Badlands there. Do you know what a pitchfork fondue is?
JEF: No, I have no idea. I'm waiting for you to tell me. [Laughter]
EGC: We were up on these bluffs, not too far from Mount Rushmore, as a matter of fact. These big fifty-five-gallon drums were filled with some kind of cooking oil and these huge fires, and you get a big pitchfork and you stick on the end of the pitchfork a steak, a big thick steak, and you stick it in as you would a fondue, and that's how you cook it.
JEF: There's your steak. [Laughter] No, I've never heard of that.
EGC: We were up there on those bluffs and the wind was blowing about fifty miles an hour, and I was supposed to give a speech. The wind was blowing so hard the microphones wouldn't work. I ended up standing up on a bale of hay with a handheld megaphone, talking to a group of ranchers and farmers.
JEF: Testing your vocal chords to the utmost.
EGC: But those things were great fun.
JEF: Your board, of course, too, included people from across the region.
JEF: Did you find that useful? Did you find them contributing in that sense?
EGC: Oh, yes, yes. Very much so. The Federal Reserve is very lucky, which is certainly true here. It's true everyplace. You're able to get very good people to serve on the boards. But I've never met—never met—a person who served on a board of a Federal Reserve bank who didn't love it, and certainly that was true here. As I said, you were able to get a tremendous diversity of people in terms not just of geography, but backgrounds, interest, industries, and all the rest of it, and that's the way it's supposed to be. I think that in many, many ways the thing that makes the Federal Reserve special and different is that unique blend of private and public input. The boards of directors, both in form and in substance, really are what make a Federal Reserve bank different, say, from a regional office of the Comptroller of the Currency or a regional office of some other federal instrumentality. It is a great, great source of strength, a great source of strength.
JEF: This area here in Minneapolis is home to two very large—in the region at least—bank holding companies, and there has always seemed to be a sort of a tension between those big banks and their desire to expand and to buy smaller banks, and the rural banks. Certainly in Minnesota, you still see it in their fear of competition from the [Twin] Cities. Give me your view on that tension.
EGC: First of all, it's not unique to Minnesota or the Twin Cities. Most people don't realize this, but if you take New York as an example, as late as 1973, we didn't even have intrastate branching in New York. The New York money center banks were prohibited by state law from having a presence in upstate New York. That was true as late as 1973.
JEF: I didn't realize that.
EGC: Yes. It's not unique to the Ninth Federal Reserve District. Again, it is a source of tension, but I think in some ways the tension is misplaced. I am absolutely convinced that a strong well-managed community bank, an independent bank, is always going to be able to survive and, indeed, to thrive. There are characteristics of those institutions, their relationships with their customers, their relationships with their communities, that simply cannot be displaced.
Again, if you take the example of New York, the great fear was, of course, that when the law was finally changed in 1973 the money-center banks would move upstate and drive all the small banks out. Well, it didn't happen. The small banks ate their lunch, and the small banks are still there, still thriving, still handsomely profitable, and I think that's going to continue to be the case. We are going to see in the United States and in the Ninth District greater consolidation in banking. There's no question about that. That's baked in the cake. But even as it occurs, there is not a shadow of a doubt in my mind that many, many of those small independent community banks will continue to flourish.
I'm not concerned about how that process works itself out. I think it will be fine. But there's no denying that it is a source of tension.
JEF: I hear you saying that when you were president of the Federal Reserve Bank of Minneapolis, you really didn't feel that regardless of whatever the local sentiments might be, that the relationship between what is now Norwest [Wells Fargo] and First Bank [U.S. Bank] and small banks was all that different than it was in some of the other regions.
EGC: I don't think so. I don't know who does this now, but there was a fellow by the name of Norb McGrady who was the executive director, or whatever he was called, of the Minnesota Association of Independent Banks, and he was a feisty fellow. He was genuine, he was a sweetheart of a guy, but he was a really feisty guy. And he really took seriously his mandate, as he saw it, to preserve and protect the well-being of those small independent banks. But I always felt that as feisty as he was, we always had a terrific relationship with him in terms of give-and-take and so on. So, again, there's no denying that it is an issue and will continue to be an issue. But I think it's one that's clearly manageable.
JEF: What relationship did you as president have with the presidents of the big bank holding companies here in the Cities?
