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FEDERAL RESERVE DISTRICTS: GOVERNANCE, 

MONETARY POLICY, AND ECONOMIC 

PERFORMANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 7, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–99 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON MONETARY POLICY AND TRADE

BILL HUIZENGA, Michigan, Chairman 

MICK MULVANEY, South Carolina, Vice 

Chairman 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

MARLIN A. STUTZMAN, Indiana 

ROBERT PITTENGER, North Carolina 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

MIA LOVE, Utah 

TOM EMMER, Minnesota 

GWEN MOORE, Wisconsin, Ranking Member 

BILL FOSTER, Illinois 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

DANIEL T. KILDEE, Michigan 

DENNY HECK, Washington 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 7, 2016 ............................................................................................ 1 

Appendix: 

September 7, 2016 ............................................................................................ 41 

WITNESSES 

WEDNESDAY, SEPTEMBER 7, 2016 

George, Esther L., President and Chief Executive Officer, Federal Reserve 

Bank of Kansas City ............................................................................................ 6 

Jones, Robert G., Chairman and Chief Executive Officer, Old National 

Bancorp ................................................................................................................. 8 

Lacker, Jeffrey M., President and Chief Executive Officer, Federal Reserve 

Bank of Richmond ................................................................................................ 4 

Spriggs, Hon. William E., Chief Economist, AFL-CIO, and Professor, Department of Economics, Howard University ............................................................. 9 

APPENDIX 

Prepared statements: 

George, Esther L. .............................................................................................. 42 

Jones, Robert G. ............................................................................................... 75 

Lacker, Jeffrey M. ............................................................................................. 78 

Spriggs, Hon. William E. ................................................................................. 106 

(1) 

FEDERAL RESERVE DISTRICTS: 

GOVERNANCE, MONETARY POLICY, 

AND ECONOMIC PERFORMANCE 

Wednesday, September 7, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON MONETARY

POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Members present: Representatives Huizenga, Mulvaney, Lucas, 

Pearce, Stutzman, Pittenger, Messer, Schweikert, Guinta, Love, 

Emmer; Moore, Foster, Perlmutter, Himes, Sewell, Murphy, Kildee, 

and Heck. 

Ex officio present: Representatives Hensarling and Waters. 

Chairman HUIZENGA. The Subcommittee on Monetary Policy and 

Trade will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. 

Today’s hearing is entitled, ‘‘Federal Reserve Districts: Governance, Monetary Policy, and Economic Performance.’’ 

I will now recognize myself for 5 minutes to give an opening 

statement. 

Economic performance couldn’t be stronger, especially in light of 

the deep hole that President Obama inherited. Well, that is the 

story that you are going to hear from my colleagues on the other 

side of the aisle, and they have been telling it for years, but the 

facts clearly contradict this situation. 

The fact of the matter is that we are mired in the slowest recovery since at least World War II. 

Historically, our Nation’s economy has grown at a 3 percent clip. 

The Obama Administration now pretends that a new normal of 2 

percent counts as a success. Small on its face, the difference between 3 and 2 percent is 50 percent. 

Unfortunately, economic opportunities are now disappearing 

even faster. And while my friends on the other side have been 

crowing about this recovery for years, Republicans have been calling out for what it really is: completely unacceptable situation. 

But today it will be different in at least one important respect. 

Our colleagues on the other side of the aisle will finally join us in 

acknowledging that our economy is underperforming. And together 

we will examine the important role that the Federal Reserve’s disVerDate Nov 24 2008 15:10 Mar 08, 2018 Jkt 025878 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\25878.TXT TERI
2 

tricts play in expanding economic opportunity—a role that is, unfortunately, under heavy attack. 

This attack has been brewing beneath the surface for several 

years. 

In late July, the Democrat Party finally made their true objective 

clear. The party platform adopted at the convention in Philadelphia 

promises to increase opportunity for all. Instead, it has taken aim 

at the very foundation of opportunity, in my opinion—that is the 

governance of monetary policy and the subject of today’s hearing. 

Democrats have constantly resisted reforms that would modernize the Federal Reserve, bringing much-needed transparency to 

what most Americans consider an impossibly opaque institution. 

While such reforms promise increased accountability, Democrats 

falsely claim that a better disciplined, more predictable, and clearly 

communicated monetary policy with Congress and the public would 

somehow jeopardize the Fed’s independence. 

Reforms such as these included in the FORM Act and the Draft 

Financial Choice Act would help insulate the Fed from any opportunity-killing political pressures. However, my friends on the other 

side of the aisle would like to double down on what Dodd-Frank 

started, co-opting the Federal Reserve district banks by subjecting 

them to the same politics that has kicked economic opportunity to 

the sidelines in the name of re-inflating asset prices. Their platform promises to press the pedal to the metal in a drag race to 

printing money for the politics of those in office. 

They now have launched a hostile takeover of the Federal Reserve itself. 

And I will note that this is a dual-edged sword that some might 

benefit now and will rue the day if this were to go through later. 

Real economic opportunity cannot return until Washington puts 

an end to the pretense of knowledge. We cannot promote economic 

opportunity for all through a monetary policy that targets assets 

that benefit only some. Oracles from the Eccles Building have been 

promising to do so for a decade, but where are the results? 

I am as fed up as anybody. We are fed up as anybody. 

Where is the promised opportunity? How could the Fed have created trillions upon trillions of dollars from thin air in the name of 

buying questionable assets that they have left us with with not 

only the slowest economic recovery in our lifetimes, but increased 

inequality to boot? 

I know that a better way is available, one that reverses the increased centralization of monetary policy in Washington’s politicized Board of Governors and restores the historic role of district 

banks as a critical source of local economic information and an institutional source of support for sound monetary policy. 

I believe my House-passed FORM Act and the Financial Services 

Committee CHOICE Act offer a much better way. Instead of doubling down on Dodd-Frank, these legislative solutions bring monetary policy out of the political shadows and into the sunlight of 

market accountability, and strengthen monetary policy independence by restoring the voice of the district bank presidents on monetary policy matters while subjecting regulatory and supervisory 

services to congressional appropriations and oversight, where they 

properly belong. 

3 

I look forward to hearing from our witnesses today. 

And the Chair now recognizes the ranking member of the subcommittee, the gentlelady from Wisconsin, Ms. Moore, for 5 minutes for an opening statement. 

Ms. MOORE. Thank you and good morning, Mr. Chairman. 

And good morning to my colleagues and to this distinguished 

panel. 

I so look forward to the tremendous assets that we have here in 

front of us, Mr. Chairman. And I especially welcome the Honorable 

Spriggs, who is a very well-educated gentleman from the University of Wisconsin-Madison. 

I think that your perspectives are going to be extremely valuable 

and we thank you for giving us the time here. 

The Federal Reserve, as the central bank of the United States, 

plays an extremely important role in our financial markets and 

economy, and I think we have seen this post our recession. 

It is also very misunderstood. So I actually think that it may be 

helpful to have had this hearing to discuss the Federal Reserve and 

the Federal Reserve System. 

I will have to admit to you, Mr. Chairman, that I was initially 

extremely suspicious of this hearing, due to some proposals that I 

think would disastrously inject partisan politics into monetary policy. And we have heard some of them. 

So I think it is interesting, Mr. Chairman, you talked about not 

wanting to inject politics into the Federal Reserve, since we have 

heard these cries to audit the Feds, and balancing the transportation budget with Federal Reserve monies, and just your statement today wanting to bring the Federal Reserve into more of congressional compliance. 

But short of undermining the independence of the Fed with policy audits or appropriating the budget, I have been open, Mr. 

Chairman, to you and others about improving the diversity of 

thought at the Fed. 

The Fed was created and established to be independent, and I 

think that independence has fueled a lot of these misconceptions 

and misgivings about the Fed. And I think that we ought to and 

should explore smart reforms that balance maintaining the Fed’s 

independence but that also bolsters public confidence and faith in 

the Fed. 

We have made some tweaks in Dodd-Frank, including having the 

GAO study—conduct a study and make recommendations on reform. And I think that that is appropriate. And I think the GAO 

recommendations are a good place to start any conversation on reform. And I also signed onto a letter with some of my Democratic 

colleagues encouraging the Fed to seek greater diversity. 

And with that, I yield back the balance of my time and I look 

forward to this hearing, Mr. Chairman. Thank you. 

Chairman HUIZENGA. The gentlelady yields back. Thank you for 

that. 

Today, we welcome the testimony of Esther George, president 

and chief executive officer of the Federal Reserve Bank of Kansas 

City. 

And I know you are coming off of a busy August, with the Jackson Hole conclave that was put together. And I know that you met 

4 

with a number of folks who are represented here today in the audience. 

Jeffrey Lacker, president and chief executive officer of the Federal Reserve Bank of Richmond. 

Robert Jones, chairman and chief executive officer of Old National Bancorp, and former Board director for the Federal Reserve 

Bank of St. Louis. 

Mr. William Spriggs, chief economist for the AFL-CIO, and professor, Department of Economics at Howard University. 

Chairman HUIZENGA. Yes, Dr. Spriggs. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, each of your 

written statements will be made a part of the record. 

Dr. Lacker, you are now recognized for 5 minutes. 

STATEMENT OF JEFFREY M. LACKER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FEDERAL RESERVE BANK OF RICHMOND 

Mr. LACKER. Thank you. 

Good morning, Chairman Huizenga, Ranking Member Moore, 

and Chairman Hensarling. I am honored to speak to the subcommittee about the governance structure of the Fed’s regional reserve banks. 

To understand the Fed’s structure it is essential to understand 

the Fed’s purpose. Prior to the founding of the Fed, the banking 

system was often unable to adjust the supply of monetary assets 

flexibly enough in response to the changing needs of commerce. 

The Fed was founded to furnish an elastic currency, in the words 

of the preamble to the Federal Reserve Act. 

Clearinghouses, bank-owned cooperatives in larger cities, played 

an important role in how periodic crises were resolved before the 

Fed, including the issuance of currency substitutes. But clearinghouses were widely viewed as favoring the interests of large 

money-center banks. 

Reserve banks were modeled after clearinghouses, but with noteissue powers and universal eligibility for membership, the aim 

being to improve upon the role of clearinghouses in a way that 

served broader public interests. 

A plan for a centralized institution was rejected out of concern 

about excessive Wall Street influence at the expense of diverse regional interests. Proposals for a government-controlled central 

bank were rejected as well, for fear the Federal Government would 

use control of the money supply to resort to inflationary deficit finance. 

At the same time, a measure of public oversight was viewed as 

essential, consistent with Progressive Era thinking. And so the act 

included a Federal Reserve Board whose leaders were politically 

appointed. 

Thus, the final Federal Reserve Act reflected a balance of competing considerations: a federated set of institutions to provide for 

representation of a diverse range of geographic and commercial interests with a hybrid public-private governance structure to provide 

for public oversight but contain potential misuse of monetary authority. 

5 

The governance structure of the Federal Reserve is still effective, 

in my view, because the considerations the founders wrestled with 

are all relevant today. 

The federated structure has benefited policymaking by ensuring 

that a diversity of perspectives on policy and economic conditions 

are brought to the table. Reserve banks historically have shown intellectual leadership on topics that initially went against the grain 

of mainstream thinking but later became broadly accepted. And Reserve bank presidents have a record of challenging conventional 

views. 

In addition, the federated structure has promoted broad regional 

engagement of the institution across the country, deepening the 

Fed’s understanding of the diverse economic challenges facing 

American communities. 

To be sure, our country’s understanding of diversity has expanded since 1913. And it is in keeping with the spirit of our 

founding that the Federal Reserve has taken the importance of diversity seriously as we have sought to ensure broad representation 

of views in the formulation of monetary policy, including those associated with disadvantaged communities. I believe our record in 

this regard, like that of many other organizations in the United 

States, shows a combination of substantial progress and areas 

where more can be done. 

In addition to bringing diverse viewpoints to bear, the Fed’s public-private governance helps our policymaking focus on longer-term 

objectives. 

At times there is a temptation to provide excessive economic 

stimulus in the short run, and leave the subsequent inflationary 

costs for future policymakers to deal with. Evidence from around 

the world, along with our own history in the United States, amply 

demonstrates that the temptation of shortsighted monetary policies 

is a bipartisan vulnerability, just as the Fed’s founders feared. 

For central banks, this implies that meeting-to-meeting monetary 

policy decisions need to be insulated from short-term political pressures driven by electoral considerations. 

But independence with regard to the choice of monetary policy 

interest rate settings must be paired with strong accountability for 

the economic results of policymaking over time. And accountability 

rests on transparent communications, which help Congress and the 

public evaluate the Fed’s performance against its mandate. 

The Fed’s public-private structure supports monetary policy independence by ensuring a measure of apolitical leadership. The reserve banks’ autonomous balance sheets, protected appropriation 

status, and independent capital stocks all play a role as well by 

limiting high-frequency interference that might diminish instrument independence. 

The presence of bankers on reserve bank Boards is said to represent a conflict of interest since reserve bank staff supervise 

banks. But strict rules limit bankers’ roles; they simply have no avenue through which they can influence supervisory matters. 

Moreover, best practice for any Board is to seek members with 

expertise relevant to the organization’s activities. 

The Fed’s large payment processing operations, for example, 

make the original rationale for having bankers serve on reserve 

6 

bank Boards still valid, in my view. And in addition, bankers are 

particularly well-positioned to report on economic conditions in 

their footprints. 

In conclusion, while some claim that the Federal Reserve’s governance structure is a historical anachronism, the continued relevance of the trade-offs taken into account by the authors of the 

Federal Reserve Act argues for the continued utility of this finely 

balanced arrangement that they crafted. 

Thank you. 

[The prepared statement of Dr. Lacker can be found on page 78 

of the appendix.] 

Chairman HUIZENGA. Thank you, Dr. Lacker. 

Ms. George, you are recognized for 5 minutes as well. 

STATEMENT OF ESTHER L. GEORGE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FEDERAL RESERVE BANK OF KANSAS 

CITY 

Ms. GEORGE. Chairmen Hensarling and Huizenga, Ranking 

Member Moore, and members of the subcommittee, thank you for 

this opportunity to share my views on the role of regional Federal 

reserve banks as part of the Federal Reserve System. 

Because the Federal Reserve is an institution that makes decisions of consequence to the broad public, a discussion of these matters is worthwhile. If changes are to be considered, the public 

should understand not only the congressional intent for its current 

design, but also the strong safeguards that assure its accountability. 

Central banks are unique institutions. They have important responsibilities for a Nation’s financial system and economy. 

Congress, as it contemplated a central bank for the United 

States more than 100 years ago, took note of central bank models 

for the United States from other countries while keeping in mind 

two earlier attempts at central banking in the United States. Ultimately, it opted for a different approach—one that recognized the 

public’s distrust of concentrated power and greater confidence in 

decentralized institutions. 

The Federal Reserve’s unique public-private structure reflects 

these strongly held views and is designed to provide a system of 

checks and balances. 

Challenges to this public-private design have surfaced throughout the Federal Reserve’s history, not unlike they have today. But 

in the end, our country has remained most confident in this decentralized governance structure. 

Criticism of the quasi-private nature of the regional reserve 

banks was anticipated from the start. Indeed, the Federal Reserve 

Act leaves no unchecked power in reserve banks. 

The politically appointed members of the Board of Governors 

have oversight authority of the most important governance aspects 

of reserve banks. For example, they appoint the Chair and deputy 

Chair of a reserve bank’s Board, they vote to approve the selection 

of the bank’s president as well as its chief operating officer, and 

they approve the reserve bank’s budget and salaries. 

7 

The Board of Governors also meets with each bank’s Chair and 

deputy Chair annually to review the bank’s performance and that 

of its president. 

Finally, the reserve bank’s operations are reviewed by the Board 

of Governors as well as an outside independent auditor. 

Notwithstanding this strong public oversight, some question the 

role of commercial banks within the Fed’s structure. Here, too, important safeguards exist. 

The supervision and regulation of the Federal Reserve’s member 

banks is a statutory responsibility of the congressionally confirmed 

Board of Governors. 

Bankers who serve on reserve bank Boards are prohibited by law 

from participating in the selection of the bank president, and no director can participate in bank supervisory matters. Finally, all directors are required to adhere to high ethical standards of conduct 

and avoid actions that might impair the effectiveness of the Federal Reserve’s operations or in any way discredit the reputation of 

the system. 

The capital stock supplied by these member banks serves as the 

foundation for the decentralized structure, allowing for separate 

corporate entities. Through the regional reserve banks, private citizens from diverse backgrounds and from the largest to the smallest 

communities have input into national economic policy. Strong and 

varied independent perspectives more easily emerge to engage in 

difficult monetary policy discussions, and the central bank is provided insulation from short-term political pressures. 

Altering this public-private structure in favor of a fully public 

construct diminishes these defining characteristics, in my view. It 

also risks putting more distance between Main Street and the Nation’s central bank. 

Former Fed Chairman Paul Volcker understood this well. He experienced firsthand how public pressure can be exerted on a central 

bank when it must make unpopular decisions that he and the 

FOMC judged to be in the long-run best interests of the economy. 

In a 1984 speech he noted the important role of the structure of 

the Federal Reserve System in supporting the central bank’s decision-making. And he said, ‘‘It was all quite deliberately done by 

men of political imagination, designed to assure a certain independence of judgment, a continuity in professionalism in staff, a close 

contact with economic developments and opinion throughout our 

great land, and a large degree of insulation from partisan or passing political concerns.’’ 

To that end, I extend a personal invitation for any of you to visit 

the Federal Reserve Bank of Kansas City to see what a regional 

Federal Reserve bank provides in support of the central bank’s objectives for economic stability. 

Thank you. I look forward to taking your questions. 

[The prepared statement of Ms. George can be found on page 42 

of the appendix.] 

Chairman HUIZENGA. Thank you, Ms. George. 

Mr. Jones, you are now recognized for 5 minutes. 

8 

STATEMENT OF ROBERT G. JONES, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, OLD NATIONAL BANCORP 

Mr. JONES. Great. Thank you. 

Chairman Huizenga and Ranking Member Moore, good morning. 

It is my honor to speak with the distinguished members of this 

committee today about the role of community bankers on our reserve bank Boards. 

In my belief, it is critically important that bankers continue to 

serve in this capacity. 

I sit before you as the chairman and CEO of Old National 

Bancorp, a 182-year-old community bank headquartered in Evansville, Indiana, serving Indiana, southwest Michigan, Wisconsin, 

and Kentucky. I am also a proud former Board director of the Federal Reserve Bank of St. Louis as well as a former member of the 

Federal Advisory Committee of the Federal Reserve Board. 

I would like to begin my remarks by touching on a partnership 

that has changed the lives for the better. At its center are two individuals: Roslyn Jackson, a former substance abuse counselor in 

western Kentucky penal system; and Ben Joergens, Old National 

Bancorp’s financial empowerment officer. 

With insights and guidance from Roslyn, Ben designed a financial education program that provides nonviolent offenders in our region with the tools to gain financial independence once they have 

completed their debt to society. Launched in 2014, this program led 

the American Bankers Association to recognize Ben with its George 

Bailey Distinguished Service Award. 

More importantly, it has led the nearly 2,000 individuals out of 

a cycle of despair and dependence that was fueled by their inability 

to manage their finances. One graduate of the program summed it 

up this way: ‘‘I learned that you can always cleanup the wreckage 

of your past and take control of your destiny.’’ 

