Politics and History of FOMC

Kansas Fed has a quarterly publication called Ten.

I was reading the President’s (Thomas Hoenig) message in the Winter 2010 edition (a heavy pdf file).

In this, he gives a nice account of history and politics of FOMC. I can’t copy and paste it. So here is a briefer account.

  • FOMC was created by the banking act of 1935 largely through the work of Senator Carter Glass (of Glass-Steagall fame). There were many people associated with creating Fed in 1913 but Glass was most well-known for his role in design of Fed. So he was quite a popular senator and reformer even before he designed the Glass-Steagall Act.
  • In creation of FOMC, Glass faced stiff resistance from then Fed Chairman Marriner Eccles. Eccles favored a centralized approach and wanted the control of the Fed with himself (or Chairman) in Washington. Glass stressed on the decentralised approach giving each region some representation in the policymaking.
  • Eccles saw Great Depression as an opportunity to control things but could not explain to the Senate Committees how would centralization would help in times of depression and stock market collapses. Eccles was unable to come with a proper response.
  • This led to formation of the FOMC as we know it today. Glass also ensured regional Feds are free from any political interference and made required additions in the Act.

Great historical insights from Hoenig. Glass could see even then that Fed could be compromised and ensured walls are created between politics and Fed. 

We need similar hard-willed senators in US  to ensure Fed is not politically compromised. Bernanke and his team alone cannot prevent it as Fed (and other central banks) is created by the US Congress.

What a fascinating repeat of history all this is. We take central banks as independent, political free institutions as a given thing. Who could have thought the battle Fed had to fight in 1930s, it would have to fight in 2009-10 as well. Never underestimate history. It repeats itself when least expected.

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