EGC: I got to know them all quite well. It was, I think, a constructive relationship. It was during that time frame that they both had some difficult—but not horrendously difficult—but some tough times, from which they have obviously recovered rather nicely. But I personally thought that my relationships not just with them but with the entire banking and business community here were pretty good.
JEF: Do you think there has been an evolution over the last ten years or so in the role that the president of a regional Federal Reserve bank plays?
EGC: Yes. Again, that gets back to the point I made before about the higher visibility. I think that the president of a Reserve bank has to play a larger role in that whole process of interaction with the community at large, trying to do all he or she can do to help promote broad understanding and, indeed, support for what it is that we're trying to do. So, yes, I think the premium placed on that aspect of the job has increased.
JEF: What about the role that the regional presidents play within the system itself? Has that changed and evolved, too? How would you characterize that?
EGC: That's a tough one. That's a tough one. I think it is probably true that that aspect of the thing tends to be driven as much by individuals as it is by events, and individuals on all sides, too. I say this with both respect and fondness, but when you have a Federal Reserve chairman like Arthur [F.] Burns, it's going to be a one-man show. If you have a Bill Martin 3 or a Paul Volcker or [Chairman of the Board of Governors of the Federal Reserve System] Alan Greenspan, it's a different ball game. So I do think that individuals have an awful lot to do with that.
On the whole, I guess I don't think there has been that big of a change other than what you could explain principally by personalities.
JEF: Do you think the political and economic environment within which an Arthur Burns could play the role that he did has changed, though? Do you think there is as much room for a one-man show now as there was ten years ago?
EGC: [Pause] That's a tough one. I have to tell you, though, I kind of think that if you superimposed Arthur Burns on 1992 instead of 1972, the result would be about the same.
JEF: Like J. Pierpont Morgan, he would prevail? 4 [Laughter] Interesting comment.
That brings me to a couple of questions that key off of that a little bit, and that is the general changes in the banking environment that you see. You've mentioned some of them-including the increasing consolidation. Clearly, the S[avings]&L[oan] failures have been massive. Now there is increasing concern about the commercial banking environment.
EGC: That concern is misplaced.
JEF: You believe it is?
EGC: That's not to say there aren't some individual problems here and there, but the banking system as a whole is much stronger today than it has been at any time in the past twenty-five years.
JEF: Within the United States. Do you feel that's true within Europe as well? Do you think that the banking systems within Western Europe are as strong as you clearly feel they are in the United States, for instance?
EGC: Yes. As a matter of fact, in a number of cases, they're probably stronger. The German and Swiss are probably stronger still.
JEF: Is that because of their underlying economies, do you think, because of the way they're run?
EGC: Well, frankly, part of the reason is that they haven't yet felt the full impact of all of the changes in technology and so on that have altered the value of the banking franchise in this country and in Great Britain. But their day will come. But so far they've been relatively sheltered from that process. People don't realize it, but Germany, for example, even today has rather underdeveloped capital markets, and the banks are still the dominant feature of the financial system as a whole.
JEF: So the competitive environment in Europe is much less, you think, so far?
EGC: Competitive in the broadest sense. But, again, that will change. It's beginning to change now.
JEF: I hear you saying that your view really is that globally the banking system, given the fact that the concentration of banking assets is largely in South America, Europe, Japan, is sound.
EGC: We still have work to do in this country. I mean, I'm not satisfied. I'm just saying that the system has been on the course of strengthening itself basically for the past five years or so. But there was a period of twenty or more years before that where, frankly, it was going the other way. Now we're reversing that. We still have some ways to go, but there's no question that we are moving in the right direction.
I think that the other place where there is work to be done in a major country is in Japan. They've had their share of problems, and they're just getting themselves through this tremendous asset price bubble situation, and it's going to take some time to work that all out. But, on the whole, if you went back ten years ago and you looked at the exposure of the international banking system, for example, to the LDCs [Lesser Developed Countries], that was pretty threatening stuff. That problem is history. So just from that point of view alone, we've made up a lot of ground.
JEF: From your vantage point at the New York Fed, the flagship bank of the system, what do you think are some of the international banking issues that need to be addressed, are being addressed, perhaps, in the next ten years?