This is just one illustration of the many ways that banks big and 

small work to strengthen the communities that we serve. Old National is a fairly typical community bank. With $14.4 billion in assets, we are literally headquartered on Main Street in 

Evansville, Indiana. Our clients are small and mid-size business 

owners, farmers, young families, retirees, labor and community 

leaders. Each year we invest millions in support of community 

causes, and our nearly 3,000 associates are known for their volunteerism, having donated more than 100,000 volunteer hours in 

2015. 

In 2016 our company was named to the Ethisphere Institute’s 

World’s Most Ethical Companies list for this fifth consecutive year. 

And recently the American Bankers Association named us as one 

the best banks to work for in the country. 

The strong connection that banks like ours enjoys with their 

communities we serve gives us a unique and valuable perspective. 

Not only do bankers serve as community catalysts, we are on the 

front lines every day assisting our clients, who represent a broad 

cross-section of industries and neighborhoods. 

Over time we gain vital instincts to how they view the economy 

and how those views shape their decision-making. 

Conversely, the bankers who sit on the Nation’s reserve Boards 

gain incredibly valuable information that they can take back to 

9 

their communities. I experienced this reciprocal relationship firsthand during my tenure. 

Fueled by the knowledge I gained from my Board experience, Old 

National spearheaded the creation of the first Bank On program in 

the Midwest back in 2009. 

In the nearly 8 years since we adopted this program we have 

added another 16 programs in our footprint, helping the unbanked 

and underbanked individuals take greater control of their finances. 

Again, all this dates back to the knowledge I gained serving 

under Federal Reserve. In my time as a director, I and other bankers on our Board not only brought valuable insights from our communities into our discussions, we frequently reached out to a diverse set of community leaders to gather specific feedback that help 

drive policy decisions. 

Over time these trusted voices from Main Street began seeking 

us out to offer their views on issues of the day. These candid regional perspectives were invaluable to our discussions on the drivers of our local economies. That is why I feel so strongly that bankers are a vital asset. 

I recognize the concerns that have surfaced over whether bank 

directors might somehow attempt to control or manipulate decisions for the betterment of their own institutions. While no system 

is perfect, I do believe this issue is effectively addressed through 

the current policies and procedures of the Federal Reserve System. 

As this committee knows, the banking industry is highly regulated and bankers fully understand the consequences if we violate 

these regulations. These same consequences apply to the regulations and policies that govern the Federal Reserve System. The existing governance model is strong and I applaud the controls currently in place. 

I can assure you that during my tenure I never felt that my integrity or ethical center were in any way challenged or compromised. 

As banker, our role in the Federal Reserve Board is limited, yet 

crucial. We serve as managers, budgeters, auditors, and strategic 

planners. And we supply a vibrant and important regional voice on 

issues that affect small and medium-sized towns all across our 

great Nation. 

I encourage this committee to retain this vital link to the views, 

perceptions, and attitudes of mainstream America. 

Thank you for your time. 

[The prepared statement of Mr. Jones can be found on page 75 

of the appendix.] 

Chairman HUIZENGA. Thank you, Mr. Jones. 

With that, the Honorable William Spriggs is recognized for 5 

minutes. 

STATEMENT OF THE HONORABLE WILLIAM E. SPRIGGS, CHIEF 

ECONOMIST, AFL-CIO, AND PROFESSOR, DEPARTMENT OF 

ECONOMICS, HOWARD UNIVERSITY 

Mr. SPRIGGS. Good morning, and thank you, Chair Huizenga and 

Ranking Member Gwen Moore, for this invitation to speak today. 

I want to start with a clear statement that I don’t disagree with 

the current set of policies that the Fed is pursuing. In fact, we are 

10 

in uncharted waters when it comes to this recovery because, unlike 

in the past, the Fed has not had the help of fiscal policy to stimulate the economy. On all previous occasions when we have had 

downturns Congress has held up its half of the Humphrey-Hawkins 

Act—to fully address full employment. 

When we look at the deficit spending under President Reagan 

and the deficits that were run up under President George W. Bush 

we see the Congress clearly understood the need to act and to respond to the downturn. So this is unprecedented for the Fed to 

have to act on its own, and I would think, as was the case with 

Chairman Volcker, it has led to a lot of public criticism that is very 

hard for the Fed. And but for its independence, Chair Yellen could 

not be steering us in these uncharted waters. 

I also want to say that it is fully possible—possible—under the 

current standards to have regional bank presidents who are quite 

open to public participation and truly do think that they have to 

represent and listen to all the voices from their region. 

You have President George here on the panel, who has let the 

doors of her bank open, has left the doors of her bank to engage 

her community and to talk to all the citizens in her region and 

hear from those who are affected by Fed policy, and to respect their 

voices. So it is possible. 

I want to give my statements with regard to your theme, which 

is policy outcomes, and to look back because, of course, we cannot 

ignore the Great Recession and what led up to it. So that is going 

to be the tone of what I would like to speak about. 

You see the chart that is up now? This shows the record of inflation pre-1978. You already heard about Chairman Volcker and his 

war on inflation; and then post-1984, what economists call the 

Great Moderation. 

And when you see the chart you can clearly see that inflation 

averaged a much higher level before 1984; since 1984 inflation has 

run at a significantly lower amount. But more importantly, the 

variance in inflation has greatly reduced. So there is great stability 

that has occurred in terms of price stability. 

You can see the green line shows current average inflation post1984. The red line shows inflation in the period before. 

The next slide, however, shows you the performance of the labor 

market. And here you see a clear difference. 

Before 1978 the average monthly unemployment rate in the 

United States was 5.1 percent. During the Great Moderation it has 

been 6.1 percent. That 1 percentage point difference means a lot. 

In the Great Moderation only 25 percent of the time have American 

workers been below 5.1 percent. 

This lack of voice on the part of workers affects the way that the 

Fed looks at things. And it is not guaranteed into the system. 

Class B members often do have influence. The current president 

of the Philadelphia bank was a class B member, chaired the search 

committee, stepped down from the search committee and then became president of the bank. There are at least 12 instances in 

which class B members chosen by the banks have ended up being 

class C members—those who then govern the regional banks. 

The voices of others needs to be put into the mix so that we can 

have, guaranteed, the voice of everyone. 

11 

When the banks were established in 1914 we had a much different banking system. Today the level of concentration in our 

banking system is at record high levels and that means that we 

can’t think that the regional banks really represent regional views. 

We need to have a way to assure that that will be the case. 

[The prepared statement of Mr. Spriggs can be found on page 

106 of the appendix.] 

Chairman HUIZENGA. Thank you. I appreciate that testimony. 

The Chair now recognizes himself for 5 minutes. 

And I would like to point out next week marks the eighth anniversary of Lehman Brothers’ collapse. Prominent scholars who 

studied the financial crisis point to a monetary policy that was too 

loose for too long as a significant contributor. 

Scholars have also shown that the unique institutional structure 

of district banks can guard against such policy mistakes. That is, 

district presidents tend to be more concerned about overly accommodative policy than are their politically appointed colleagues on 

the Board of Governors, while this tendency has been criticized by 

advocates for extending what is already the greatest monetary accommodation in American history, under the theory that doing so 

will increase wages and employment at lower income levels. 

Research also suggests that we need to do just the opposite. For 

example, Dr. Christina Romer, a Berkeley economics professor and 

the first person to Chair President Obama’s Council of Economic 

Advisors, observed that, ‘‘Compassionate monetary policy is sound 

monetary policy.’’ Monetary policy that aims at low inflation and 

stable aggregate demand is the most likely to ‘‘permanently improve conditions for the poor.’’ 

President George, do you agree with President Obama’s first 

CEA Chair that sound monetary policy is most likely to permanently improve conditions for the poor? And I am going to asking 

everybody for just a yes or no. 

Ms. GEORGE. Yes. 

Chairman HUIZENGA. Yes. 

How about you, Mr. Spriggs—Honorable Spriggs? Do you agree? 

Mr. SPRIGGS. I think that sound monetary policy includes making 

sure that the wages of workers rise with productivity, that we are 

at full employment so that the Nation can have the highest level 

productivity possible. 

Chairman HUIZENGA. Is that a yes or a no? 

Mr. SPRIGGS. That is my definition of sound monetary policy. 

Chairman HUIZENGA. Okay. 

How about you Dr. Lacker? 

Mr. LACKER. I agree with Christina Romer’s sentence. 

Chairman HUIZENGA. Okay. 

Mr. Jones? 

Mr. JONES. I agree, yes. 

Chairman HUIZENGA. Okay. 

I do too, and it seems to me that we share a common interest, 

which is the widening wage gap—the underrepresentation that has 

occurred for those in low and moderate income who have not seen 

their wages in increase. 

We all know, and if you have watched my subcommittee at all 

or watched me in committee I have said this many many many 

12 

many times, Wall Street is doing just fine. I am concerned about 

Main Street and what is going on. And you literally, Mr. Jones, are 

at the corner of Main Street in Evanston, Indiana. 

This is something that we have to tackle. And I think that there 

really is something that the right and the left share, which is a 

suspicious view of the Federal Reserve and want to make sure that 

there is a proper check on the Federal Reserve. I believe these district bank presidents do that. 

I also want to do a quick—quickly ask, do you agree that the 

Federal Reserve district presidents bring important regional and 

local knowledge to the FOMC deliberations? 

And, Dr. Lacker and Ms. George, if you don’t mind touching on 

that briefly? You are at the table. 

Mr. LACKER. Yes I do. It is an intense focus of every regional reserve bank to understand economic conditions in their district in 

way that complements the national economic statistics and is more 

granular and more thoughtful than the statistics that the national 

level can reveal, so yes. 

Chairman HUIZENGA. Ms. George? 

Ms. GEORGE. And the transcripts show that a significant portion 

of the discussion about the economy does come from talking about 

regional aspects of the national economy. 

Chairman HUIZENGA. Actually, I have had my own little experience in that. 

My family is involved in construction in Michigan. I own a small 

third-generation sand and gravel operation. Family has been involved in construction for decades. And that when I went to visit 

the president of the Chicago Reserve Bank the first 15 minutes of 

that was an interview of me—what was happening in the local 

economy in West Michigan. 

Given those changes in populations and demographics, does the 

current rotation of who votes in each FOMC meeting fully leverage 

the benefits of that regional and local perspectives that can bring 

to monetary policy? 

Again, Ms. George, why don’t we start with you? 

Ms. GEORGE. Certainly, 

So the importance of those regional connections come through access that we have in those district lines through our branch offices, 

through our Boards of directors on those branch offices. And so I 

think the country has been covered in terms of—despite demographic changes that span—that each regional reserve bank takes 

seriously, which is to make sure they understand, within the confines of their district, how that economy is performing. 

Chairman HUIZENGA. Dr. Lacker, I will let you have the— 

Mr. LACKER. Yes, I think you asked about voting rotation, as 

well. 

So all the participants in a meeting, whether they voter or not, 

have a voice and do bring their characterization of regional economic conditions to the discussion, and it is part of the discussion. 

Where voting comes into play is just where is the center of gravity 

of the committee and where does the Chair finds it useful to find 

a consensus? 

13 

The current rotation was crafted decades ago and altering it 

would alter the—sort of the balance of forces within the committee. 

And I will leave it at that. 

Chairman HUIZENGA. My time has expired, but I will just end 

quickly and I will have a light gavel with my ranking member, as 

well. 

That is one of the reasons why I felt it important to include in 

the FORM Act provisions that would bring a more balanced set of 

district-level views into the FOMC voting process. And we have 

had such a weighted view towards New York and that permanent 

seat, I wanted to make sure all those voices are being heard. 

So with that, my time has expired. 

And I recognize the ranking member for 5 minutes. 

Ms. MOORE. Thank you so much Mr. Chairman. 

And I do want to thank you all for your testimony. 

I think I heard correctly from all of you that you think that the 

independence of the Fed is really critical toward your being able to 

do your jobs. Did I hear correctly from all of you? 

Ms. GEORGE. Yes. 

Ms. MOORE. Yes. So you all agree on that. 

That being said, I guess I am concerned about—I guess I want 

to hear from each of you of what you think of the importance of 

having a more diverse representation on the Federal Reserve 

Board. Do you think or do you not think that that would interfere 

with independence or would that enhance the decision-making 

process? 

I was on a letter with about 100 lawmakers, which asked the 

Federal Reserve to look at greater diversities, so I guess I would 

like to hear from each of you just very briefly about whether or not 

you think that efforts to diversify the Board would interfere with 

independence. 

Mr. LACKER. So we take diversity very seriously. I know that 

that is a commonplace cliche almost. 

But diversity, as I noted in my statement, is built into the structure of the system. And the idea bringing diversities to the table, 

the value of diverse perspectives in strengthening a decision-making process, is something that predates the concerns of this decade 

or the previous decade in diversity of access to economic resources 

and opportunities. 

We have been focusing on at the Board—our Board of directors 

level diversity for several decades now. And I know that we and 

others have had minority representation, women representation on 

their Boards going back several decades. It is something that is a 

regular part of the discussion and regularly reported on within the 

system. 

Ms. MOORE. Thank you, Dr. Lacker. I want to give others a 

chance to answer this question, as well. 

Mr. SPRIGGS. I would say that a problem with having it owned 

by banks is, regrettably, the Board of directors looked like banks. 

So they look like the executives of banks: 83 percent of the directors are white; 75 percent are men. These are people who look like 

bank directors. They are trained and they talk like bank directors. 

So it is not necessarily a capture in the usual sense of regulatory 

capture, but clearly in a cultural capture. 

14 

Ms. MOORE. Gotcha. 

Mr. SPRIGGS. In the transcripts that you see going up to the crisis, even regional bank presidents who were in regions where the 

epicenter of the subprime crisis hit hardest had no comments about 

what was going on in terms of the effect of the subprime crisis on 

the African-American and Latino community— 

Ms. MOORE. With that— 

Mr. SPRIGGS. —or an understanding of it— 

Ms. MOORE. Dr. Spriggs, my time is limited so let me take you 

here: There is often a lot of resistance to the bank doing their dual 

mandate to look at unemployment. And unemployment in the African-American community—African-Americans are not experiencing 

the recovery as other communities are. 

So what do you think about reforms that might—or activities of 

the bank—that focus on reducing unemployment, especially among 

African-Americans? Is that something that would interfere with the 

other mandate to control inflation? 

Mr. SPRIGGS. The mandate of the bank actually comes from the 

Humphrey-Hawkins Act and the clear mandate is full employment. 

Full employment benefits everyone, and that means full employment for everyone. 

Actually, African-Americans employment-to-population ratio has 

been rising faster than for anyone else. It has gone up 10 percent. 

The problem is that often the Fed ignores the importance— 

Ms. MOORE. Exactly. 

Mr. SPRIGGS. —of that trend continuing and often thinks that it 

can stop recoveries before full employment is actually reached. 

When full employment comes we know that workers are better 

allocated, we get the efficiencies of the labor market at full employment, and discrimination falls. Currently, that is what is taking 

place. Currently, the gap in the unemployment experience of better-educated African-Americans to less-educated whites is closing, 

and that is because the labor market is beginning to heal. 

But it is not at full employment. Wages are not rise with productivity. We do not see quit rates to show that workers are being reallocated, and we do not see the level discrimination dropping. 

Ms. MOORE. And do you think reformation of the Board and, 

moving from class D to C or some sort of programming would enable—would inform the Board about the importance of focusing on 

the full employment part of their mandate if we were to diversify 

the Fed more? 

Mr. SPRIGGS. Yes, because finally the worker’s voice would be at 

the table and the worker’s voice from communities that really are 

hurt the most would be at the table. 

In 2010, when the African-American unemployment rate was always above 15 percent, no one mentioned in the transcripts anything about the African-American unemployment rate at the 

FOMC. 

Ms. MOORE. All right. 

Thank you for your indulgences, Mr. Chairman. I yield back. 

Chairman HUIZENGA. The gentlelady yields back. 

With that, the Chair recognizes the vice chairman of the subcommittee, Mr. Mulvaney of South Carolina, for 5 minutes. 

Mr. MULVANEY. I thank the chairman. 

15 

I am going to try and talk about three apparently different 

things and see if I can weave them together, if you would give me 

a second to try and do that. 

I heard each of the three of you who have been presidents of the 

regional feds talk about the importance of knowing your district. I 

admire and respect that and believe that you are doing that. In 

fact, I have talked to Dr. Lacker about the district he lives in and 

he and I share, and I know that he is doing that. 

And then I weigh that against my personal experience. I can 

never forget being at a homebuilder’s conference in California in 

2006 or 2007, and the keynote speaker one night at dinner was 

some high-ranking member of the San Francisco Fed. It was not 

Janet Yellen at the time. 

And the subject of his speech that night was that it was the studied opinion of the San Francisco Fed, after having done intensive 

research, that on a national basis the homebuilding business would 

never go into recession again, that the restrictions on supply of new 

housing was such at the local level that we would never see a housing recession again in the country. 

So I weigh your efforts to try and know your district with just 

the human weaknesses of being wrong from time to time and occasionally being wrong on a monumental scale. 

Secondly, I would draw to each of the panelists’ attention not 

only a recent article in the Economist magazine, but a scholarly 

piece of work that was referenced in there. I wish I could read the 

names. I think it is Professors Cieslak, Morse, and VissingJorgensen—one from Duke and two from Cal-Berkeley. 

It goes into a very interesting analysis of what market returns 

have been in the weeks after the private FOMC meetings, that if 

you invested a dollar in the stock markets in the week after the 

meetings your return on that dollar over the—since 1994 would be 

about 12 times—1,200 percent—versus almost zero if you had 

weighed it in on every other week, the obvious application being, 

as the article mentions, that the—and I will read from the article 

very briefly—that the scholars speculate that there is a causal connection, selective disclosure, which they say is unfair. 

Those who attend the meetings have informal contact with the 

media, consultancies, and financial firms, and eventually the content of those meetings makes its way into the stock market. 

Again, I would commend the study to you folks and be curious 

to know your opinion about it at another time. 

It reminded me, by the way, that there is an investigation going 

on into the leak involving a company, Medley Global Advisors, from 

several years that is still ongoing, where we know information was 

leaked out of the FOMC meetings. 

Again two things not apparently similar, but I am trying to get 

there. 

Lastly, Dr. Lacker, you mentioned in your testimony something 

that we have talked about in this committee several times, which 

is—and I will read from it now—at times there is temptation to 

provide excessive economic stimulus in the short run and leave the 

subsequent inflationary cost for future policymakers to deal with. 

16 

Evidence from around the world along with our own history 

amply demonstrates a temptation of shortsighted monetary policies 

is a bipartisan vulnerability, just as the Fed’s founders feared. 

For central banks this implies that meeting-to-meeting monetary 

policy decisions need to be insulated from short-term political pressures driven by electoral consideration. 

And certainly my party is experiencing that now. We have a Fed 

chairman who was appointed by someone of another party, different political philosophy than we then we share. And my guess 

is my Democrat colleagues may in the future sometime share that 

same concern if a Republican nominee holds that chair. 

What do these three things have in common? It seems like the 

current system makes it very difficult—that our record of predicting the future at the Fed is fairly poor. 

It also seems that there is a risk of market distortions just from 

us doing things. The scholarly piece doesn’t suggest that there is 

any nefarious activity; it is just a casual connections. 

Lastly, you have the risk of political pressure from either side on 

the Fed. Why? Because they are people and they are appointed by 

other people, and there are human tendencies here. 

