A Post-Accord History of Principal Federal Reserve Functions

Abstract

The unique nature of the Federal Reserve System’s work has long been the basis for defending its autonomous position within the federal structure. Nevertheless the central bank is perceived in a variety of ways depending on the orientation of the observer. Professional economists understandably view the formulation and the implementation of monetary policy as the more prominent and fascinating aspect of the Fed’s work. Granting the importance of and the intellectual respect generated by monetary research, academicians’ inclinations toward this area are understandable. Some economists study regulatory effects on the structure and functioning of the commercial banking industry. Commercial bankers are concerned with both regulatory effects and the services rendered by Federal Reserve institutions as they influence bank balance sheets and profit and loss statements. Although most people are probably untutored in the Fed’s comprehensive role in linking money to national income and welfare, economists seem equally unaware of the system’s non-monetary work. The system’s managers, appreciating their independence, may not be unhappy that the public views the Fed from a mixed position of ignorance and respect. Regardless of optical coloration, Fed watchers generally accept an orthodox independence rational.¹ This rationale is logical, but its range of applicability becomes problematical as one realizes the scope of the system’s work.

The author is assistant professor of economics, Virginia Commonwealth University, Richmond. Thomas Mayer and Edward J. Kane read the manuscript and offered many helpful suggestions. I am grateful for generous support with time and data sources given by John Kakalec, controller, and William H. Wallace, director of the Division of Federal Reserve Bank Examinations and Budgets, Board of Governors of the Federal Reserve System, Herbert F. Wass, assistant vice president and secretary, Federal Reserve Bank of Boston, and Welford S. Farmer, senior vice president Federal Bank of Richmond. I also benefited from excellent research assistance from Robert E. Rigsby. None of these individuals should be associated with the views expressed here. This research is supported by the Grant-in-Aid Program for Faculty of Virginia Commonwealth University.