EGC: There's a whole bunch of them, actually. First of all, banking structures everyplace are changing a lot. In Europe you're beginning to see consolidation of banks and insurance companies, securities firms. That process has a long way to go, and that raises a lot of issues, including how do you try to regulate these so-called financial conglomerates. I think this explosive growth in off-balance-sheet activities, financial derivatives, and so on, is another huge issue. The whole question of how we, on a global scale, build into existing international bank capital standards, proper allowances for so-called price and market risk on securities and other financial instruments is a major problem. I think that the whole question as to how we rationalize, or better rationalize, I should say, the cross-border establishment of banking offices and institutions is another great big problem. All those things grow out of both technology, again, which is driving this train and the associated process of globalization of finance. But those are going to be huge issues as far out as anybody can see.
JEF: Talking about the globalization of finance, what impact do you think, from the vantage point that you have now, that is going to have on central banks and their ability to control the financial system?
EGC: I think central banks have the ability to control, but the most important implication it has is the need, the clear need, for greater communication and coordination of monetary and regulatory policies across national borders. That's the big issue. No man is an island, but no monetary system is either. Our country hasn't even yet intellectually grasped the fact that, for example, the dollar exchange rate, which is so important, say, to all these farmers who export so much, could be influenced by things far removed from New York or Washington or Minneapolis. That phenomenon, as I said, affects every single one of us one way or another, and if you're a farmer, it really affects you. I think that's in some ways the most graphic illustration of the point.
JEF: What prognosis do you have at the movement for the common European currency?
EGC: I think the events of the past six weeks have certainly postponed it a bit. I've always felt that a greater degree of economic integration in Europe made a lot of sense, and I still do. But I think, at least in a temporary sense, that process has been set back by the events of the past six or eight weeks. But I still think it's fundamentally that—a setback—but not a reversal. I also think that it's going to take a little more time to sort out the implications of the events of the past six or eight weeks. They clearly have a very large political element, as well as an economic and financial element.
JEF: And so much of it based on emotion, inevitably.
EGC: Oh, sure. Sure.
JEF: Among the industries that I work with a lot, is the sugar beet industry, which, of course, has an immense stake in the outcome of those talks because of the European Common Market's persistent overproduction of sugar.
EGC: The agricultural aspect of the GATT [General Agreement on Tariffs and Trade] talks is the tough nut. There's no question about that.
JEF: A topic of interest, I think, is whether you feel that there is any need for concern in the United States, as there always seems to be, although another emotional issue, is about the ownership of US banks by foreign banks. Is this really a problem, or is it rather like the farm land issue 5, do you think?
EGC: I don't see it as a problem. I suppose there is some threshold where I might see it as a problem, but I don't see that we're anywhere near that threshold. The foreign banks fundamentally, of course, represent another source of competition, and all competition is a good thing. I think that's how we should look at it. But we also have to understand that if we're going to get concerned about foreign banks here, other people are going to get concerned about our banks over there. The fact of the matter is that our big banks have major operations all over the world, and I think that's in our national interest, by the way. So you can't have it both ways.
You know, there's another example of this that people lose sight of. Take the automobile industry. There's a tremendous concern in this country, which I can understand up to some point, about foreign-made cars—whether imports or so-called transplants. Well, you know, that's a bit of a problem. But let's face it. First of all, it has been the foreign competition that has provided the cutting edge that has helped our auto industry begin to get its act together, and our auto industry is now producing some damn good cars at very competitive prices.
Another thing we tend to forget, that almost nobody pays any attention to, is that General Motors and Ford, believe it or not, have twenty-five percent of the market share in Europe. But it's not through exports; it's through production by their affiliates and subsidiaries in Europe. But those two companies have twenty-five percent of the market share in Europe. So, again, you can't have it both ways.
JEF: And major companies that persistently make profits while their US operations lose money, which is amusing. What do you think about the BCCI [Bank of Credit and Commerce International] scandal? Flash in the pan? Passing problem?
EGC: You mean?
JEF: Its effect on international banking.