So my question to all of you is this: Doesn’t a rules-based approach to monetary policy lessen the possible distortions to each of 

those weaknesses? Doesn’t it take away and make it less important 

if we make big mistakes in terms of our predictability? Doesn’t it 

lessen the likelihood that information is selectively distributed to 

the market so that some people can benefit and others do not? And 

doesn’t it lessen the likelihood of political pressure? 

Doesn’t a rules-based system, whether you are conservative, liberal, Republican, Democrat, solve a lot of the problems that we face 

at the Fed? 

I will asked Dr. Lacker and then Mr. Spriggs. 

Mr. LACKER. Sure. We consult rules very regularly. I think having a sense of the pattern of past behavior of your own institution 

that gave rise to good outcomes is an important benchmark, and 

I gave a speech about this last Friday. 

I would caution on—I draw the parallel between the search for 

the right rule and the San Francisco Fed study you cited, which 

was clearly obviously well-meaning. They believed their results sincerely, but there was some measure of uncertainty to the conclusion they drew, nd I think you would have to attach some measure 

of uncertainty to what you chose as the optimal rule. 

And for that reason I think it is useful to sort of back away from 

a rule, consult it as a guide to good policy, but not follow it mechanically or slavishly. But I do think it is important to give prominent attention to rules that encapsulate good past behavior in our 

conduct of monetary policy, and we do that. 

Mr. MULVANEY. Professor Spriggs? 

Mr. SPRIGGS. I am sympathetic to your point. However, the Fed 

has limited tools to influence the economy. The problem is that 

many of the problems are more complex and can have counterbalancing effects. So I don’t think in all situations you would want 

them to adhere to the rule. The rule, in fact, may be not the best 

policy. 

17 

For farmers right now the problem is an oversupply of commodities and this hurts them. The value of the dollar hurts our manufacturing sector. 

So there are many things that are moving at the same time, and 

I think you wouldn’t want a rule that would bind the Fed in dealing with how those different— 

Mr. MULVANEY. I thank you, gentlemen. 

I thank the chairman for the indulgence. 

It sounds like the two gentlemen may not be that far apart, but 

I appreciate the time. 

Chairman HUIZENGA. Thank you. 

The Chair will note again, I have a light gavel. But 4-minuteand-40-second questions might not leave a whole lot of time for answers. 

Ms. MOORE. It took him a long time to ask the question. Let me 

defend my colleague. 

Chairman HUIZENGA. With that, the Chair recognizes Mr. Foster 

of Illinois, for 5 minutes. 

Mr. FOSTER. Thank you Mr. Chairman. 

And thank you, to our witnesses here. 

It seems to me that a big part of the diversity challenges of the 

Fed System are driven by the fact that the geographical regions of 

the Fed districts are very far from representative of today’s population distribution or, in fact, the GDP distribution, or however you 

might assign the regions. 

This, to my mind, is a huge problem in the distribution of legislative power in our country. Just the fact that the Senate is grossly 

unrepresentative of the actual population distribution of the States 

results in about $.5 trillion per year wealth transfer from the highpopulation States, which are underrepresented in the Senate, to 

the low-population States, which are overrepresented in their 

power in the Senate, and the huge economic distortion to our country that costs us a lot. I know it costs my home state of Illinois 

about $40 billion a year and is the primary driver of our fiscal difficulties. 

So I was wondering what your reaction would be to a proposal, 

which has been floated from time to time, to periodically redistrict 

the Fed System perhaps once a century, and with enough decades 

of the time that you would actually have time to plan and it 

wouldn’t be disruptive? 

How big a problem do you think the male distribution of political 

power inside the Fed is to its current operation? And do you think 

it would net out positively to redistrict the Fed every century or so? 

Ms. GEORGE. I don’t think that we are handicapped by the current district lines, notwithstanding the changes in demographics 

that you have described over the last 100 years. And the reason I 

say that is because each region, regardless of how its boundary is 

defined, is focused through its operations on making sure that it 

understands every part of that region. 

And so the Federal Reserve works carefully—as we do in Kansas 

City—to make sure that all parts of that region are not only represented, but we understand the economic issues there. 

Mr. FOSTER. That would be true with or without redistricting. 

That is a separate issue than presumably if you redistricted things 

18 

every district would represent the interests of whoever—whatever 

people and banks were in its district. 

Ms. GEORGE. I agree. 

Mr. SPRIGGS. And I would offer that it appears that way, but 

over time some of the district lines have been redrawn. So Detroit 

once was represented by Cleveland and now Detroit is with Chicago, as the whole state of Michigan is. So fine-tuning— 

Mr. FOSTER. At present I think there is still something like a factor of six difference in the number of people in different Fed districts, which is a big number. 

Mr. SPRIGGS. Yes, but I think more important would be an assurance that the people of the district actually were represented. The 

issue now is that the banks are represented. 

So I think an issue is, how can we make sure that the people 

themselves are represented? How do we make sure that an actual 

farmer in Illinois is represented, not some giant agricultural chairman of some huge corporation? How do we make sure that the 

workers on the south side of Chicago are represented? Because 

these policies affect them and their voice needs to be integral to it. 

Currently this is at the whim of the banking community whether 

those voices really factor into the decision-making because those 

people aren’t on their Board—aren’t on the Boards of the regional 

banks. 

Mr. FOSTER. Yes. I was very struck by a study paper from I think 

one of the Federal Reserve study groups talking about fiscal hawks 

and doves. And if you look at the course of a cyclical downturn and 

the choice that the Fed faces of maintaining constant inflation or 

constant employment, that if you focus on constant employment it 

has real distributional advantages to those at the bottom. And conversely, if you choose to optimize the other way. 

And so I think this is a fundamental reason—fundamental argument for diversity, that there are real distributional effects because 

of the intrinsic trade-offs that the Fed has to make. 

Just a final comment or a question on rules-based system. If you 

did go to a rules-based system it seems like the sort of rule you 

would need to realistically represent our—today’s economy would 

include GDP growth in China and every major country in the world 

as a fundamental input to that. So you are not talking about a simple Taylor Rule; you are talking about a very involved macroeconomic model, which I take it exists, but really sort of hard to 

specify in legislation. 

Wondering if you had comments on that complexity trade-off? 

Mr. LACKER. Sure. In the models we have that capture economic—the economic economy—economic activity pretty well, implementing a Taylor Rule gets very close to the optimal rule that 

would be dependent on a broader range of things. So, it is an empirical matter whether that is true or not, but in the models we 

have it looks as if the Taylor rule does—gets you fairly close. 

Mr. FOSTER. Prior to the Taylor Rule there was another economist whose name I forget who actually had a more complete and 

general version of the Taylor Rule that obviously, because it had 

more parameters, did a better job. It is not an argument that started with the Taylor Rule. 

Mr. LACKER. Right. 

19 

Mr. FOSTER. Okay. 

Well, I will be a rarity and only be a little bit over time here and 

yield back. 

Chairman HUIZENGA. Thank you, Mr. Foster. I appreciate that. 

The Chair recognizes Mr. Lucas of Oklahoma for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman. 

And for my time, since I am a resident of the Kansas City Fed, 

I would like to turn to President George. 

And my colleague just a moment ago, with his observations about 

realigning the districts, touches on a subject that to you as a historian as well as a CEO know goes back not just the beginning of 

the Fed but to the very beginning of this country—about where the 

concentration of capital should be and control over the economy 

and how that capital flows. 

From the very beginning the great battle was should the money 

centers—New York, Chicago—should they be the dominant force? 

I suspect that is why my predecessors in this Congress a century 

ago demanded the 12 districts and the lines be laid out the way 

they were, to protect the entire country from a handful. 

Now, that said, this is an issue that is not just theoretical; it is 

a real subject. In 2009, when I was the ranking member of another 

committee with jurisdiction over the derivatives markets, in a 

meeting one night a senior Administration official brought up the 

topic of realigning Feds as we were preparing to launch in the 

Dodd-Frank. 

Taking the 12 districts, did we need that many? Shouldn’t the 

districts reflect the economic strength of a particular region? Now, 

rather quickly both Republicans and Democrats, House and Senate 

members in that meeting, made it clear to the senior official that 

that was not a topic that was acceptable at the time of the Congress. 

But even as recently as 2009 it was a subject of real debate, apparently at the highest levels of the Administration. 

Now, that said, from my perspective I like not only the 12 Feds, 

but I like the sub-Feds. I like the groups in our district in Denver 

and Oklahoma City and in Omaha who act as consultants, advisors. Could you expand for a moment on the involvement in those 

communities within the Kansas City Fed, President George, how 

they add to the process? 

Ms. GEORGE. So the branch offices for each of the head offices 

play very important roles. And in the case of the Kansas City Fed, 

I rely heavily on the input from those branch Boards—for example, 

in the state of Oklahoma to help me understand what is happening 

in energy markets, and our Omaha Board to understand what is 

happening in agriculture. 

And the diversity of input that comes onto those Boards serves 

us well in the head office. So that sort of regional input is essential, 

in my view, to make sure that all parts of that district are wellunderstood. 

The regional economists who head each of those offices are out 

in those communities engaging on a daily basis with those that affect that economy and are affected by it. So that structure has 

served us well. 

20 

Mr. LUCAS. So even though you don’t clear checks anymore and 

those regional banks aren’t big currency repositories and you don’t 

grind up wore-out paper money they still serve a purpose, correct, 

Madam President? 

Ms. GEORGE. Absolutely. The Federal Reserve has changed dramatically in its operations, but its commitment to those regions remained constant over that time. 

Mr. LUCAS. Side question deviating just a little bit from the subject matter, but your district is manufacturing, of course; it is agriculture and energy. 

We seem to be under pressure these days in the Kansas City district in all three areas. How much concern do you have as an economist and as a banker with the circumstances right now in your 

district? 

Ms. GEORGE. So we have seen over the last 6 years, a clear shift 

in the economies of that region based on commodity price falls. So 

the drop in oil prices, the fall in agricultural product prices, and 

the strong dollar on our manufacturing have affected that region 

significantly. 

So today we do see more unemployment; we are seeing flatter 

growth, although some sectors are still growing. So those are important inputs as we look at that region relative to the performance 

of the national economy. 

Mr. LUCAS. So it does matter having eyes and ears all of the 

country. Thank you, President George. 

I yield back, Mr. Chairman. 

Chairman HUIZENGA. The gentleman yields back. 

With that, the Chair recognizes Mr. Perlmutter of Colorado for 

5 minutes. 

Mr. PERLMUTTER. Thank you. 

And, President George, you are going to get some questions from 

me too, although Mr. Lucas stole a few my questions. 

Let’s just go back to basics. How many directors are there for 

each of the regional banks? 

Ms. GEORGE. There are nine directors. 

Mr. PERLMUTTER. Nine. And what are the basic requirements of 

those nine directors? 

Ms. GEORGE. The first requirement is integrity. 

And, of course, beyond that there are three bankers, there are 

three businesses, and there are three that are selected by the 

Board of Governors. So six of those nine represent labor, represent 

community, represent generally what is reflective of the region in 

that district as well as the three bankers on our Boards. 

And in the case of the Kansas City Fed, those three bankers are 

community banks. They are individuals who connect tightly with 

many aspects of meeting the credit needs of our region as well as 

community leaders that we have in our class B category and on our 

class C directors. 

Mr. PERLMUTTER. Okay. And this applies to all of the regional 

banks? 

Ms. GEORGE. The— 

Mr. PERLMUTTER. Nine directors for every one of the regional 

banks? 

Ms. GEORGE. Yes, yes. 

21 

Mr. PERLMUTTER. And similar kind of criteria—I was looking and 

it seem like it was agricultural, industrial, commercial, and financial seem to be the basic core principles and noticed, looking at 

your website, you have these regional kind of Boards within your 

regional bank. So you have a head office, a Denver office, an Oklahoma City office, and an Omaha office. 

And Dr. Lacker used the terms, ‘‘everybody is looking for diversity.’’ So to the two of you I would say, ‘‘Okay, what the heck does 

that mean to you?’’ 

I’ll start with you, President George, and then to you, Dr. Lacker. 

What you mean by diversity? 

Ms. GEORGE. So diversity is built into an institution like the Federal Reserve, who is serving a broad public. And it is essential to 

the public’s trust in this institution that the public sees themselves 

around those that are making decisions and have input to policy. 

Mr. PERLMUTTER. So do you mean—and this really applies to 

both of you—and, Mr. Jones and Mr. Spriggs, jump in if you wish— 

does diversity mean ethnic backgrounds? Does it mean level of income? Does it mean regional diversity? What does it mean? 

Ms. GEORGE. It means all of that. 

We will not be successful without having ethnic diversity on our 

Boards, without having the interest of labor represented on our 

Boards, as well as the multifaceted contributors to that economy, 

whether they are business, ag, energy. So we look broadly at all aspects of that. 

Mr. PERLMUTTER. All right. Dr. Lacker? 

Mr. LACKER. Yes. I agree with how President George characterized it. 

There are multiple dimensions on which when we are looking at 

rounding out a Board we look at. Ethnic diversity is certainly one 

of them, gender. 

But we are also looking at diversity within our region. Our region goes from South Carolina to Maryland out to West Virginia. 

Very diverse economies. We want representation from around the 

region. 

We want coverage across different industries. We want some representatives of someone in touch with consumers and consumer 

groups, labor. All of those perspectives are valuable to us and we 

try and balance that when putting together a slate. 

Mr. PERLMUTTER. Mr. Jones? 

Mr. JONES. If I could just add, I think that is one of the key roles 

that commercial bankers play towards diversity because diversity 

is race, it is religion, it is—but it is also neighborhoods, it is also 

communities. 

And if you think about the Bank On program that was started, 

it was really driven through the Fed to say, how do we better serve 

the underbanked and unbanked? And that is really the key role 

that bankers play because we have a moral obligation to ensure 

that all of our communities are served. 

And as we sit on the Fed Boards, our primary focus is to make 

sure those voices are heard. So as you prepare for meetings you 

talk to folks from the underbanked and the unbanked all away to 

the GM running Toyota, and you bring those voices to the Fed and 

say, ‘‘Here is what we see and what is going on in our markets.’’ 

22 

And that is what is so critical for us as a commercial banker because we are one of the few industries that see everything, and 

that is the value we bring— 

Mr. PERLMUTTER. Let me ask Mr. Spriggs the same thing. 

Mr. SPRIGGS. Regrettably, there are only three labor members 

among the 12 regional banks. So considering the importance of 

workers and workers as consumers, I don’t think the current system gets us the kind of diversity that we need. 

In the entire history of the Fed, no—zero—African-American or 

Latino as ever been chosen to be president of a regional bank. So 

I don’t think the system is designed—it looks like bankers, it talks 

like bankers, it is people bankers are comfortable with. 

Mr. PERLMUTTER. Okay. 

Mr. SPRIGGS. But it doesn’t have a built-in way to assure it. 

Currently, we do applaud the Fed for paying attention to this 

and trying to address it, but there— 

Mr. PERLMUTTER. All right. My time has expired. I got it, and I 

thank you for your answer. 

And I thank the panel for appearing today. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes Mr. Schweikert of Arizona for 5 minutes. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

This is one of those occasions that there is just so many things 

to ask and we will try to do this with a little caffeine in our soul 

and go quickly. 

Doctor, I want to make sure I got my head around something you 

said before. It was a comment of fiscal policy, meaning stuff we do 

here. And the overtone I was picking up saying, hey, you know, 

there is all this monetary liquidity out in the system but you guys 

on fiscal side, you need to put more cash into the system. Was I 

misunderstanding that? Because was it— 

Mr. LACKER. It was Dr. Spriggs. 

Mr. SCHWEIKERT. Dr. Spriggs. 

And my reason for that is even in this year we are going to push 

up close to $600 billion of deficit spending in a year where just a 

couple years ago our projections were, ‘‘Hey, we are only to be 

about $245 billion to $265 billion this year.’’ 

So somewhere here we are deficit spending like crazy, which 

functionally is a type of liquidity in the system. We are borrowing 

money, putting out the door—plus the accommodative. 

Can you really make an argument that there is not enough liquidity put out in the society in a world with almost zero interest 

rates? Was I mishearing what you were saying here? 

Mr. SPRIGGS. No, you weren’t mishearing, but it is not putting 

liquidity; it is actually putting demand into the system. 

Mr. SCHWEIKERT. Okay, so— 

Mr. SPRIGGS. So at the current rate that we are going we are not 

getting the level of investment that we should, and that is because 

we have not had our state and local governments in a position to 

take advantage of the current low interest rates. They have— 

Mr. SCHWEIKERT. So let’s backup because—okay, demand in the 

system. Does demand in the system come from more—saying, 

‘‘Let’s go borrow more money and go build something,’’ or does deVerDate Nov 24 2008 15:10 Mar 08, 2018 Jkt 025878 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\25878.TXT TERI
23 

mand in the system ultimately come from the regulatory—the environment we have created here? 

And a good example would be when we look at some of our environmental rules, I can come to you with a way saying, ‘‘You know 

if we crowd-sourced much of this data we could clean up the air, 

do it cheaper, do it faster.’’ But instead we still engage in this regulatory model, which is a command and control put in paper and file 

cabinets, and say that is good environmental policy. It doesn’t have 

anything to do with cleaning the air; it has to do with office buildings full of people shoving paper in file cabinets. 

Some of our labor policies—some of these things—if you wanted 

fiscal policy to increase demand, don’t we need to be doing a series 

of things where we rationalize some of the crazy regs we are in— 

whether it be labor, whether environmental—all the way down to 

some the creative destruction aspects that actually create new lines 

of economic growth—that we have created barriers of entry? 

Is demand available out there not from a bastardized helicopter 

money, which all of those are sort of involved in, and actually it 

is a regulatory arbitrage that we need to move through? 

Mr. SPRIGGS. The demand is the drop in investment that we have 

seen, and it is not picking up in the private residential sector, and 

it is not picking up in the public sector. 

Mr. SCHWEIKERT. But how can you— 

Mr. SPRIGGS. So we know we are down in terms of pupil-teacher 

ratios. We have let go hundreds of thousands of teachers— 

Mr. SCHWEIKERT. No, no, no, hold it— 

Mr. SPRIGGS. —and that investment is necessary both for our 

long-term— 

Chairman HUIZENGA. The gentleman from Arizona controls the 

time. 

Mr. SCHWEIKERT. Hold on for one second. That doesn’t—in a line 

where I have gone a decade now with falls in productivity, how do 

you equate, just in those couple of statements of teacher-pupil ratios, with the fact of the matter is capital isn’t moving into acquisition of things that make us more productive? 

Mr. SPRIGGS. Education does make us more productive. It is a 

foundation because workers have to be trained and have to be 

trainable. And so de-investing, as we have done, because our public 

sector had to live through not having the lender of last resort. They 

have downsized their operations to a smaller size. 

Mr. SCHWEIKERT. That is not even— 

Mr. SPRIGGS. And so we have to invest in our people. We have 

to invest into higher education, which we have de-invested in, and 

we have to invest in their K to 12. 

Mr. SCHWEIKERT. But that is not what the data actually says. 

The data says, ‘‘Hey, embrace online learning, embrace apprenticeship programs, embrace these things.’’ And yet, we have a regulatory barrier right now saying we can’t do that because it is not 

collectivized, it is not unionized, it is not those things. 

I hope there is a second round because in many ways we have 

to be willing to tear down many of the very bureaucratic structures 

right now that have been built that actually stop the very thing 

you and I want to see, which is more demand, more productivity. 

