Posted: August 01, 2010
The Economist: our unique central bankBy Tucker Hart Adams
A few years ago, before the Great Financial Crisis, I doubt the average American could have told you the name of our central bank. Although business reports occasionally included Chairman Ben Bernanke's latest pronouncement or a squib on the decision to keep overnight interest rates at historic lows, the Federal Reserve Bank wasn't of much interest outside the financial industry and a few economists.
But in our search for a scapegoat for the recent economic catastrophe, the Fed has assumed a prominent spot on our radar screen.
Our Federal Reserve Bank is a latecomer to the central banking scene - the Bank of England, for example, has been around since 1694. However, there was a brief experiment with central banking early in our history. Following the Revolutionary War, there were more than 50 types of bills, coins and notes issued by both states and individual banks (the origin of the term "banknote") in circulation. The First Bank of the United States was created by Congress in 1791 in an attempt to standardize our currency. But when its charter expired in 1811, charter renewal was defeated in Congress by one vote.
After a five-year hiatus, the Second Bank of the United States was chartered in 1816, in the wake of the inflation that followed the War of 1812. It was plagued by fraud and corruption (both early banks were privately held), and it fueled land speculation by overextending credit. It was heartily disliked by President Andrew Jackson, and its charter was not renewed. The U.S. was without a central bank for almost 80 years, until our current Fed was created by an act of Congress in 1913, after a series of disastrous financial crises and recessions - one lasting 65 months in the 1870s, another lasting 38 months in the 1880s, four recessions totaling 78 months between 1899 and 1912.
A reflection of American distrust of centralization of power, our Federal Reserve System is composed of a seven-person Board of Governors in Washington, D.C., and 12 regional banks. Colorado is part of the Kansas City Federal Reserve Bank. Members of the Board of Governors are appointed by the U.S. president for 14-year terms and must be confirmed by the Senate. In the middle of his term, the president appoints the Fed chair, also confirmed by the Senate, for a four-year term. The Fed chairman is arguably the second most powerful person in the U.S., after the president.
The Fed governors in turn appoint one-third of the nine directors of each regional bank, including those eligible to serve as chair and deputy chair. Three of the directors, who may not be bankers, and another three, who must be bankers, are elected by the bankers in their district. Regulations require that two of the latter come from smaller community banks.
Monetary policy is the responsibility of the Open Market Committee, made up of the seven governors in D.C., and five of the presidents of the regional reserve banks, four of whom serve on a rotating basis. The exception is the president of the New York Fed, who is always a committee member. Colorado is currently represented on the Open Market Committee by Tom Hoenig, president of the Kansas City Fed, the lone member to vote recently to raise interest rates.
Although there are no Coloradans on the current Federal Reserve Board, Boulder resident Lu Cordova chairs the Kansas City Board of Directors and First Bank CEO John Ikard is a board member. Denver businesswoman Barbara Mowry chairs the Denver Board of Directors, and three of the other six members are from Colorado. We have two economists on the Regional Economic Roundtable - Mark Snead and Richard Wobbekind - and Coloradans serve on the Community Development and Payments Advisory Councils.
The Federal Reserve System, protected from political meddling by its charter, learned from its mistakes in the 1930s and has served us well over the last 70 years. We would be ill advised to change that in our frantic search for someone to blame for our overuse of debt and leverage that led to the Great Financial Crisis and Recession.
Tucker Hart Adams, president of the Adams Group, monitored and analyzed the Colorado economy for 30 years. She can be reached via her website, coloradoeconomy.com.