EGC: I think that it's an isolated event, first of all. There's no question about that. But it was sufficiently spectacular, however isolated, that it has had an effect. One effect I happened to be directly associated with is, as you may know, that I'm chairman of the so-called Basle Committee on Banking Supervision International. Partly as a result of BCCI, we have just promulgated new minimum standards that will apply on a global basis to certain aspects of supervisory policy for banks that have cross-border establishments and establish some new procedures in terms of how banks go about getting the authority, both from their home country and a host country, to operate cross border. So it has had the effect already of tightening up, if you will, some aspects of supervisory practice and policy as it applies to cross-border banking establishments. That may well be the silver lining behind the cloud, because that's something that, frankly, I think needed to be done anyway. And I think it's probably fair to say that the BCCI affair was a bit of a catalyst in terms of our ability to get it done. But I do think it is clearly an isolated case. However egregious it may have been, it's clearly an isolated case.
JEF: Do you think it will continue to have fallout, or has the major impact of that already—
EGC: Well, no. I think the fallout in the United States has pretty well run its course, but in England that is not the case. As a matter of fact, just yesterday a major report that had been commissioned by the government, by Parliament, the so-called Bingham Report, was released in London. And that Bingham Report, I can assure you, is going to be front-page news in the U.K. for some time to come. But I think here it's probably off the front pages.
JEF: And will not return likely. There's a lot of talk, and this harks back to something you talked about a little while ago, about the checkless society, which always reminds me of the paperless office, you know. What is your prognosis? Is there a checkless society in the future?
EGC: No. I think you will see the use of the check peak in the probably not too distant future and maybe begin to decline a little bit. But checkless society—not in your lifetime or mine. But there are some fairly exciting things happening in terms of the technology here. As I said, image processing is one. Consumers are slow to change, but you can now go to a bank, for example, and for virtually no cost at all, probably less than postage stamps, get a bank to pay your regular household bills for you, your electric bill and that kind of stuff. There's no question in my mind that little by little that is going to catch on, and that's the kind of thing that I think will begin to change. But, as I said, I think for most people those services are available right now probably for less than the cost of a stamp.
JEF: But habit is powerful.
EGC: That's what I say. The inertia factor is incredible. But little by little those things will begin to take hold.
JEF: Do you think that's true also for home banking? It is something that made a huge splash a while ago and then just died.
EGC: I always thought that was a—I don't see that as realistic.
JEF: You never saw people sitting at home clicking out their financial transactions?
EGC: Well, maybe I'm too old-fashioned or something, but I don't see that as a big thing. Small businesses, I think, are going to be able more and more to use that kind of service and indeed use it very effectively. I think if there's an area where you will see a great deal of that type of change, I would say it would be in the small business area rather than at the household level.
JEF: Where there's a real cost benefit to be gotten.
EGC: Oh, yes. And information benefits.
JEF: Some time ago you mentioned the Federal Reserve Bank staffs in various places and certainly here in Minneapolis when you worked here. Every CEO has a management style of some kind. How would you describe your management style?
EGC: I suspect I would describe it differently than most other people would. [Laughter] All right. I guess I have to admit that I tend to be a bit on the hands-on side of things. I think that's in my nature. I don't, however, think that being hands-on implies that you are either unable or unwilling to delegate. I don't think those things are fundamentally in conflict with one another. But I'm sure that the characterization of being hands-on would apply to me. If I admit it, I'm sure other people would say it.
I do very much believe in and try to encourage an element of collegiality. I think that's very important, especially in an institution like the Federal Reserve Bank where very little of what occurs on a day-to-day sense is in isolation from something else. So trying to get people to interact with each other through whatever devices you can create or invent is a very important thing. And I think, as I said, trying to foster some element of collegiality is important. I guess I think people would probably say that, at least in some ways, I tend to be a bit on the demanding side, which I think is probably also true.
JEF: High expectations.
EGC: Yes. But I don't think people really ultimately resent that. I have never, ever, ever, ever had somebody come to me and complain because they were either too busy or they had too much to do. But I had a lot of people come to me and complain that they weren't busy enough, that they weren't challenged enough. So I think that being demanding at times maybe doesn't win you a hell of a lot of popularity points, but at the end of the day I think that, you know, people want to be challenged.
JEF: When you came here, this was your first role as president of a Federal Reserve bank.
JEF: Did you try consciously to develop some kind of a program, a way in which to meet employees, to make them know you or to help to know them better?
EGC: No, I don't think I did; nothing I designed. But I think especially here that it came pretty easily, because this place really is very collegial and not terribly hierarchical. And it's relatively small, which helps, too. So I don't remember that we ever sat down with a piece of paper and said, “This is what's got to be done.” I felt that achieving some semblance of that came pretty easily.