24 

And you can’t say that I want to support the very institutional 

bureaucratic structures that have been there for years that are 

dysfunctional in a modern, data-driven—where this is the driver of 

the economy, not a mechanism that was designed in the 1930s. 

And with that I am way over time. Thank you, Mr. Chairman. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Washington, Mr. Heck, 

for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. 

I also want to express my appreciation to the panel for your presence here today. 

I want to go back to briefly a line of questioning the Dr. Foster 

pursued, which was population maldistribution, and preface my remarks by calling up one of my favorite adages, namely the two 

most powerful forces on the face of the earth are compound interest 

and the status quo. And the latter point certainly seems to be at 

operation here. 

What I heard said in answer to the question of whether or not 

we ought to reexamine the population distribution among Fed districts was it would make a difference. Things are fine as is, i.e., 

let’s not dink with the status quo. 

But I guess I want to pose a question in a slightly different way, 

which is does anybody on the panel genuinely believe that if you 

were starting from scratch to design the Federal Reserve system 

and you had any X number of Federal Reserve districts in mind— 

let’s use an arbitrary number, 12—would it look anything—can you 

honestly say it would look anything like it currently does? 

Ms. GEORGE. I think it is fair to say that if you were starting 

today it may not look like that. It may be that every state would 

want its own regional reserve bank and you would have more. 

Mr. HECK. Well— 

Ms. GEORGE. Your point I take, which is the world looks different 

today than it did 100 years ago. 

Mr. HECK. —103 years ago. 

And with all due respect, the largest Federal Reserve district 

now by population is more than six times larger than the smallest. 

And I dare say that its GDP is probably 10 times greater than that 

smallest one. 

I actually like what Mr. Jones said very much, which is diversity 

includes reflecting the neighborhoods and the communities. I don’t 

know how you can achieve that without some semblance of a more 

balanced population distribution. 

Dr. Spriggs, I want to ask you about this underlying issue, the 

elephant in the room, if you will, the hawk-dove issue. It is my 

reading of history that if you look back over the last 25 years the 

Fed has actually been involved in the achievement of its full employment goal exactly 60 months out of 25 years. 

They have generally had more tangible targets in that regard 

than on the inflation side, but I think it is fair to say that they 

have been more effective on the inflation side. I think it is, therefore, fair to say that they have been much more willing to put their 

foot on the brake on inflation than their foot on the gas pedal to 

achieve full employment, as evidenced by the data. Would you 

agree, sir? 

25 

Mr. SPRIGGS. Yes, I would, and I—my third slide emphasizes one 

good product of full employment. A condition for wages to rise with 

productivity is we have to be at full employment so that we get the 

allocative efficiencies of the labor market so that workers quit low 

productivity firms and move to higher productivity firms. That 

really can only happen once we have full employment. 

We have other institutional factors that help to make that happen. But when you look at that third slide that I had you see that 

productivity continued to grow but wages don’t. 

And when you don’t have full employment you don’t have the 

competitive forces that the labor market can bring to bear on making sure that we get as much out of workers but they also make 

something that reflects it. And so we all benefit. 

The best policy—and the reason Congress passed the Full Employment Act in the 1940s and reemphasized it under the Humphrey-Hawkins Act—the best policy is for Americans to be at work. 

That means all Americans need to be at work. 

The workforce is greatly diversifying. In a few years the majority 

of new entrants to the labor market, beginning in—beginning at 

2021— 

Mr. HECK. Dr. Spriggs, I have 13 seconds. 

Mr. SPRIGGS. Yes, so— 

Mr. HECK. And I want to get another point in here— 

Mr. SPRIGGS. —will be workers of color. And so it is important 

that we— 

Mr. HECK. I still want to get another point in here, which is I 

think—and have said so on this committee at hearing after hearing—that it is time to reexamine how we measure full employment, 

that the continued use of the U-3 measure is inadequate in the 

wake of the Great Recession, that U-6, which takes into account 

part-time workers who want to be full-time and some more discouraged workers, is still stubbornly at just under 10 percent, and that 

if we are measuring achievement of our goal of full employment as 

we traditionally have in U-3 then we are missing the boat and, in 

fact, not achieving what it is we should. 

And I appreciate the chair’s indulgence very much. Thank you, 

sir. 

Chairman HUIZENGA. No problem. 

With that, the Chair recognizes the gentleman from New Mexico, 

Mr. Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Thanks, each of you, for being here today. Fascinating discussion. 

So I am going to follow up a little bit on what the gentleman 

from Washington was just talking about. You just got back from 

Jackson Hole, and if you are looking at the full employment mandate, what is the sense of all the members? Are they pretty satisfied with the 5 percent unemployment? Are they concerned? 

Mr. Jones, I will just take you out on—you got an opinion about 

how—what the outlook was about the employment—the full employment mandate? 

Mr. JONES. I can only speak to the regions that we serve. Again, 

Indiana— 

Mr. PEARCE. You didn’t go to Jackson Hole? 

Mr. JONES. No. I didn’t get invited. 

26 

Mr. PEARCE. Anybody on the panel go to Jackson Hole? 

Ms. GEORGE. Yes. 

Mr. SPRIGGS. Yes. 

Mr. LACKER. Yes. 

Ms. GEORGE. So the focus of Jackson— 

Mr. JONES. So I was the only one that didn’t get invited. 

Mr. PEARCE. You didn’t read the online comments or anything? 

Ms. GEORGE. The focus of Jackson Hole was on looking at monetary policy frameworks for the future across global central banks. 

The issue that you raise, though, is one that is routinely discussed at the FOMC meetings to understand how are the labor 

markets performing in the economy today, and judgments about 

how close we are to full employment— 

Mr. PEARCE. So what is the judgment? Fairly close—5 percent is 

okay? 

Ms. GEORGE. I believe we are at or near full employment. 

Mr. PEARCE. Okay. So when you reverse that mirror then you 

look the other direction then we see a labor participation rate of 

62.8 percent. 

So we are saying, in your words, we are near full employment, 

so 62.8 percent, which is back—you have to go back to the 1970s 

to get a labor force participation rate at that level. You and the 

Federal Reserve are saying that this is as good as it gets. 

That is alarming because I see the difficulty of spreading the cost 

of the government between fewer working participants, and it is 

alarming that this is as good as it is going to get. 

You put that up against the 1.1 percent rate of growth and then 

you get into the monetary policies. 

And so, Dr. Lacker, you mentioned in your more expanded paper 

that the Fed was created to furnish an elastic currency. And so 

when I go to my town halls my seniors tell me, ‘‘We lived our life 

correctly. We paid for our house. We put money into secure investments. We saved. And now, then, you are making our savings 

worth nothing because we get nothing, and the value of our house 

is down to 50 percent what it was before 2008. Your policies are 

killing us.’’ 

And so this this function of creating this elastic currency, as you 

are talking about—do you all ever sit behind closed doors and ask 

yourselves quietly what the hell are we doing this for? 

Mr. LACKER. That hasn’t happened in my experience. 

Monetary policy is a blunt instrument. Its capacity to influence 

real economic activities is quite limited. I think it was true at our 

founding, I think it is true now. I think we are all painfully aware 

of that. 

When I look at the graph that Dr. Spriggs put up of the unemployment rate going back over the last 50 years, several of those 

recessions were not recessions we could have prevented but we 

were left to cope with. Some of those recessions we did cause. 

Mr. PEARCE. Yes. I was asking more about the effect of the elastic currency on the lives of seniors especially, but on the lives of 

people in the poorer States. My district is one of the poorest in the 

Nation. 

Mr. LACKER. I understand. 

27 

Mr. PEARCE. So when the price of food goes up because of this 

elastic currency it hurts our constituents—my constituents—worse 

than any other. And I was just trying to get—I didn’t want all the 

history. I just was trying to get, do you ever talk about the effects 

on the poor and the effects on the seniors of these policies? That 

was my question, if you want to try it again. I am running out of 

time so I really do want to ask one more— 

Mr. LACKER. I apologize. 

Mr. PEARCE. The— 

Mr. LACKER. The answer is yes, we do, so. 

Mr. PEARCE. Okay. Thank you. 

So the idea that you have information on local economies—I met 

with the Federal Reserve branch in El Paso just last week or the 

week before. They have the correct information. 

In other words, the thing that troubles most employers in our 

district is they cannot find workers who will show up for work. Yet, 

when I asked Janet Yellen personally about this she said she had 

no knowledge. 

So if the information is not going to be transmitted from those 

branches who are out there tracking the specific problems of the 

economy, what difference does this all make anyway? 

Ms. GEORGE. We do bring forward that information. And I think 

the anecdote that you described is one that I hear regularly in the 

region, and it gets to understanding what is it that monetary policy 

can affect and what are more structural issues that will require 

other sorts of policies to affect? 

The one you described, I would argue, is one that will have to 

have other remedies brought to it, as opposed to low interest rates. 

Mr. PEARCE. Thank you. I see my time is exhausted. I appreciate 

the answers. 

Chairman HUIZENGA. The Chair now recognizes the ranking 

member of the full Financial Services Committee, Ms. Waters from 

California, for 5 minutes. 

Ms. WATERS. Thank you very much. 

I would like to address a question to Dr. Spriggs. 

Dr. Spriggs, in your testimony you discuss how African-Americans continue to suffer from overt employment discrimination. As 

concrete evidence of this fact you point to evidence that the unemployment experience for better-educated African-Americans is 

worse than the unemployment rates for less-educated whites. 

To what extent can and should the Fed take such discrimination 

into account as it sets monetary policy? 

Mr. SPRIGGS. First, thank you, as the ranking member of the full 

committee, for joining us. 

When we look before the Great Moderation the unemployment 

experience of blacks with more education looked like the unemployment experience of whites with more education. And there was a 

significant closing of the gap that occurred between the passage of 

the Civil Rights Act and as we came into the late 1970s, so much 

so that if you looked at young men who were college-educated there 

was virtually no difference between being black or white. And that 

gap was shrinking for other African-Americans with less education. 

Once we went into our high unemployment of the 1980s when 

the black unemployment rate never fell below 11 percent for the 

28 

entire decade, that gap grew for all levels of education and has remained. And so that gap can close. We saw in the late 1990s as 

we did push towards full employment and the Fed allowed the unemployment rate to the fall and did not intervene, despite a lot of 

people thinking that they needed to be more worried about inflation. 

By letting the labor market tighten we saw once again the power 

of competition in the labor market to reduce those disparities. 

So if we are at full employment—and the Humphrey-Hawkins 

Act clearly anticipated that market forces could address discrimination. It is one of the findings in the act itself. And you knew Congressman Hawkins as well as I did, and he meant full employment. 

His language, the preamble, talks about full employment, full opportunity for useful paid employment at fair rates of compensation. 

It is way down at the bottom that there is a sentence about reasonable price stability. These aren’t on equal footing. 

The preamble of that act says full employment and then these 

other things should be considered. And full employment gets us a 

lower rate of discrimination. 

Ms. WATERS. That is very interesting. Thank you. 

And I think that we on this committee who are concerned about 

full employment should pay attention and engage the bank—the 

Feds on this. And you are absolutely right. I knew Gus Hawkins 

and he was very serious about it. 

As a matter fact, when I was first elected to office here it was 

in the seat that he held. With reapportionment that has changed 

somewhat, but I have an appreciation for how you have helped us 

to understand what we need to encourage the Feds to also set some 

priorities for and take into consideration. 

But let me thank the Feds for something that may not mean a 

lot to a lot of folks—the recent meeting in Jackson Hole, where 

FYDP was invited to participate, was extremely significant and I 

have a great appreciation for that. Thank you so very much. 

With that, I yield back the balance of my time. 

Chairman HUIZENGA. The gentlelady yields back. 

The Chair recognizes the gentlelady from Utah, Mrs. Love, for 5 

minutes. 

Mrs. LOVE. Thank you. 

I believe that the United States House of Representatives is the 

branch of government that is closest to people. And hearing the 

concerns on both sides of the aisle on the structure of the Federal 

Reserve System is a concern of mine, also. 

And if you couple that with the FOMC structure and the interests and the economic priorities of Americans, especially in western 

States like Utah, with the answers that have been given I am still 

not convinced that the western States are represented as well as 

the eastern States. 

So with that thought and knowing that concern, I don’t think it 

is enough to just say, ‘‘Well, we believe that it is working well,’’ because you do have members on both sides of the aisle that are expressing concerns. And I happen to agree with those concerns that 

they are expressing. 

So I guess I would like to know what you think might be done 

to rebalance the Federal Reserve System to make sure that all 

29 

Americans are equally representative—represented in monetary 

policy discussions? 

President—do I call you President George? Is that okay? 

Ms. GEORGE. So your question is an important one for the Federal Reserve. And as I have listened to this discussion I remain 

convinced it is a question of accountability and not of the structure 

of the Federal Reserve. 

So in the case of the western States, I happen to have a few of 

those in my region—Wyoming and Colorado, the northern part of 

New Mexico—we are intentional in picking up information. In fact, 

today you will see coming out of the beige book, which is released 

by the Federal Reserve, a sense of each region, which directly includes those kinds of— 

Mrs. LOVE. Okay, so I guess the question I am asking is that I 

know that you are convinced that it is working. But, like, the reason why I mentioned the House of Representatives being closest to 

people is that every single one of us are talking to our people. We 

are talking to our bankers, and they share those concerns also. 

So again, I know that you feel as if it is representative, but I am 

trying to look for different ideas where that thought—they may feel 

like they are being more represented. Yes? 

Mr. LACKER. So an important thing to keep in mind is that, although the Federal Reserve, as we have described, is deeply engaged in understanding the entire country, we have just one monetary policy for the whole country. The set of interest rates we set 

at the FOMC apply to—in financial markets and they set monetary 

conditions for the whole country. 

So while President George or President Williams from San Francisco or myself can go and explain what conditions are like in our 

district, it is still—as in this body, we have to make the case that 

it is good for the country as a whole, one policy change or another. 

So there is a matter of understanding and then there is a matter 

of what tools do we have? 

Now, here in this body you have tools that can address things 

in one particular district or another. We do not have that. We do 

not have a way to target monetary policy to a particular region. 

Mrs. LOVE. Okay. So if all else were equal, why—what difference 

would it make, then, if there were—not to say whether I agree or 

disagree with this—but if there were more representation on the 

western side then that shouldn’t change things either then? 

Mr. LACKER. Well— 

Mrs. LOVE. If that is the argument that— 

Mr. LACKER. So in my view, the question was asked earlier, if we 

would—what our prediction would be fore how the districts would 

be drawn were they to be drawn again today, and I think it is a 

fair prediction that they would be different. 

Would we be worse or better off in terms of how the Fed engages? I think we would be about the same, and I think this goes 

to the way Esther George framed it, which is that the structure 

doesn’t impede us. We would probably be as good as we are now, 

perhaps better. But it wouldn’t make a big difference, in my mind, 

for the degree to which we are connected. 

Mrs. LOVE. Of course I end up with about 30 seconds. 

30 

But, President Lacker, just to switch gears very quickly, you— 

in one of your speeches, Investing in People as Economic Growth 

Strategy, I just want you to give a brief description on why district 

bank presidents would be interested in workforce development and 

why that would be a good thing. 

Mr. LACKER. So when I look around my district Carolina is deeply affected by manufacturing and the like and what has gone on 

in the last couple of years. It is hard to think about economic conditions without thinking about workforce and labor markets. 

And when you think about how labor markets work and what 

kind of transformation the Carolinas have gone through, for example, it is hard not to think hard about skills, and then you are 

thinking about, well, how do people acquire skills? How does the 

changing demand for skills affect people’s choices? What can we do 

to enhance the rapidity with which our labor force adapts to the 

changing mix of skills that our economy seems to need? 

Mrs. LOVE. I am out of time. Thank you. 

Chairman HUIZENGA. The gentlelady’s time has expired. 

And speaking of the Carolinas, the Chair recognizes Mr. 

Pittenger of North Carolina for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

President Lacker, thank you all for your attention and participation with us today. 

But, President Lacker, I would like to ask you in your testimony 

you spoke about the Federal banks and the representation they 

have supplied from various interests in diverse regions of the country. I happen to be from Charlotte. We are certainly in your district. 

Can you walk me through how the Fed, as a fully public institution, would affect the American public and the economy? 

Mr. LACKER. How we affect the American public and the economy? 

So it is paramount to keep inflation low and stable. I understand 

that maximum employment is part of our mandate, but keeping inflation low and stable is our best way of achieving that. 

The recessions of the 1970s and the early 1980s were deliberately 

engineered by the Fed, essentially, in response to spikes in inflation. We are very concerned about that when we are thinking 

about, are we at full employment? Is there a chance that we have 

gone beyond it? Is there a chance that we are approaching going 

beyond it? 

Because the risk of overstimulating the economy is the risk that 

inflation—expectations and inflation get out of control. It may be 

an unpopular notion these days, but if that were to happen it 

would be hard for us to calibrate a response without risking causing a recession. And I would point out that in recessions minority 

groups tend to do very badly. 

Mr. PITTENGER. With that in mind, I guess I would ask you, with 

the Fed’s extraordinary policy stance that has been in place now 

for a full decade, what—has it produced the robust economic 

growth that we have since—seen since post-World War II? That 

has been the norm in the country. Give me an explanation for why 

you believe that is true. 

31 

And I will go down the line. I would like all your perspectives 

on that. 

Mr. LACKER. So there was a discussion of labor force participation earlier. 

The fraction of the working-age population that is looking for 

work or is employed has fallen. We are no longer benefitting, as we 

did in the second half of the 20th century, from the increasing engagement in women in the labor force. 

The rate of growth of productivity has fallen, as well. This is the 

byproduct of a confluence of forces, including capital formation. 

Neither of those is under the direct control of the Federal Reserve, 

I would point out. 

So while we can achieve price stability with low growth or high 

growth, we have limited ability to shift to a high-growth economy. 

Mr. PITTENGER. President George? 

Ms. GEORGE. I would simply say that the Fed’s accommodative 

policies I think have been important to the progress and the recovery. 

But I think to see where the economy is at this stage after this 

many years suggests that there are other economic policies that 

should be considered and come to bear on further progress that the 

economy needs. 

Mr. PITTENGER. And could you elaborate on that, just specifically? 

Ms. GEORGE. So, for example, I absolutely agree with Dr. 

Spriggs. It will be important in the United States that any individual that is willing and wants to work is able to find a job. 

A healthy labor market will be important, but we must address 

issues that were raised earlier about businesses that aren’t able to 

find the kind of workers they need, whether that comes from training, education, and other things. 

We should seriously look at all policies at our disposal to make 

sure that that workforce can continue to contribute to the economy. 

Mr. PITTENGER. Mr. Jones? 

Mr. JONES. I would just elaborate on what President George said. 

The single biggest issues I hear from our clients is the inability 

to attract workers. I think, as Dr. Spriggs said, workforce development is critical. Full employment needs to go beyond what we normally realize full employment to be, and to do that, we need to 

have more workforce development and training programs to assist 

with the growth. 

Mr. PITTENGER. I would like to ask you as well, do you agree that 

the Federal Reserve district presidents brings important regional 

and local knowledge to the FOMC deliberations? 

Mr. JONES. I absolutely do. As sitting 6 years in St. Louis and 

speaking for southern Indiana and western Kentucky, and listening 

to the voices from agriculture to community leaders to, as I said, 

the head of Toyota, I can tell you Dr. Bullard and his team took 

those input very seriously and passed it on. I think it is critical. 

We represent diversity. I understand the need for more diverse 

in terms of race and all, but we represent a diverse economy. And 

I have clients who sell on the corner of Main and High, and I have 

Toyota as a client. Those voices are all critical to the process. 

Mr. PITTENGER. President Lacker, do you agree with that? 

32 

Mr. LACKER. Yes, I do. 

Mr. PITTENGER. Thank you. My time has expired. Thank you 

very much. 

Mr. SPRIGGS. Excuse me, Mr. Chair. I apologize. I do need to 

leave, and I am sorry that I won’t be able to stay for the second 

round of questioning. 

Chairman HUIZENGA. Yes. 

Mr. SPRIGGS. But I do appreciate you extending me the invitation, and thank the ranking member, as well, for the invitation. 

And I apologize. 

Chairman HUIZENGA. Not a problem. And we appreciate you, Dr. 

Spriggs, sharing some time with us here today. 

We are hoping to do a quick second round, but first we still have 

a first-round questioner here, the gentleman from Indiana, Mr. 

Stutzman, who is recognized for 5 minutes. 

Mr. STUTZMAN. Thank you, Mr. Chairman. And I apologize for 

being a little late. I just came from a Budget Committee meeting. 

But it is good to see Mr. Jones, a fellow Hoosier, and would like 

to ask Mr. Jones a question. 

But first I would like to address President George. In a recent 

article you observed how Carter Glass, the House sponsor of the 

Federal Reserve Act and the legislations key author, explained the 

challenges of establishing the Federal Reserve System in a report 

to the 63rd Congress. Your article quotes Congressman Glass’ observation that, ‘‘In the United States, with its immense area, numerous natural divisions, still more competing divisions, and abundant outlets to foreign countries, there is no argument either of 

banking theory or expediency which dictates the creation of a single central banking institution, no matter how skillfully managed, 

how carefully controlled, or how patriotically conducted.’’ 

My question is this: Are observations like those of the Democratic leader Carter Glass—does the decentralization nature of our 

Federal Reserve System bring with it a considerable level of integrity under which we can conduct the most basic economic policies— 

monetary policy? Could you address— 

Ms. GEORGE. So I think from the start these issues were debated 

a long time in coming to the conclusion that a decentralized structure would best serve the country. I think that remains true today. 

And I think its value comes from drawing from many parts of the 

country—not just Washington, not just New York—in bringing 

those views to bear on something that is very important to the 

lives of every American, and that are decisions about money. 

Mr. STUTZMAN. I think that Mr. Jones can probably attest to 

this, what is going on in Indiana, because I see this frequently. I 

mean, I believe that our economy—it is pent up right now, and that 

it is ready to go but it needs certainty and it needs to know the 

rules. And if we don’t get our monetary policy right, can our economy grow? 

Ms. GEORGE. So as I said earlier, I think monetary policy has 

played an important role, but it is not the only factor in what can 

stimulate an economy. And as I listen to voices in my region there 

are questions about other kinds of economic policies that come to 

bear on their decisions. So I would not want to overburden moneVerDate Nov 24 2008 15:10 Mar 08, 2018 Jkt 025878 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\25878.TXT TERI
33 

tary policy as being the answer to all the issues that can be affecting our economy’s performance today. 

Mr. STUTZMAN. Sure. And I agree with that, but we are focusing 

specifically here on decentralization or centralization. Again, sound 

monetary policy is really a foundation for an economy that is going 

to be strong. 

Mr. Jones, it is great to see you, and I know that your work in 

Indiana has been recognized not only in Indiana but across the 

country. 

Could you talk just a little bit—just for the benefit, I guess, of 

others. But in Indiana we have seen—Indiana is pretty strong. The 

economy is strong in Indiana. 

Can you talk maybe a little bit about the differences between 

some of the state regulation that is encouraging growth, but also 

I feel like there is this conflict with Washington policy where they 

are kind of butting heads against each other? And I think not only 

could Indiana be doing better, but the country as a whole could be 

doing better. Would you be willing to touch on that? 

Mr. JONES. I would. 

First, thank you for your service to Indiana, as well. 

I mentioned earlier workforce development is a critical issue we 

hear from our clients. The other issue we hear, and often, is regulation. And it is both current and pending regulation that is challenging businesses to know the roadmap to success. 

And you think about coal, which is critical to our state; you think 

about agriculture and some the changes in agriculture—and clearly, Congressman, you know that as well as anyone. But businesses 

need a clear path to success, and part of that is understand the 

regulatory environment they operate in. 

Access to capital is a critical element to all of our customers and 

our clients. So you think about just banking regulation—and I will 

make an observation—and you have seen Flat Tony. I spoke to our 

head of compliance yesterday, and getting ready for our first CFPB 

exam, which is going to be—is very, very important—we submitted 

7.5 feet of paper. If you stack it from the ground up it is 7.5 feet. 

My head of compliance is five-foot-nine. I am sure there is a lot 

of good information in there, but it requires a lot of people to review who could be out giving access to capital. 

We are symbolic of other industries as well, whether it be coal, 

agriculture, manufacturing; regulation is a real challenge for clients. 

Mr. STUTZMAN. Mr. Chairman, I saw Flat Tony and he was about 

my height when I first visited him, but now he is much, much taller. It is unbelievable to see the amount of regulation that our institutions have to deal with, so—not only flat but he is tall now. 

Chairman HUIZENGA. All right. With that the gentleman’s time 

has expired. 

We would like to quickly move into a brief round two of some 

questioning, if that is all right with our witnesses? And I will start 

by yielding myself 5 minutes. 

And, Mr. Jones, while you were chatting a little bit this struck 

me as we were talking about your business and what you do. Obviously we have had conversation, not just here but other places, 

34 

that the Federal Reserve System is lacking diversity and not doing 

enough to serve their communities. 

I used to be a licensed realtor when I got out of school. And as 

I said, my family has been in construction and those kinds of 

things. And one of the fundamental cornerstones of my licensure as 

a realtor was to recognize that people aren’t black, people aren’t 

white, people aren’t yellow, people aren’t brown, people aren’t red, 

people aren’t any color other than green—meaning they can either 

afford it or they can’t afford it. 

And that is how you had to treat customers. And that is how you 

had to deal with people. And it was an equitable way of looking at 

that. 

And it seems to me that there is a similar translation, that we 

need to make sure that there is an equal opportunity. And what 

I am really concerned about—and I just saw our friends—our 

FYDP friends just left, unfortunately. I would have loved for them 

to hear this. 

My goal is to make sure that we have an equality of opportunity 

for everybody no matter where they live, no matter what their income is. And we have seen time and time again that being thwarted, sometimes for maybe a good goal, but certainly the ways that 

it has gone about hasn’t gotten it there. 

And I noticed in your testimony that your organization is remarkably diverse and heavily involved in various communities. 

And I know that you have a business to run, as well, as part of 

that. 

And so my question is, do feel a conflict between, say, reaching 

out to literally tens of thousands of people? I know you did—I think 

it was 900-plus sort of seminars on how to better manage financial 

affairs on one hand and making money and having an ongoing 

business with employees and for your investors on the other hand. 

Do you feel any conflict in that? 

Mr. JONES. Not at all. Just the opposite. It is good business. 

If you think about what we do as community bankers, our moral 

obligation is to strengthen our communities. And that means dealing from the underbanked and unbanked all away up to the large 

corporations. 

In doing so, we strengthen the markets that we serve. And there 

is no real conflict there because that is what a community banker 

does every day. There is 8,000 of us throughout the country that 

every day wake up and worry about what we can do to make this 

a better place for everyone. And those are the voices that we also 

bring to the Fed as we think about what we do as members of the 

Federal Reserve Board is to talk about all those voices. 

So clearly, Mr. Chairman, there is no conflict. It is just good 

business. 

Chairman HUIZENGA. And what I am very concerned about—because I, too, like one of my colleagues, I can’t remember who it 

was—as they sit down and talk to employers a couple of things 

that they expressed is they said, ‘‘We have a hard time finding 

somebody who will show up every day be able to pass a drug test.’’ 

Those are those are two basic thresholds that they need to meet. 

And they say, you know what, we will take care of so much of the 

35 

rest of it. We need to have people who will show up, and who can 

show up clean, and who are willing to work. 

And that is a struggle that we have had in Michigan. And I saw 

a chart earlier today, Michigan is doing different or better than 

other States in the region of Chicago. 

Interestingly enough, Illinois is the lowest performing and Michigan is the highest performing. I would say that it is not just about 

regulation and taxation; it is about the environment that has been 

created in. And we in Michigan know that we have very much attempted to create a accommodative, growth-oriented atmosphere, 

and Illinois has gone the opposite direction. That is why you see 

billBoards at that at the intersection of Illinois and Indiana saying, 

‘‘Welcome. We are in Michigan.’’ 

Mr. JONES. ‘‘Illinnoyed’’ is what it says. ‘‘Move across the border.’’ 

Mr. Chairman, I would just say you just took the Hoosier handbook and just took it to Michigan. So it is— 

Chairman HUIZENGA. Yes. We did, because Indiana tried that on 

us for a number of years with those welcome home billBoards. But 

we— 

Mr. JONES. It worked for a while, too. 

Chairman HUIZENGA. It did work for a while. We got that turned 

around. 

But I want to make sure that we are moving forward on this, we 

are not losing sight of Main Street. And Wall Street is doing just 

fine. 

We have to make sure that this economic recovery, as slow and 

as long and as sluggish as it has been, reaches down and goes to 

all levels. And we are seeing that. Because of that upward pressure 

we are seeing wages come up in Michigan. We are seeing some of 

that—some of those things restored, but not fast enough. 

Mr. JONES. Right. 

Chairman HUIZENGA. And ultimately that is about demand. 

I filibustered myself. My time is up. I was going to ask a quick 

question of the—of our bankers, but I appreciate your time. 

And with that, I will recognize the ranking member for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And thank you all for agreeing to stick around for a little bit 

longer. 

And I, too, Mr. Chairman, am sorry that Mr.—Dr. Spriggs left 

and some of the other folks who were observing left. 

But having said that, I do want to engage the panel on some 

things that I heard Dr. Spriggs say, and he got a lot of pushback 

for this in the context of other things that I have heard here today. 

There has been a—we have put a lot of pressure on the Fed to 

grow our economy. There is a lot of criticism or praise on both sides 

of the aisle regarding your fixes—what you have done. 

But that being said—I am—I think it was Mr. Jones that said 

that you guys have a blunt instrument with monetary policy. I 

think it was Dr. Lacker responding to the gentlelady from Utah, 

saying that monetary policy has to fit for the whole country. We 

can’t have a monetary policy for New York and then another one 

for Montana. So you are limited in terms of what you can do. 

36 

That being said, I guess I am wondering what you think about 

the slow growth, the lack of a recovery in certain parts of the country among folks like African-Americans with regard to what, number one, what Congress is doing? 

We focus a lot on austerity and we believe that that has hurt 

growth. For example, there is a gap of $1.7 trillion in infrastructure spending, something that used to be bipartisan, and it is predicting that could put 20 million people to work if we were to do 

that versus giving tax cuts. 

And so I guess I am wondering—and Dr. Spriggs said that there 

is a lack of demand. So as we talk about regulation being too great, 

the debt being too great—he made the point that 70 percent of our 

economy depends of people having money so they can spend it. 

I know in the African-American community they spend every 

dime that they get. So if shops are closing down an African-American communities it is because they don’t have any money. 

So I am wondering what you all think about what we do with 

regard to hurting growth this country. What is your opinion on sequester, and austerity, and cutting Pell Grants, and so on? 

And I will yield to maybe Dr. Lacker? 

Mr. LACKER. You have asked a difficult and troubling set of questions. You asked me to stray outside of the bounds of Federal Reserve policy. 

I can tell you, though, that we do think about that and it is hard 

not to in our country. Baltimore, for example—inner-city Baltimore 

is part of my district—and in thinking about the events that have 

transpired there in the last couple of years it is hard not to think 

about why it is that African-American communities have lagged so 

far behind despite the last 50 years of efforts, despite the vast 

array of interventions we have made, despite the vast array of policy initiatives that have brought to bear on that. 

Dr. Spriggs is right that Federal Reserve policy can influence the 

broad sweep of demand in our country. But there is nothing we can 

do to guarantee where it is going to show up. 

Is it going to show up in Silicon Valley? Is it going to show up 

in the Carolinas? Is it going to show up in inner-city Baltimore? 

Ms. MOORE. Just specifically, though, is the time to be doing austerity with slow growth? 

Mr. LACKER. I would think you would want to evaluate programs 

on their merits, not for what they add to total aggregate demand. 

Ms. MOORE. Okay, just, a transportation bill or infrastructure 

bill that was adequate—do you think that that would help your efforts to— 

Mr. LACKER. I think you should evaluate a transportation bill 

based on what our transportation infrastructure needs, not on 

whether it adds— 

Ms. MOORE. I think we have like 80,000 bridges that could collapse just like in Minnesota at any point. 

Mr. LACKER. That is a legitimate— 

Ms. MOORE. It is not like we don’t need—we don’t have to go out 

and do a survey to see if we need to fix the roads and bridges. 

Mr. LACKER. That sounds like a legitimate reason. I have no reason to disagree with it. 

37 

Ms. MOORE. Would that or would that not spur our economy, Mr. 

Jones? You are chomping at the bit. 

Mr. JONES. Well, chomping at the bit is a strong thing. 

But clearly, creating jobs, creating demand will help all of our 

markets. And the economy is just not one subsection; the economy 

is a multitude of policies and procedures and inputs. 

One of the biggest one we see his confidence. And if we could get 

a consistent message that said, ‘‘It is okay,’’ then I think you will 

see more and more people respond to the economy. But it is awfully 

difficult when all the negativity that surrounds our economy creates challenges. 

Ms. MOORE. Thank you. 

I yield back. Thank you for your indulgences, Mr. Chairman. 

Chairman HUIZENGA. You are welcome. 

With that, the Chair recognizes the gentleman from Arizona, Mr. 

Schweikert, for— 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

And to my friend the ranking member, we partially agree here 

but it is—like on infrastructure, if the left would be willing to work 

with some of those who want to stack—adjust the capital stack and 

how you pay for it, there is a way to get there. 

As the discussion we had earlier with Mr. Stutzman, when you 

have seven feet tall of regulatory paperwork for a bank examination, how does that improve productivity in our society? Because 

functionally you have paperwork, it goes into file cabinets. So that 

is what they said earlier. That was the testimony just about 20 

minutes ago. 

So for many of us we are fixated that we believe monetary policy 

probably has gone as far as it can and now it is our responsibility 

here, but we need to get creative, instead of just trying to do more 

of we are going to throw a bunch of cash at something. We see how 

well that crashed and burned in 2010 and 2011, the years where 

we—all these models said this was going to happen and it didn’t. 

So can I go off—this is just a different discussion. But, Ms. 

George, you are someone I wanted to sort of ask because—walk me 

through first the services your Federal Reserve branch provides. 

Just sort of, from someone who was on one of the old check 21 committees and those things many years ago—yes, I am that old. Walk 

me through the services you provide. 

Ms. GEORGE. So the regional banks are involved in the payment 

system, and we still have— 

Mr. SCHWEIKERT. So payment—ACH? 

Ms. GEORGE. ACH. We are still clearing checks, believe it or not. 

We distribute cash to financial institutions in our region, and we 

are involved now in an effort to look at how to modernize the payment system by working with the private sector on how that might 

happen. 

Mr. SCHWEIKERT. Okay. So you already know where I am going. 

I see now, fascinating discussions coming out of Silicon Valley of 

using a distributive ledger model to basically—it is a functioning 

debit-credit ledger with sort of an airtight mechanics to move 

money and dramatically cut down the costs. Where if I am—let’s 

use PayPal just because they are in my neighborhood or a substantial portion of them are—they have landed—what—a Utah indusVerDate Nov 24 2008 15:10 Mar 08, 2018 Jkt 025878 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\25878.TXT TERI
38 

trial Bank to move money. They pick up those regulatory costs, 

where if I use a block chain, put it into a cryptic currency or whatever you want, some designation of value and clear it on this side, 

all of a sudden I have moved money for fractions of a penny. But 

that is outside your mechanics. 

From your discussion—because you have lots of really smart people around you—are you ready for what you and I would call the 

creative destruction that will help us bring dramatically more efficiencies in the movement of money, the distribution of those resources? And are you looking at these alternative transmission networks and how to lower the cost? 

Ms. GEORGE. So our responsibilities in this area are to make sure 

that the payment system is efficient, that it is accessible, and that 

it is safe. 

And so the nature of this technology holds some interesting 

promises, and as part of our work with the private sector to think 

about how this will affect the payment system going forward, we 

are very much engaged in learning from them and trying to see 

where this intersects. 

Mr. SCHWEIKERT. But you already know—we already have a 

handful of our large money center institutions—two of them—that 

are actually already engaging in the movement of money using a 

distributive ledger. 

Ms. GEORGE. Yes. 

Mr. SCHWEIKERT. And why this is so important is for a lot of us 

who really care about economic vitality, but also optionality for 

things like millennials, is you are the Uber driver, and you decide 

you are going to put $0.50 into your retirement account or into 

your savings account every time you drive someone, and you hit— 

we just do a smart contract in the back so the payment hits, the 

$0.50 goes over. Except on some of the networks that just cost $.18, $0.27 to move that $0.50. You cannot do the sort of micromanagement of small 

dollars. 

I need a network, a—I need a backbone that is dramatically less 

expensive—safe because this is soon going to be our banking institution. 

And my great fear is, as we have had the conversation of efficiencies in our society, productivity—I desperately hope that the 

Federal Reserve doesn’t become one of the barriers to the adoption 

of the dramatically more efficient society that we desperately need 

for that productivity. 

And my fear is Silicon Valley is about to run around you and 

build optionality that says the Federal Reserve is my barrier not 

my partner. 

And with that, I am out of time. Thank you, Mr. Chairman. 

Chairman HUIZENGA. Thank you. 

And for our last question of the day we will go back to the gentleman from Indiana, Mr. Stutzman, for 5 minutes. 

Mr. STUTZMAN. Thanks again, Mr. Chairman. 

And thank you to all for your testimony and thoughts and advice 

today. It is really helpful. This is a—it has been a fascinating discussion and I—Ms. George, you made a comment about disturbing 

cash and things like that and then, of course, Mr. Schweikert holds 

39 

up his smart phone. And I guess that is where I wanted to go, and 

I think it kind of falls under maybe governance? And maybe you 

could just—all of you could share with us—online banking, security, access? 

I just found products just recently that are extremely easy and 

almost feel like they are—they are very easy, which is nice, but the 

security of them—can we trust the technology that is coming 

along? 

And I know this has—I don’t know if it has been talked about 

at all today, but if some of you could kind of address that and what 

is your role? And then, Mr. Jones, if you could talk—maybe you 

could lead off, Mr. Jones, about what you all are doing is a banking 

institution in online banking and how much of it is being done on 

smart phones? 

Websites are being adapted to fit smart phones because that is 

where most of the banking is being done. If you talk that; then, Ms. 

George and Dr. Lacker, if you could talk about what the Fed’s role 

is in all that? 

Mr. JONES. Sure. 

Great question. And clearly as you think about our industry and 

the dramatic changes, fintech and mobile banking are going to be 

at the forefront over the next few years, if not already. 