JEF: So you didn't bring anything with you like a desire to do quarterly staff meetings with everybody, or to wander the halls meeting people.
EGC: I don't function that way. I mean, that's not my style. I always think I have a pretty clear idea of an agenda of important issues, and I worry a lot about that. The best example I can give you is this. Everybody these days likes to talk about career paths. Well, I've never spent five minutes thinking about a career path in that meaning of the word. You know, if you're doing the right thing and if the people around you are doing the right thing, that takes care of itself.
The one thing I do strongly believe in is trying to encourage professional development of the people who work for you by providing as much as you possibly can in terms of diversity of experience, taking people from here and putting them there; even though on paper you'd say, “What the hell? That has nothing to do with this.” I am a firm believer in diversity of experience. In my judgment, it builds real strength in people. We did some very unorthodox things when I was here, in terms of moving people around in the interest of trying to develop that diversity of experience.
JEF: These are things you consciously did? I mean, after you got here for a while and got to know people.
EGC: Oh, sure.
JEF: Would consciously move A to position Z, and Z to C?
JEF: Based on your own personal convictions.
EGC: Well, not my own. I mean, Tom Gainor and Len and Mel and Gary, we would always do this in a collegial collaborative way.
JEF: But with a purpose.
EGC: Oh, absolutely. Absolutely. And in New York, they do much more of it. Of course, it's much bigger, so you've got more flexibility in a way in terms of shuffling the deck every now and then. But I was very lucky. I never realized it fully at the time. I came in to the Federal Reserve in the research department. But basically from 1971 to 1979, hell, I did everything but wash the dishes. I was in charge of the accounting department, the personnel department, the computer department, you know. That whole eight-year period I worked basically on the administrative side of the bank, not on the so-called policy side of the bank. I learned more stuff. I didn't realize at the time how incredibly valuable all that was, but, as I said, diversity of experience is what really builds a staff.
JEF: And that's really based, you're saying, on your own experience.
EGC: Oh, yes.
JEF: Did you bring in any of your own people after you got here? People talk about corporate executives bringing their own people with them.
EGC: No. The only person who I brought who might be considered my own was Gary [Stern].
JEF: And you had worked with him in New York.
EGC: Gary had worked for me at the New York Fed when he got out of graduate school, and then he worked in the private sector for seven or eight years. As I said, shortly after I came here, the fellow who was then director of research resigned to take a job in Washington. I ran into Gary at a dinner at the New York Fed shortly after that, and I said to him, “You know, this guy is leaving. If you have any thoughts about somebody I could bring in, because I don't think I have the right person here.”
Then Gary called me up. That was a Friday night. The next Monday morning he said, “I have a person for you.”
I said, “Who's that?”
He said, “Me.”
And I said, “Done.” So he's the only one.
JEF: You had been at New York. You went to Washington and you came here and then you went to New York as president. What was it like going back there as president of the bank? You had been away by that time for quite a number of years.
EGC: Four-and-a-half years. It's hard to remember. That's a long time ago. First of all, I knew virtually everybody there. That's always a big plus. And I knew the bank. I guess the only thing that I can distinctly remember was that sitting on the other side of that desk made a difference. When you're sitting in front of the desk talking to the person behind the desk, all your brilliant ideas come very easily. But when you're on the other side of the desk and all of a sudden you're the guy who's responsible, it felt a little different. It's not to take anything away from Minneapolis or anyplace else, but there is a big difference.
JEF: Oh, there must be. Having been there before and then having been the president of a regional bank, did you go back to New York with some items on an agenda, some things you really wanted to do, that you saw needed to be done, either at that bank specifically or within the system, that being the president of the flagship bank gave you the chance to do?
EGC: Well, again, not in the sense of your question. I mean, did I walk in with a checklist? No. Did I walk in with a series of loose ideas? Yes. Some of them were nurtured by my experience here. For example, one of the things that I have tried to do there with some mixed results is to try to strengthen the role of the bank as a corporate citizen. That was very much conditioned by the experience I had had here. And, again, it's a lot harder to do that in New York than it is here, but I think we've had some measure of success in achieving that.
Another thing that I took with me from here that was directly relevant was I felt that the research department of the New York Fed was too big. This was one of those areas where I came to the conclusion that smaller and leaner was better, and I think that my experience here had a lot to do with that. In fact, over a period of time, I shrank the size of the research establishment of the New York Fed by about a third, and I think that was the right thing to do, too. I think it's worked very well.