Your question really revolves around cybersecurity. And I would 

offer, as a commercial banker, this is an area where great cooperation between our regulatory agencies and the commercial banks 

has made a significant difference. 

Both the Federal Reserve, and the OCC, and now the CFPB have 

come together, and we are working to make sure that those systems are safe and secure. 

Richmond, where Dr. Lacker is, is the head of I.T. for the Federal Reserve. And when I was the audit Chair in St. Louis we were 

able to experience the great controls they have in place. So take 

that knowledge of the commercial banks—8,000 commercial banks 

can’t work separately on things like cybersecurity. It takes a collaborative approach. 

And again, as I said, the ability for the Fed to convene commercial banks—the OCC the CFPB—to really combat that has made 

a significant difference. And it has made large, significant improvements for us. 

Ms. GEORGE. So there are rapid changes going on in our payment 

system, as you note. 

And the initiatives that we currently have underway is to carry 

on a tradition we have had for most of our history, and that is to 

work with the private sector as they come up with different ways 

to conduct payments to make sure at the end of the day safety, accessibility, and efficiency is part of that. 

And so the effort we have undertaken right now is in the process 

of looking at those issues around new technologies to see how that 

can be best managed on behalf of the public. 

Mr. LACKER. We do, as Mr. Jones noted, invest a tremendous 

amount of the Federal Reserve System to a secure our systems to 

make sure they are safe and effective, but that we keep up with 

the latest cybersecurity threats. And cooperation from agencies 

based around here in D.C. have been very important to that. 

40 

For the banking system as a whole, we cooperate with sharing 

what we know and can share. And it certainly led us to focus on 

the extent to which the cyber risks are being managed effectively 

in the banking sector, as well. So it is a supervisory focus for the 

teams that oversee these large organizations and small, as well. 

So it is something we take seriously. It is an evolving landscape, 

and so it is one where we are going to have to continually keep 

keeping up, in essence. 

Mr. STUTZMAN. How do you do that? Do you hire teams of experts who know their industry that are on your side that are working together but also making sure that there are safeguards in 

place? Do you have to invest more down the road or are you already making an initial investment focusing on banking? 

Mr. LACKER. Our investments have increased substantially over 

the last 10 years in information security. And yes, talent is something we look at. The particular skill sets you need are highly valuable in the marketplace and we work very hard to find the skills 

that we need. 

Mr. STUTZMAN. Thank you, thank you. Anybody—I don’t know— 

any further comments? There is 20 seconds left if anybody wants 

to say anything. 

If not, I will yield back to the chairman. 

Chairman HUIZENGA. Gentleman yields back. 

And I would like to thank our witnesses for taking the time and 

coming. Deeply, deeply appreciated by all of us. I think I have had 

a number of colleagues as they have been going giving me thumbs 

up. And we thought this was a very informative, very helpful hearing as we are looking at what the future of this monetary system 

is and the effects of it. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

I ask the witnesses to please respond as promptly as you are 

able. 

And that with that, our hearing is adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

September 7, 2016 

42 


25878.001

Statement of 

Esther L. George 

President 

Federal Reserve Bank of Kansas City 

before the 

House Subcommittee on Monetary Policy and Trade 

United States House of Representatives 

Sept. 7, 2016 

The views expressed by the author arc her own and do not necessarily reflect those of the Federal Reserve System, its 

governors, officers or representatives. 
43 


25878.002

Chairman Huizenga, Ranking Member Moore and members of the subcommittee, thank 

you for this opportunity to share my views on the role of regional Federal Reserve Banks as part 

of the Federal Reserve System. 

Because the Federal Reserve is an institution that makes decisions of consequence to the 

broad public, a discussion of these matters is worthwhile. If changes are to be considered, the 

public should understand not only the Congressional intent for its current design, but also the 

strong safeguards that assure its accountability. 

Central banks are unique institutions. They have important responsibilities for a nation's 

financial system and economy. Congress, as it contemplated a central bank for the United States 

more than J 00 years ago, took note of central bank models from other countries, while keeping 

in mind two earlier attempts at central banking in the United States. Ultimately, it opted for a 

different approach: one that recognized the public's distrust of concentrated power and greater 

confidence in decentralized institutions. The Federal Reserve's unique public/private structure 

reflects these strongly-held views and is designed to provide a system of checks and balances. 

Challenges to this public/private design have surfaced throughout the Federal Reserve's history, 

not unlike they have today. But in the end, our country has remained most confident in this 

decentralized governance structure. 

Criticism of the quasi-private nature of the regional Reserve Banks was anticipated from 

the start. Indeed, the Federal Reserve Act leaves no unchecked power in Reserve Banks. The 

politically-appointed members of the Board of Governors have oversight authority of the most 

important governance aspects of Reserve Banks. For example, they appoint the Chair and 

Deputy Chair of a Reserve Bank's board; they vote to approve the selection of the Bank's 

president as well as its chief operating officer; and they approve the Reserve Bank's budget and 
44 


25878.003

salaries. The Board of Governors also meets with each Banks' Chair and Deputy Chair annually 

to review the Bank's performance and that of its president. Finally, the Reserve Bank's 

operations are reviewed by the Board of Governors and an outside independent auditor. 

Notwithstanding this strong public oversight, some question the role of commercial banks 

within the Fed structure. Here too, important safeguards exist. The supervision and regulation 

of the Federal Reserve's member banks is a statutory responsibility of the Congressionallyconfirmed Board of Governors. Bankers who serve on Reserve Bank boards are prohibited by 

law from participating in the selection of the Bank president, and no director can participate in 

bank supervisory matters. Finally, all directors are required to adhere to high ethical standards of 

conduct and avoid actions that might impair the effectiveness ofthc Federal Reserve's operations 

or in any way discredit the reputation of the System. 

The capital stock supplied by these member banks serves as the foundation for the 

decentralized structure allowing for separate corporate entities. Through the regional Reserve 

Banks, private citizens from diverse backgrounds and from the largest to the smallest 

communities, have input into national economic policy; strong and varied independent 

perspectives more easily emerge to engage in difficult monetary policy discussions; and the 

central bank is provided insulation from short-term political pressures. 

Altering this public/private structure in favor of a fully public construct diminishes these 

defining characteristics in my view. It also risks putting more distance between Main Street and 

the nation's central bank. 

Former Fed Chairman Paul Volcker understood this well. He experienced first-hand how 

public pressure can be exerted on a central bank when it must make unpopular decisions that he 

and the FOMC judged to be in the long-run best interest of the economy. In a 1984 speech, he 
45 


25878.004

noted the important role of the structure of the Federal Reserve System in supporting the central 

bank's decision making by saying, "It was all quite deliberately done by men of political 

imagination -- designed to assure a certain independence of judgment, a continuity and 

professionalism in staff, a close contact with economic developments and opinion throughout our 

great land and a large degree of insulation from partisan or passing political concerns." 1 

To that end, I extend a personal invitation for any of you to visit the Federal Reserve 

Bank of Kansas City to see what a regional Federal Reserve Bank provides in support of the 

central bank's objectives for economic stability. Thank you. I look forward to taking your 

questions. 

1 Paul A. Volckcr, "Remarks at the 781

h Commencement of the American University," (speech. Washington, D.C., Jan. 29, 1984), 

https:/ /fraser.stlouisfed.org/docs/historical/volcker/Volcker _19840 129. pdf 
46 


25878.005

STRUCTURE, GOVERNANCE, REPRESENTATION: 

Federal Reserve Member Banks and Federal Reserve Bank Stock 

INTRODUCTION 

Esther L. George 

President and Chief Executive Officer 

Federal Reserve Bank of Kansas City 

July 2016 

The Fixing America's Surface Transportation (FAST) Act changed the Federal Reserve 

Bank stock dividend rate for member banks with assets of more than $! 0 billion. The Act also 

placed a cap of $10 billion on the aggregate surplus funds of the Federal Reserve and directed 

that any excess be transferred to the Treasury general fund. The potential policy implications of 

modifying dividends to member banks, or more generally, the requirement for member banks to 

purchase stock in a regional Federal Reserve Bank, should be studied carefully before altering 

this long-standing institutional design of public and private interests serving the American 

public. 

In designing the governance structure more than a century ago, Congress accepted a 

compromise proposal from President Woodrow Wilson to create a central bank with a combined 

public and private structure with those roles filled respectively by the Board of Governors of the 

Federal Reserve System and the regional Reserve Banks. In this design, the stock ownership of 

the regional Reserve banks is a key component in a central bank design that provides 

representation for both the public and private interests with each acting as a potential limit on the 

control of the other. 

The debate regarding the role of Federal Reserve stock in the Federal Reserve System 

structure is not a new one: In 1938, Congressman Wright Patman proposed that the government 

should take over the Reserve Bank stock, effectively turning the regional Reserve Banks into full 

government entities. At the heart of this issue is whether changes that aim to alter the 

private/public status of the central bank and potentially nationalize the 12 regional Federal 

Reserve Banks could undermine the barriers carefully constructed by Congress to protect against 

political pressures on Federal Reserve policies. 

This analysis offers historical perspective on these issues, as well as an assessment of the 

effectiveness of the current governance and structure of the Federal Reserve System. 

A LOOK BACK ON CENTRAL BANKING IN THE UNITED STATES 

A careful reading of Federal Reserve history will find that proposals for increased 

government authority over the Federal Reserve are often raised most pointedly during periods 

when government debt is high. Pressure on the Federal Reserve to implement policy supportive 

of government spending dates back almost to the 1913 founding of the Federal Reserve and the 

subservient role the Federal Reserve soon assumed related to government financing demands in 

connection with World War L Similar pressure continued during and after World War II. 

The views expressed by the author are her own and do not necessarily reflect those of the Federal Reserve System, its 

governors, ofliccrs or representatives. 
47 


25878.006

Eventually, the Federal Reserve's resistance to continually supporting government spending led 

to a formal accord with the Treasury in 1951. 

The list of events that have occurred in these environments is long and includes such 

high-profile instances as pressure from President Lyndon Johnson to hold rates low as a means 

of supporting his proposals during the Vietnam War to calls for Federal Reserve Chairman Paul 

Volcker's resignation during the Federal Reserve System's successful, but painful, battle against 

high inf1ation, Beyond these major events, numerous legislative initiatives have met varying 

degrees of success over the years but have overall led to what Duke University economics 

professor Thomas Havrilesky termed the "deterioration of traditional constraints on the political 

manipulation of monetary policy" since the modern Federal Open Market Committee (FOMC) 

was created in 1935.2 

The Failure of Earlier Central Bank Designs 

At the time of the Federal Reserve's founding, the United States had already witnessed 

two unsuccessful attempts at establishing a central bank. Neither was able to outlast their initial 

20-year charter. 

There was intense political debate around the creation of both the First Bank of the 

United States, in 1791, and its successor, the Second Bank of the United States, in 1816. While 

recognizing the need for the stability that a central bank could provide, many Americans with 

vivid memories of the fight to win independence from England were understandably leery of 

creating another powerful institution. As a result, both the First and Second Banks were the focus 

of significant public distrust. Both were highly centralized institutions that many Americans 

viewed as too closely aligned with powerful political and financial interests of the Northeast. In 

the early 1900s, after a series of financial crises, a third effort was launched to create a central 

bank with a structure that combined both government and private interests. 

Carter Glass, the House sponsor of the Federal Reserve Act and the legislation's key 

author, explained the challenges in a report to the 63'd Congress: 

"In the United States, with its immense area, numerous natural divisions, still 

more competing divisions, and abundant outlets to foreign countries, there is no 

argument either of banking theory or expediency which dictates the creation of a single 

central banking institution, no matter how skillfully managed, how carefully controlled or 

how patriotically conducted. " 

As Glass's comment suggests, the concern about centralization was not something that 

could be addressed solely by geography or the number of bank facilities. Nor was it simply a 

question about adjusting the bank's ownership structure. While both of those arc elements of a 

decentralized structure, arguably the most important issue--and the glaring weakness of both the 

First and Second Bank~was the centralization, or the perceived centralization, of control. 

Indeed, both the First and Second Banks were geographically diverse with branch offices 

located in the important financial centers of their eras. Additionally, both had a combined 

public/private ownership; however, the ownership structure utilized in each case was problematic 

for two key reasons: the need for profits, and the homogeneity of ownership and centralization of 

control. 

2 T. Havrilesky, "The Po!iticization ofMonetarv Policv: The Vice Chairman as the Administration"s Point Man." C'ato Journal, 

Vol. !3, No. 1 (Spring/Summer 1993). Copyright Cato Institute. 
48 


25878.007

• The Risks of a Structure that Requires Profits 

Although the nation's first two central banks had slight differences, particularly in 

their size, they were alike in many key structural ways. In both cases, private investors held 

an 80 percent ownership stake while the government held the remaining 20 percent. Investors 

acquired their shares through an initial public offering (!PO) process that was similar to other 

public stock offerings. In the case of both banks, the IPO involved the immediate sale of 

subscriptions, or "scrips," that were essentially a down payment for a later stock purchase. 

Scrip and stock purchases for the First Bank, which required the combined use of specie 

(gold or silver) and U.S. debt securities to complete the transaction, created what is now 

considered the nation's first financial crisis when scrip prices soared on high demand, 

causing debt markets to become distorted. While this distortion and the resulting U.S. 

financial crisis was an early indication of one of the many potential risks in a profit-seeking 

central bank structure, the era's more prominent international example involved the 

privately-held French central bank, Banque de France, which took actions in the 1880s to 

protect and increase profits-moves that had a negative impact on its effectiveness as a 

central bank. 

• The Consequences of a Homogeneous Leadership Structure 

Shares for both the First and Second Banks were prohibitively expensive for most 

Americans. Stock in the First Bank, for example, was initially offered at $400 per share (the 

equivalent of about $10,000 in 2016 after accounting for inflation). Stock in the Second Bank 

was still pricey at about a quarter of that cost. As a result, U.S. central bank ownership was 

vested primarily in the hands of wealthy and powerful individuals (including-perhaps 

unexpectedly-a number of foreign investors). Similarly, the majority of the directors of the 

First and Second Banks were elected from the ranks of the politically and financially 

powerful, including some members of Congress, who lived in and did business in the 

nation's power centers. The lack of diversity of central bank leadership was a major 

criticism, especially from those living outside of the East Coast. 

The Combination o{Public and Private Components: Checks and Balances 

Economic historians sometimes note that the fundamental issue about a U.S. central bank 

correlates with the fundamental issue dividing America's two chief political ideologies: the role 

of government versus the role of the private sector. 

At the time of the Federal Reserve's founding, most of the world's other central banks 

were privately held institutions. In the United States, the Federal Reserve's congressional 

creators recognized that a private structure would not work and instead devised a structure with 

checks and balances between the private sector and the government. 3 

Balancing government authority over the central bank was not solely about placating 

political ideologies that preferred limited government. The primary motivation was to avoid the 

use of monetary policy and inflation as the means of financing government debt. Related to this 

concern. of course, was the risk of Federal Reserve policy manipulation for political gain. 

3 T. Todd, The Balance of Power: The Political Fight fOr an lndcpendent Central Bank 1790~Prcsent, Federal Reserve Bank of 

Kansas City, 2009. 
49 


25878.008

To address concerns about national debt funding, the Federal Reserve Act expressly 

prohibited the direct financing of the Treasury. However, since the Federal Reserve's founding, 

political pressure to ease monetary policy has surfaced.4 

To mitigate this political pressure, the Federal Reserve's creators made the Reserve 

Banks private entities under the supervision and control of a board of directors with authority to 

perform all duties usually pertaining to directors of a banking association. This includes the 

appointment of the president and first vice president (directors affiliated with supervised entities 

are no longer involved in this process), appointment of officers, prescribing by-laws, and 

designating a representative for the FOMC. As initially designed, the Reserve Banks were far 

more autonomous than they are today. While the Federal Reserve System's government 

component has always been responsible for Reserve Bank oversight, the Federal Reserve's key 

functions, including monetary policy, were under the purview of the Reserve Banks during the 

System's early history. Over time, the monetary policy function has become balanced between 

the private and public components with the Board of Governors holding the majority votes. The 

FOMC consists of 12 members: seven members of the Board of Governors and five Reserve 

Bank presidents. 

Private Sector Involvement 

While private sector involvement through a network of separate and distinct Reserve 

Banks located across the country expanded leadership diversity and helped balance government 

authority, on the surface it presented another problem: how to engage the private sector while 

preventing risks associated with a pure-profit motivation. This aspect was addressed by putting 

restrictions on Reserve Bank stock and establishing the Board of Governors' authority for 

oversight of the Reserve Banks. 

While law requires stock ownership in Federal Reserve Banks as a condition of a 

commercial bank's membership in the Federal Reserve System, this stock is not like stock 

available on public markets. It may not be sold, traded or pledged as security for a loan. It does 

pay a dividend rate that is established by statute and, as a result, cannot be manipulated through 

the use of Federal Reserve policy tools or otherwise. This design provides the Federal Reserve 

System with private ownership over the Reserve Banks, but without the profit motivation that 

can distort policy. 

Stock ownership allows member banks to nominate and elect Class A and B directors to a 

Reserve Bank's Board of Directors. However, unlike traditional corporations which grant one 

vote per share, the Federal Reserve Act provides for class voting wherein each member bank 

receives one vote as a member of one of three designated classes based on the total amount of 

capital, surplus and retained earnings of the member bank. There are further limitations on voting 

as each class elects only one Class A and one Class B director. 

In addition to these restrictions on Reserve Bank stock, the Board of Governors plays an 

important oversight role, including its authority to: 

• Examine at its discretion the accounts, books and affairs of each Reserve Bank; 

• Suspend or remove any officer or director of a Reserve Bank; 

• Order an annual independent audit of the financial statements of each Reserve 

Bank; 

4 T. Todd, Undrrl.I£ssurc: P...QJjtics and TheJ:'edemLR_~::i._~J..Y£J)urino the 1990- J 991 Recession, Federal Reserve Bank of Kansas 

City. 2011. 
50 


25878.009

• Approve compensation provided by Reserve Banks to directors, officers, and 

employees; 

• Approve the president and first vice president appointed by the Reserve Bank 

Class B and C directors; and 

• Appoint three of the nine Reserve Bank directors, including the Reserve Bank's 

chair and deputy chair. 

MEMBER BANKS HELP RESERVE BANKS FULFILL THEIR MISSION 

Stockholders of the Federal Reserve System, also referred to as members, have some 

rights and obligations similar to traditional corporate stockholders in that they provide capital to 

the Federal Reserve Banks, which are federally-chartered corporations. All national banks along 

with state-chartered banks that choose the Federal Reserve as the bank's primary federal 

regulator are required to purchase Federal Reserve stock. By purchasing stock, members are 

entitled to a dividend fixed by statute as well as a role in Reserve Bank governance.5 Members 

are therefore invested in the Reserve Banks' and Federal Reserve System's success and are 

integral to the Federal Reserve's mission. Member banks must buy stock in the Federal Reserve 

Bank equal to 6 percent of the bank's capital, 3 percent of which is held at the regional Reserve 

Banks. The other 3 percent is callable by the Bank in certain circumstances. Paid-in capital from 

member banks was the initial funding mechanism for the Federal Reserve Banks, and the 3 

percent on call remains available in the event it is needed by the Reserve Banks. 

Role o[Member Banks in Governance o[Reserve Bank Activities 

Stockholding member banks elect a portion of the Reserve Banks' director seats,6 are 

core to Reserve Bank corporate governance and provide critical industry information and 

5 The dividend rate was set to 6 percent in the original1913 Federal Reserve Act to provide a rate of return comparable to 

alternative risky investments and to attract state-chartered banks as members. Investing in the Federal Reserve in 1913 was not 

risk-free given that the previous two central banks in the United States had not survived and the short-term ability to pay a steady 

dividend was unclear. Today, however, Federal Reserve stock is essentially a risk~frce perpetual bond as long as a bank chooses 

to remain a member. While the dividend remained unchanged tOr over a century, analysis by the Bipartisan Policy Center found 

it was similar to the average return on the 10-year U.S. Treasury note over that period (A. Klein, K. Readling, 0. Weiss, A. Woff; 

'"Fcd~ral Reserve Divklends ShoyJsLNQtJ3e a Piggv Bank for Co_ngr~g;,.·· Bipartisan Policy Center, 2015). The Fixing America's 

Surface Transportation Act, 129 Sat 1312 ('"FAST AcC), effective Jan. I. 2016, changed the dividend for stockholder banks with 

more than $10 billion in total consolidated assets from a fixed 6 percent rate to a dividend equal to the lesser of 6 percent or the 

rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend. 

The 10-year Treasury bond rate is seen by some as a reasonable alternative because it is the benchmark risk-free rate used for 

most long-term. fixed-rate investments and has a long history of continual issuance. The 30~ycar Treasury rate might also be an 

option because it is the longest maturity Treasury rate, but there is a risk that the Treasury could decide to stop issuing it at some 

point as it did from late 2001 to early 2006. 

If a market rate is used as a reference rate, it should not be capped at 6 percent as it currently is for member banks with more than 

$10 billion in assets. Using a market rate only when it is below a threshold is economically inconsistent with the notion of tying 

returns to the market. and it is inequitable to penalize member banks when rates rise above the threshold. In addition, changing 

the dividend has raised questions about the appearance of breaking an agreement with members. The American Bankers 

Association asserts that the FAST Act's dividend rate change amounts to an unconstitutional taking of member banks' property 

without compensation. Sec Letter dated ApriJ 28, 2016 from Rob Nichols, president and CEO of the American Bankers 

Association, to Robert de V. Frierson, secretary. Board of Governors of the Federal Reserve System (Attachment B). An 

alternative would be to allow current members to retain the 6 percent dividend or elect the 10-year Treasury rate and issue a new 

class of stock for new members with the dividend tied to the I 0-year Treasury rate. 

6 Class A and B directors are nominated and elected by member banks within their respective Federal Reserve District. Unlike 

traditional corporations. which grant one vote per share. the Federal Reserve Act provides for class voting wherein each member, 

regardless of shares, receives one vote as a member of one of three cla;:;scs. The classes are designated based on the total amount 
51 


25878.010

perspective on economic and banking conditions. At the same time, the structure includes shared 

oversight with the politically appointed Board of Governors that prevents members from having 

undue influence on Federal Reserve System activities. 

The Federal Reserve Act states that every Reserve Bank "shall be conducted under the 

supervision and control of a board of directors," and provides that the nine director positions of 

the Reserve Bank's board of directors are filled through two methods: election and appointment 

(12 U.S.C. 301). Only three of the nine directors on a Reserve Bank's board may be ofticers, 

directors or employees of a bank. Those directors (Class A) are chosen to represent member 

banks. The remaining six directors (Class B and Class C) cannot be bankers, and are chosen to 

represent the public with "due but not exclusive regard to agriculture, commerce, industry, 

services, labor and consumers" (12 U.S.C. 302). While member banks nominate and elect the 

Class A and Class B directors. this Reserve Bank's staff plays an important role in considering 

representation from local and regional organizations to identifY qualified candidates. Likewise, 

Class C directors are identified by Reserve Bank leadership with appointment by the Board of 

Governors. The chair and vice chair of the Reserve Bank board of directors must be selected 

from the Board of Governors-appointed Class C directors. Reserve Bank directors come from 

diverse backgrounds in the region and across industries. They must comply with legal 

requirements and rules related to their eligibility and conduct. 

Benefits of Banker Directors 

Reserve Banks are nationally chartered banks that serve as the operating arms ofthe 

central bank. They function much like a banker's bank or a clearing house. As such, banker 

directors' knowledge of the payments system complements the Reserve Banks' operational role 

in providing financial services to the industry. Indeed, corporate best practices recognize that 

"the key to effective board composition is ensuring that the people gathered around the board 

table can leverage their experience to contribute in meaningful ways, to understand the issues, 

ask the right questions, demand the right infonnation, and make the best possible decisions."7 

Class A directors bring informed views related to banking, as well as to the industries of their 

customers, and act as consolidators of information. For instance, a banker director can provide 

details about lending trends, stresses in the financial system, and other banking metrics, in 

addition to sharing insights into farming, commercial real estate, housing and the auto industry. 

Their reports at Reserve Bank board meetings offer input to economic analysis used by Reserve 

Bank presidents for monetary policy. 

Limitations to Banker Influence 

While Reserve Bank directors have important oversight responsibilities for the operation 

of their respective Reserve Bank, they have no involvement in the Federal Reserve's supervision 

of depository institutions. By law, the Board of Governors of the Federal Reserve System is 

responsible for the supervision and regulation of banks, and any information or discussion 

related to supervisory issues is conducted directly between a regional Reserve Bank's staff and 

the Board of Governors. In addition, any supervisory matter regarding a Class A director's bank 

is handled by the Board of Governors. 

of capital, surplus and retained earnings of the member bank within the class. Not every class votes each year, and each group 

within the class elects one Class A and one Class B director. 

7 D. Nadler. B. Behan. and M. Nadler, Building Better Boards (Jossey-Bass 2006). 

10 
52 


25878.011

Reserve Banks may not provide confidential supervisory information to any director ( 12 

C.F .R. 261.2). Moreover, Reserve Bank directors may not participate in bank supervisory 

matters and may not be consulted regarding bank examination ratings, potential enforcement 

actions, application/approval matters, or similar supervisory matters. Tn regard to the Reserve 

Banks' lending activity involving financial institutions, directors receive only aggregate 

infonnation about loans extended to ensure adequate knowledge of the Reserve Bank's balance 

sheet per their oversight responsibilities. Finally, if a banker director wants to convert his or her 

bank to Federal Reserve membership or take any other actions that would involve Federal 

Reserve regulatory approval, the Board of Governors in Washington must act on the application 

without Reserve Bank involvement. 

Statutory and Policy Restraints 

The directors representing member banks are subject to other restraints by statute and 

through System policy. As noted above, only Class Band Class C directors appoint, subject to 

approval by the Board of Governors, the Reserve Bank president and first vice president. Class A 

directors are excluded from that process to eliminate the perception that they have a role in 

choosing their regulator. Class A directors also are prohibited from participating in the selection, 

appointment or compensation of Reserve Bank officers whose primary duties involve 

supervision of banks for the same reason. 

All directors are subject to the Guide to Conduct for Directors of Federal Reserve Banks 

and Branches (http://www .federalreserve.gov /generalinfo/listdirectors/PDF /guide-toconduct. pdf), a policy implemented to ensure adherence to high ethical standards of conduct, and 

avoid actions that might impair the effectiveness of Federal Reserve System operations or in any 

way discredit the reputation of the System. The policy details procedures when directors are 

involved in procurements as a means to avoid any actual or apparent conflicts of interest. 

Further, while the policy allows for waivers, it indicates waivers are both highly unlikely and 

strongly discouraged except under the most exigent and extraordinary circumstances. This 

Reserve Bank has never sought a waiver for a director. 

CONCLUSION 

Altering the current structure and character of the Federal Reserve System risks 

diminishing the effectiveness of its operations. 

For more than a century, the structural design of the Federal Reserve System has 

functioned well in carrying out its mandates from Congress. It is possible that Reserve Banks 

could operate as separate corporate entities without stock ownership, but altering the central 

banks' current design creates the potential to diminish its effectiveness. 

The private nature of the Reserve Banks through stock issuance to member banks 

provides balance to the public nature of the Board of Governors. The public's trust 

and confidence is enhanced by this "balance of power." 

• Requiring stock purchases through capital investment creates incentives for member 

banks to support successful outcomes for the Reserve Banks. 

• Rather than a Washington-centric voice for the Federal Reserve System, the 

structure of 12 separate Reserve Banks encourages strong and varied perspectives 

from across the country as the System fulfills its mission. 

ll 
53 


25878.012

• The structure of the Reserve Banks as separate corporate entities allows private 

citizens from communities across the country to have input into national economic 

policy. 

• The current decentralized structure insulates the Federal Reserve System from 

certain political pressures, as the Reserve Bank presidents are not political 

appointments, but instead chosen by Class B and Class C directors, with approval 

by the Board of Governors. 

Nationalizing the Reserve Banks, and thereby making them essentially field offices of the 

Board of Governors, would dramatically alter these defining characteristics. 

12 
54 


25878.013

PUBLIC COMMENTS ON STRUCTURE AND GOVERNANCE 

Esther L. George 

President and Chief Executive Officer 

Federal Reserve Bank of Kansas City 

THE EXCHEQUER CLUB, WASHINGTON, D.C. 

May 21,2014 

An "End the Fed" demonstration took place outside my office last Saturday on Main 

Street in Kansas City, Missouri. It was a reminder that democracy demands accountability from 

its most powerful institutions to its citizens. The Federal Reserve is no exception. 

In my role as president of a regional Reserve Bank, I am well aware of the range of views 

on the topic of Federal Reserve accountability. I'd like to share with you some comments I read 

recently. For example, one commentator wrote that even if the central bank's "power would 

remain in the hands of the wisest, the most honorable, and the most disinterested" leaders, "it 

would not be possible to satisfy the people throughout the country that the vast resources and 

powers of the bank were used only for the best interests of all the people and without partiality or 

favor to any section of the country, or to any class or set of people .... " When it comes to the 

nation's financial matters, someone else noted that authority should not be "concentrated in one 

city where a small clique could control the system." 

Yet another comment stated that, "The business resources of the United States ... cannot be 

centralized .... By reason of the great expanse of the country and the diversity of business 

conditions in the different sections of the country, the details of the business of a central bank 

could not be managed at a central office."3 Finally, the desire for local control was highlighted in 

this comment: "No centralized power could dominate an organism whose life is drawn from 

functions local to each community." 

The sentiments behind these words--concerns about power and the concentration of 

financial resources-ring true, but they are not in fact comments on the recent financial crisis. 

This commentary offers a flavor of the robust and contentious public debate that preceded the 

signing of the Federal Reserve Act in 1913. It is striking to me how familiar those words arc 

today. It was this public sentiment about the country's economic future under a central bank that 

influenced Congress to shape the institution in a way that would garner the trust and confidence 

of the American public. The result was a decentralized structure that exists today with locations 

across the country operating under a rigorous system of checks and balances. 

As a career Federal Reserve employee, bank supervisor and lifelong Missourian, I 

understand the importance of having a central bank that is accountable to the public. In fact, as 

an official with input to national policy who lives and works in the center of the United States, 

my role is not happenstance, but rather it is a deliberate choice on the part of the Federal 

Reserve's congressional founders that reflects their intentions for the structure of the nation's 

central bank. It is my view that the Federal Reserve's ability to achieve its broad objectives over 

the past century has been possible because of its decentralized structure. 

Full speech text: 

https ://www. kansasc i tyfed.org/-/mcdia/ti I es/pu b I i cat/ speec hes/2 0 14-gcorge-washingtonexchequer-05-21.pdf 

13 
55 


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CENTRAL EXCHANGE, KANSAS CITY, MO. 

Feb.2,2016 

... As the Federal Reserve contemplates the appropriate path of normalizing its monetary 

policy, it naturally does so with considerable public attention. One source of this attention comes 

from Congress itself. Calls for legislative reforms of the Federal Reserve have persisted over the 

past five years, ranging from its structure and governance to its monetary policy approach and 

decision making. Additionally, Congress has shown its willingness to tap the Federal Reserve to 

fund fiscal activities ranging from new government agencies to highway construction. 

l understand that Fed actions during the crisis have raised a number of questions about 

the institution and its scope. When Congress established the Federal Reserve more than a century 

ago, it designed the institution to be apolitical but with accountability to Congress. This construct 

was designed to protect the stewards of the nation's money supply from the vulnerabilities 

associated with short-term political agendas. It includes important checks and balances that are 

often misunderstood, but nonetheless critical to the functioning of the institution. 

During my 33 years at the Federal Reserve Bank of Kansas City, the primary focus of 

thousands of dedicated Federal Reserve employees has been the health of the economy, 

supported by an efficient and accessible banking and payments system. To the extent that there is 

any doubt in the minds of Congress or the public about this, it is incumbent on the Federal 

Reserve to work with Congress in a direct and transparent way until we satisfY any remaining 

questions about the execution of our mission. Such dialogue would provide the highest 

probability for outcomes that best serve the public interest. 

Full speech text: 

https://www .kansascityfed.org/-/medialti les/publ icat/speeches/20 16/20 l6-georgekansascity-02-02.pdf 

14 
56 


25878.015

The Federal Reserve Bank City values ofexperience, industry, 

geography, race and gender on its Board of Directors. 

Steve Maestas, Chair (Class C) 

Chief Executive O!Ticer 

De,ve!!onment Group 

Mexico 

Rose M. Washington, Deputy 

Chair (Class C) 

Executive Director 

Tulsa Economic Development 

Corporation 

Tulsa, Oklahoma 

,Jim Farrell (Class C) 

President and CEO 

Farmers National Company 

Omaha, Nebraska 

Len C. Rodman (Class B) 

Retired Chairman, President & CEO 

Black & Veatch 

Overland Park. Kansas 

of Colorado 

Campus 

University of Colorado 

Aurora, Colorado 

15 

Brent A. Stewart Sr. (Class B) 

President and CEO 

United Way of Greater Kansas City 

Kansas City. Missouri 

Max T. Wake (Class A) 

President 

Jones National Bank & Tmst Co. 

Seward. Nebraska 

Paul J. Thompson (Class A) 

President and CEO 

Country Club Bank 

Kansas City. Missouri 

Mark A. Zaback (Class A) 

President and CEO 

Jonah Bank of Wyoming 

Casper, \Vyoming 
57 


25878.016

FRBKC Head Office Female Directors 

20li 2012 20!3 20!6 

--Head Oft1ce Female Directas 

FRB KC Head Office Racially Diverse Directo1·s 

2011 2012 20! 3 201.! 20!5 2016 

--Racially Diverse Head Office Directors 

16 
58 


25878.017

PUBIC ENGAGEMENT SAMPLING 

Esther L. George 

President and Chief Executive Officer 

Federal Reserve Bank of Kansas City 

FED'S ESTHER GEORGE: SPEAKING UP FOR MIDDLE AMERICA 

By Alister Bull 

Reuters 

Apr. 29, 2013 

EL RENO, Oklahoma Federal Reserve officials, as a rule, can expect a tough crowd 

when they visit places like Oklahoma where suspicion of big government runs deep. 

Esther George, president of the Kansas City Fed, is an exception. As she surveyed the 

cattle ranchers, energy bosses and other business leaders waiting to hear her speak at an event in 

El Reno, Oklahoma this month, she had a lot in common with her audience. 

Like many of them, George has become troubled that the dramatic measures the Fed has 

taken to restore U.S. growth might fuel inflation and asset price bubbles .... 

Full article: 

http://www .reuters.com/article/us-usa-fed-george-idU SBRE93 S02M20 1304 29 

FED BRANCH CHIEF HEARS TALES OF BANKING WOE FROM POT BUSINESS 

OWNERS 

By David Migoya 

Denver Post 

Apr. 9, 2015 

Federal Reserve Bank of Kansas City president Esther George on Thursday listened 

intently to a group of20 businessmen, bankers and government of1icials who talked about the 

troubling lack of banking services available to the marijuana industry, but offered little indication 

how it could be resolved. 

In the first meeting of its kind, George heard tales from marijuana business owners that 

ranged from one who was made to close more than a dozen bank accounts- each time leaving 

with an armful of cash- to another who described how a family member uninvolved with the 

enterprise was forced to close an investment account, according to people who attended the 

closed-door affair. 

'The fact that she took the time to meet ... is a significant indicator of how seriously 

these issues are being taken now," said Taylor West, deputy director of the National Cannabis 

Industry Association. "So even if there isn't immediate action coming out of the meeting, it's 

still definitely a positive step forward." ... 

Full article: 

http://www. denverpost.com/20 l 5 /04/09/fed-branch-chief-hears-tales-of-banking-woefrom-pot-business-owners/ 

17 
59 


25878.018

LABOR AWARDS HANDED OUT 

The Labor Beacon 

Kansas City, Mo. 

April2015 

... (Greater Kansas City AFL-CIO President Pat ''Duke") Dujakovich noted introducing 

keynote speaker (Esther) George that local AFL-C!Os around the nation were working to 

establish conversations with regional Federal Reserve Banks and thanks to George, the dialogue 

in Kansas City is excellent. The Kansas City Fed President makes a real effort to understand 

economic conditions on the ground in the region, he noted .... 

Full article: 

http://www.kclaborbeacon.com/ Archived%20Publications/20 15/ April%2030, %202015% 

20Edition.pdf 

ON YOUR SIDE CONSUMER ALERT: WHAT ECONOMIC RECOVERY? 

KAKE-TV 

Wichita, Kan. 

March 29,2016 

What economic recovery? That was the question some Wichita community leaders asked 

Kansas City Federal Reserve President Esther George. 

One by one Wichitans shared their stories of financial hardship in an economy that many 

on Wall Street say has recovered. 

"People below the one percent even the two percent, we are still struggling .... there are 

days in which I am going home trying to figure out how I'm going to feed my kids," said Tye 

McEwen, a Sunflower Community Action member. 

"They laid me off. No reason, no explanations, just hand me a slip and have a good day," 

said Desmond Bryant. 

The woman across the table listening intently is Kansas City Federal Reserve President 

Esther George. For many people keeping interest rates low is important to stimulant economic 

growth among the poorest. As important as it is for President George to meet with Wichita 

community leaders, meetings likes this serve as a good way for the community to see just what 

the Federal Reserve can and cannot do. 

Full article: 

http://www .kake.com/story /32 1 3 97 4 5/on-your-side-consumer-alert -what -economicrecovery 

18 
60 


25878.019

MEDIA COVERAGE AND ANNOUNCEMENTS NOTING 

PUBLIC OVERSIGHT ROLE OF THE BOARD OF GOVERNORS 

KOHN HAD BOARD BACKING FOR NY FED WAIVER: OFFICIAL 

By Alister Bull and Mark Felsenthal 

Reuters 

May 11,2009 

A waiver granted by Federal Reserve Vice Chairman Donald Kohn that allowed the 

chairman of the New York Fed's board of governors to stay in his job had the full backing of the 

Fed's Board of governors, including Chainnan Ben Bemanke, a Fed official said on Monday. 

The controversial waiver allowed Stephen Friedman to stay in his job as chainnan of the 

board of governors of the New York Federal Reserve despite owning shares in Goldman Sachs, 

which the Fed began regulating in September. 

Friedman, a retired chainnan of Goldman Sachs, resigned last week after it was reported 

in The Wall Street Journal that he had bought more Goldman shares. 