JEF: Did that involve redirecting the research?
EGC: Yes. Yes. But that was different. That wasn't so much based on experience here. My agenda there was I felt that the bank was not taking advantage of its natural comparative advantage in its research program, and that is being the most important financial center in the world. So what we tried to do over time was redirect more of the research into the financial side and less into the kind of traditional macro-economic stuff, although we still do that, of course. But the balance has shifted quite a bit.
JEF: There seems to be a lot of talk about opportunities, and indeed some action being taken, for centralization within the Federal Reserve System now-centralization of automation, for instance. What are some of your thoughts on opportunities for it, the ones that are taken, the ones that haven't been taken yet?
EGC: I tend to be very, very cautious about this. I certainly will acknowledge that in some areas there seem to be some rather distinct economic advantages to that—opportunities for cost savings and so on. Of course, you can't ignore that. Having said that, however, I think we have to be very careful about this. First of all, some of these things, just in straight business terms, can be a bit on the risky side, including automation consolidation. It's tricky stuff. I think the real issue, however, is not that, although that's obviously something you've got to be careful of.
The real issue is this. Is there a danger that the process of consolidation taken beyond some point begins to fundamentally undermine the role of the individual Reserve banks? Now, most people would say, "Well, you know, perhaps, but that's way down the road. Let's not worry about that today." Well, I think we should worry about it today, because the Reserve banks, all of them, are very, very special institutions that really do constitute what is special about the Federal Reserve as a whole. If by accident or by design you alter that very delicate balance of relationships with the community, within the Federal Reserve, within the broad political framework within which things happen in this country, the consequences of it could be quite large indeed. And I've got to tell you, I'm old-fashioned. I think that's something that we've got to preserve. So for that reason, I have to say that I tend to be pretty cautious about this, and I think we've got to approach it with our eyes wide open. That's not to say that there may not be, and probably are, areas in which it makes a lot of sense.
JEF: Like automation, perhaps, or something.
EGC: There I think the added problem is the business risk. It's a tough job. We cannot afford to have a big foul-up there. You just can't.
JEF: You are saying very strongly that part of the Federal Reserve's strength politically, as well as an institution, is the fact that it's not viewed as something that, like a lot of government agencies, is in Washington and simply has no local presence. People find it easy to dislike it because they have no contact with it. Am I right on that?
EGC: Yes. As I said before, what makes the Federal Reserve Bank of Minneapolis different from the Minneapolis Office of the Department of X? The only answer you can give to that question—again is it gets to the very character, fabric, and structure, including the unique role that boards of directors play and this unique blend of public and private. It's really quite special, and I don't like to see that tampered with lightly.
JEF: Because once tampered with, it would be hard to go back, if not impossible.
JEF: What's your prognosis for the Federal Reserve System in the coming years under the enormous political challenges? There are going to be financial challenges, regulatory challenges.
EGC: Well, I think my prognosis is that it will continue to thrive. As long as we maintain our professionalism and our confidence and our integrity and with them the ability to retain and attract good people, no problem. No problem. That's what I expect.
JEF: Do you see increasing political pressures on the Fed, particularly given the recession, and other difficulties?
EGC: Again, you've got to put these things in historical perspective. Are they really different? I'm not sure. I mean, people forget that in 1968, when the Fed raised the discount rate by a quarter point, [President] Lyndon Johnson dragged William McChesney Martin down to his ranch in Texas and publicly humiliated him. You know, we worry today about some of the congressional inquiries that we get, for example from Chairman Gonzales.6 Well, he's not the first. Is it really all that different?
JEF: More of same
EGC: I think so.
JEF: Do you have any particular reflections about your term here in Minneapolis that you haven't made that you'd like to have on the record?
EGC: Well, as I said, I think you can tell it was something I rather thoroughly enjoyed. I really did. Every aspect of it. Great group of people here in the bank. I said I found the community to be great. I think the telling point is that I still maintain very close—I mean, very close—relationships on a thoroughly personal level with people I met from all over the district. I'd say, case closed.
JEF: Thank you, Mr. Corrigan.
1 Hugh D. Galusha, Jr., was president of the Federal Reserve Bank of Minneapolis (1965-1971).