The Wall Street Journal called in an editorial on Monday for Kohn's resignation, and said 

he had shown a tin political car by allowing Friedman to stay at the New York Fed. 

Full article: 

http://v..'Ww.reuters.com/article/busincsspro-us-usa-fcd-kohn-idUSTRE54BOFR20090512 

2016 RESERVE BANK BUDGET APPROVALS 

On December 16, 2015, the Board approved the 2016 Reserve Bank operating budgets 

totaling $4,116.6 million, an increase of$219.9 million, or 5.6 percent, from the 2015 estimated 

expenses and $147.9 million, or 3.7 percent, from the approved 2015 budget. 

Full announcement: 

http://www.federalrcserve.gov /foia/20 l6rb _ budgets.htm 

NOT FAR TO LOOK: NEW FED PRESIDENT SEARCHED, FOUND HIMSELF 

By Christopher Condon 

Bloomberg 

June 3, 2015 

... Details of how (Patrick) Harker was appointed rankled a Philadelphia-based 

community group that had pressured the bank last year to be more open about how it would 

select a new chief. 

"This just furthers our message about transparency and accountability,'' said Kendra 

Brooks, an organizer at Action United. "This is part of the problem we're talking about." 

The Philadelphia Fed is one of 12 regional Fed banks. Their presidents, together with the Fed's 

Board of Governors in Washington, set interest-rate policy for the U.S. economy. 

Regional presidents are selected by their boards of directors under the Federal Reserve 

Act and must be ratified by the Fed's board. 

The Fed board approved Harker's appointment in a 5-0 vote and was aware of his role in 

the search process, said Michelle Smith, a spokeswoman. The hoard was confident the search 

was thorough and robust, and that Harker had appropriately removed himself when he became a 

candidate, Smith said. 

Full article: 

http://www. bloom berg. com/news/ artie les/20 15-06-0 3 /not-far-to-1 ook-fed-s-newcstpresident-searched-found-himself 

19 
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ROBERT STEVEN KAPLAN NAMED PRESIDENT AND CEO OF DALLAS FED 

News Release: Aug. 17, 2015 

DALLAS-The Federal Reserve Bank of Dallas today announced the appointment of 

Robert Steven Kaplan as president and chief executive officer. In this role, Kaplan will represent 

the Eleventh Federal Reserve District on the Federal Open Market Committee in the formulation 

of U.S. monetary policy and will oversee the 1,200 employees of the Dallas Fed. 

His appointment is effective September 8, 2015. 

Kaplan, 58, is the Martin Marshall Professor of Management Practice and a Senior 

Associate Dean at Harvard Business School. He is also co-chairman of the Draper Richards 

Kaplan Foundation, a global venture philanthropy firm that invests in developing non-profit 

enterprises dedicated to addressing social issues. 

Kaplan was appointed by eligible members of the Dallas Fed board of directors and 

approved by the Board of Governors of the Federal Reserve System. He succeeds Richard W. 

Fisher, who retired from the Dallas Fed in March 2015. 

Full news release: 

http://dallasfed.org/news/releases/20 J 5/nr J 50817.cfm 

NEEL KASHKARI NAMED NEXT MINNEAPOLIS FED PRESIDENT 

By Christopher Condon 

Bloomberg 

Nov. 10,2015 

... Presidents of the 12 regional Fed banks are appointed by a portion oftheir respective 

boards of directors, subject to the approval of the Fed Board in Washington. Reserve 

bank boards typically consist of nine members, including three bankers. The banking 

members are excluded under Dodd-Frank ii·om participating in the selection of 

presidents. 

Full article: 

http://www.bloomberg.com/news/articles/20 15- J 1-1 0/neel-kashkari-named-by 

minneapolis-fed-as-its-next-president 

BOARD OF GOVERNORS APPROVES REAPPOINTMENT OF RESERVE BANK 

PRESIDENTS AND FIRST VICE PRESIDENTS 

News Release: Feb. 19,2016 

The Federal Reserve Board on Friday approved the reappointment of J 0 Federal Reserve 

Bank presidents and l 0 first vice presidents by their respective boards of directors. Each 

individual has been approved to serve a new five-year term beginning March 1, 2016. The 

recently named presidents of the Federal Reserve Banks of Minneapolis and Dallas, as well as 

the recently appointed first vice presidents of the Federal Reserve Banks of Philadelphia and 

Chicago, were approved for tenns to February 28, 2021, at the time of their initial appointments. 

Under section 4 of the Federal Reserve Act, all Reserve Bank presidents and first vice 

presidents serve five-year terms that expire at the end of February in years ending in I or 6. 

Generally, presidents and first vice presidents who take office in intervening years are initially 

appointed for the remainder of the current term. Before the expiration of a president's term, the 

Class B and C directors of each Reserve Bank who are not affiliated with a supervised entity 

vote on whether to reappoint the president or first vice president to a new term. 

20 
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"The leaders of the Reserve Banks have important jobs and are expected to perform at a 

high level," said Governor Jerome H. Powell, chairman of the Board's Committee on Reserve 

Bank Affairs. "The eligible Reserve Bank directors, with significant input from the Board of 

Governors, conduct a rigorous process to inform their reappointment decisions." 

Full announcement: 

https://www.federalreserve.gov/ncwscvents/press/other/20 160219a.htm 

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of KANSAS CtrY 

Diversity & Economic Inclusion Activities 

Activities intludinj\Jtanding speclrl ((mve!lings, 

Name of Activity 

Strategic Stakeholder 

Engagement Program (SSEP) 

Community Development 

Advisory Council (CDAC) 

Description Key Actions and Expected Benefit 

Actions I Ongoin

Strategic stakeholders include: 

Senlor Women Bankers 

Minority Bankers 

Emerging Bank Leaders 

Community Leaders 

Labor Leaders 

FRS. 

Established in 2001, (he CDAC meecs twice 

annually with senior management to offer its 

Conducted needs and gap analysis for each group within each 

District stare. ln response, developed diverse networks and targeted 

and meetings to provide exposure to the Fed for 

Sunflower Community 

Action and Center fOr Popular Democracy. 

2016 Community Leaders Roundtables: Oklahoma City (April13); 

Kansas City (May 20); Omaha (Aug. 9); anJ, Denver (Sept. 27), 

2016 Labor roundtables: Kansas City (May 16); Denver (May 26); 

and, Oklahoma City (Occ 12). 

Minority Bankers Forum to be hosted Sept. 29, 2016, in Kansas 

City. 

Benefits 

Mutually beneficial interactions with supporters and critics. 

Enhanced understanding of the Federal Reserve. 

programs and resources that will benefit rhe 

Broad and diverse candidate pool for Bank boards and councils. 

Actions 

Hosted annual additional conference call with CDAC 

District members on rhe BOG's CAC. 

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Economic and Small Business 

Development 

The Bank's economic and small business 

development initiatives strengthen 

Launched an application process m let community development 

professionals express interest in joining the CDAC in 2017. 57 

applications were received. 

Proactively communicated relevant content (i.e., 

articles) to CDAC members ro enhance their 

engagement with the FRS. 

Benefits 

Board Pipeline: CDAC members 

of directors. Over the past flve years, two 

joined branch boards. 

it1formed and 

Increased Diversity: 56 percent of CDAC members are minority 

and 56 percent are women. 

Actions 1 Ongoin

Hosted a national 

economic development summit to build a stronger communi tv of 

practice 

attendees 

economic 

presentations on minority economic development, the 

businesses on the economy and minority 

business trends. 

Conducted a small business roundtable with rhe U.S. Small 

Business Administration on access to capitaL 

Led the formation of a CDFI coalition in Oklahoma to 

similar coalition has launched in Colorado. 

nd build a greater 

business owners. A 

practice guide for CDFls/microlenders that 

organiZations that provide reasonably priced and faster 

capital options for small businesses. 

Parrnering with the New York Fed and nine other FRBs on the 

annual Small Business Access to Credit Survey. 

Hosting a national webinar for the System on small business as an 

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Workforce Development Financial Stability 

The focus of the Bank's workforce 

development initiative is to improve the 

employment outcomes lowskilled workers. Our "Raise the Build 

the Ladder" 

growth sectors 

workers for success. 

The fmancial stability initiatives are focused on I 

increasing public understanding of financial 

issues impaccing LMI communities. Effort') are 

also focused on increasing the overall financial 

health of LMI adults bv exoandine: the oool of 

economic development engine in communities. 

Benefits 

Launch of the Oklahoma CDFI Coalition will increase financial 

and technical assistance products and services offered to small 

business owners and consumers. 

was a partnership 

Partnering with the Dallas Fed on a guide for bankers that outlines 

how CRA can be maximized to support workforce development 

initiatives. 

Helping KC's workforce investment board, the Full Employment 

Council, fulfill certain requirements related to a $5 million 

workforce development grant it received from the U.S. Department 

of Labor. The grant rargets low-skilled LMI young adults interested 

in tlnanda! services, IT, advanced manufacturing or hea!thcare 

fields. The Bank wHI assist with financial education and mock 

interviews. Program graduates could become Bank 

Benefits 

workers will receive and utilize skills that make them 

employable for livable-wage careers. Organized a citywide, daylong event that provided a variety of 

financial education workshops for about 300 consumers. 

Hosted two of four interactive workshops for social service 

to train them on the content and delivery methods of 

Financial Protection Bureau's, "Your Money, Your 

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resiliency Goals" toolkit. The remaining workshops will be in August and 

September, 

In October and 1\ovember, the Bank will partner with Central New 

Center 

and career _ 

Hosting a national conference on financial resiliency and mobility 

in September. 

Benefits 

Increased awareness of sound financial practices, available resources 

and credible resource providers. 

Social service professionals will 

knowledge and a suong coaching framework that will enable them to effectively coach clients, 

Diversio/and 

Name of Activity l Description l Key Actions 

Signature Diversity and 

Inclusion Summits 

Diversity Strategy Steering 

Council (DSSC) and Employee 

Diversity Council (EDC) 

expert 

rhc summit topic. 

discussions allowed 

to share best practices. FRS guests 

and communiry leaders are invited w 

participate in each summit. 

Diversity Strategy Steering Council 

Comprised of members of senior 

managemem and other Bank officers. 

Actions 

Hosted a Diversity and Inclusion Summit focused on Unconscious 

Bias, March 16,2016, with 189 attendees. 

Inclusion Summit focused on Women in 

7, 2016, with 92 attendees. 

Hosted a Diversity and Inclusion Summit 

Strategies: Creating an Inclusive Organization, Aug. 11,2016, with 

82 attendees. 

Benefits 

Creates a forum around the importance of diversity and inclusion in our organizations and communities. 

Enhances both the community and Bank understanding of diversity 

and inclusion. 

DSSCActions 

The DSSC meers four times annually. 

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Diverse Bank Groups 

Advises the OMWI office on diversity 

opportunities and issues. 

Provides the necessary 

are well supponed and its strategies 

are achieved. 

Employee Diversity Council 

Comprised of select staff chosen by Bank 

Division heads. 

Coordinates activities that create 

awareness of diversity and inclusion as a 

incre..1.se employee 

. and inclusion and 

support the Bank's reremion strategy. 

Communicates information about Bank 

and community diversity and inclusion 

events to employees. 

the 

Reviews and refreshes the three-year diversity and inclusion strategy. 

Champions and participates in diversity events and activities at the 

Bank. 

EDCActions 

The EDC hosted the annual Diversity and [ndusion Champions 

Retreat, Feb. 25,2016, which brought rogerher several imernal 

diversity and inclusion groups to collaborate on the future of 

and inclusion at the Bank as well as hear from external and 

speakers regarding the topic. 

The EDC hosted the annual Diversity Awareness Week, Aug. l-5, 

2016, which consisted of a Ted Talk about Exclusion, Illusion, and 

Collusion; a Multicultural Showcase; and a Lunch and Learn with 

for an Inclusive 

Work Environment." 

EDC members and EEO Liaisons participate in an annual diversity 

and inclusion training in addition tO the annual Diversity Retreat. 

DSSC Benefits 

EDC Benefits 

Creates awareness of diversity and inclusion as a business 

opportunity. 

Encourages Bankwide involvement in diversity and inclusion 

activities. 

Members serve as a resource for the Bank and employees about 

diversity and inclusion related activities. 

Minority Members of Management Mentoring Circle Actions 

Brent Stewart, president and 

Kansas City, on career and 

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Minorit

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Hosted an IT Professional Showcase for Bank employees 

highlighted current IT opportunities at the 

functional interaction berween Bank IT 

first-hand knowledge on a day in 

WIT COP 

Minority Members of Management Mentoring Circle Beneflts 

;\'feets and discusses issues regarding diversity and inclusion in the 

workplace. 

and development for greater retention of minorities 

throughout the year with internal 

minority 

WITCOP Benefits 

Nurtures value-creating interactions and provides plarform of 

support and resources. 

Empowers members to be positioned to influence and/or drive 

planned and emergent technology innovaLions within the Bank. 

information flow and knowledge by leveraging internal 

subject matter expertise. 

Develops the abillty to sense and respond to key problems and 

opportunities in FRBKC's technology ecosystem. 

Focuses on community outreach through sharing, encouraging and 

oooortunitics to get involved in the community and 

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to choose a career in STEM. 

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Mentorship Program 

Supplier Diversity Practices 

Supplier Outreach 

reached its highest level of 

employees, about 27.9 percent of the tora! 

Minority and female participation rates increased tO 25 percent and 

31.2 percent, respectively. 

Benefits 

Improves employee retention. 

Improves the overall quality and depth of our leadership ream. 

Supports the Bank's diversity and inclusion objectives. 

Increases the number of minorities in management positions. 

Increases the success rate in hiring high-quality staff. 

are included in all competitive acquisitions when 

are identified through engaging in local, regional 

and organizations though outreach activities 

and events to diverse suppliers. 

The Bank informs suppliers about its business practices and 

encourages their participation in contracting opportunities. 

Benefits 

comract with the Bank, the contractor confirms a 1 • 

similar commitment in its own practices. 

The Bank parmers with local, regional and 

national organizations rhat focus on minorityand women-owned business members. Partner The Bank has participated in seven outreach events and activities 

8o0.3)J.JOIO • 8t6.88t.l.OOO 

MEMORIAl. DRIVF .• KANSAS CITY, MISSOURI 

www. KA:->SASCITY Fs:n.OR-G 

Mentor/

Agreeme

year and 

relations

ongoing

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25878.029

Heartland Black Chamber of Commerce, Mountain Plains Min< Development Council 

Business Enterprise Council. 

this year and targets to attend at least 10 by year's end. 

The Bank hosts several meetings with diverse 

more about their work and to inform those 

to learn 

about the 

Bank's general business needs and how to navigate the procurement 

practices. 

The Bank collaborates with other Federal Banks co develop and promote initiatives that strengthen supplier diversity. 

Benefits 

the Bank communicate business 

opportunities and build its network of diverse suppliers. 

Outreach events and activities provide staff wirh opportunities to 

network and connect with diverse suppliers, learn more about 

supplier diversity best practices and support the effort<; of the Bank's 

community partners. 

Diversity Recruitrrient/HR.activities, including Board ofDirectors and Reserve Ban)!: staff 

Name of Activity ] Description I Key Actions and Expected Benefit 

OMWI Campus Recruiting l Each year, a number of Bank employees visit I Actions 

on 

serving campuses. In addition, the 

participates in the pilot HBCU/HSI 

systemwide initiative with I·Iampton and 

Universi[y of New Mexico. Minority and 

colleges the Bank partners with 

include: 

Clark Atlanta University 

Colorado State University at Pueblo 

Cottcy College 

The recruiting team attends 

delivers 

participates in 

The recruiting team has attended 15 events at majority-minority 

and women serving colleges and universities this year, and targecs to 

ar.tend 26 by year-end. 

Diversity Liaisons connect with multicultural offices and 

organizations on each campus. 

Benefits 

Increases the Bank's emphasis on attracting diverse talent from all 

campmes. 

Expands pool of diverse talent beyond the Tenth District. 

Supports the Bank's sourcing strategies and talent acquisition needs, 

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Collaborative Partners 

Director Pipeline Program 

Langston University Lincoln University 

Morehouse College 

Prairie View A&M University 

Saint Mary's College Spelman College 

Stephens College 

Texas Southern University 

Texas Women's University 

University of Arkansas at Pine Bluff 

University of New Mexico 

The Bank partners with 17 professional and 

diverse organizations to connect with the 

community and crcare an additional talent 

sourcing channel for the Bank Collaborative 

parrners are invited to Signature Diversity and 

Inclusion Summits and are provided the 

host events in Bank [aci!ities. 

also have the 

members of the 

from business 

the Tenth District. In 2006, economists 

were placed as the lead officers ln Denver, 

Oklahoma City, and Omaha, They are 

supporred by a Public and Community Affairs 

Actions 

The Bank supports 

enrich the partnerships by at key programs, 

events and speaking engagemenrs, 

for events. 

Benefits 

networking events, 

Nerworking events allow Bank employees to connect with the 

community while also providing an opportunity for ncrworking and 

recruiting. 

Enhances community understanding of the Bank's commitment to 

diversity and inclusion. 

Actions 

District's Board of Directors are women 

minorities* reprcsendng a broad and diverse cross section of 

business and industry. 

*A direaor who is both kmalc and minority is counud jusr once 

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Experienced Professional 

Recruiting 

team that enhances the District's ability to 

maintain a robust programming and public 

1

1 

in each zone, thus attracting 

Board of Directors. 

The Bank attracts experienced professionals 

through a variety of channels, including 

hosting professional networking cvems, 

attending national conferences and 

collaborating with national organizations, 

Benefits 

for sourcing Kansas Ciry 

directors. Enhances FRS and ensures people 

with diverse perspccdves have input into national policy matters. 

Actions 

This year, the Bank has attended nine urban career fairs and 23 

networking events with professional organizations in the 

community. 

Benefits 

Experienced professionals bring outside perspective to the Bank. 

Supports the Bank's sourcing strategies and talent acquisition needs 

Enhances the diversity of thought at the Bank. 

Other.Outreacli/Education :Activities 

Name of Activity 

Student Board of Directors 

Summer @ rhe Fed 

Actions 

Benefits 

In 2016, more than 750 fourth through sixth grade students 

participated in the summer camp program. 

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t MHWRTAI. DR IV£ • KANSAS Cnv, MissouRI (i,p9~ WWW.KA:-<SASCnYhD .ORG 

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Annual 

Annual 

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Financial Education Day KC STEM Alliance-Girls in 

Technology 

Ilaymen!S ActJv'ifies. 

Name of Activity 

Payments Research 

fourth through sixth grade students in the 

Kansas metro area. Student Board 

members interactive economics 

education lessons with the students from JuneBenefits The summer program gives these college-bound high school opportunity to boost their job skills with professional 

accivities and serve as role models and menrors to 

younger students. Participants also benefit front exposure to District 

directors. 

The camp participants benefir from eadv exnosure 

education concepts delivered in a fun 

Actions 

On Oct. 28, the Bank will host 400 high school students for 

Financial Education Day. 

Benefits 

Increases financial literacy in the community. 

Actions 

The Bank hosted a kick-off event for Computer Science Education 

Weekin2015. 

The Bank coordinated volunteers for a weeklong Girls App Camp, 

hosted by KC STEM Alliance in 2016. 

employees serve as mentors to the participants. I Benefits 

·.·. 

. ; .: .. 2 

Description 

Exposes, engages, excites, and encourages female participation in 

computer science educational ro build a stronger and 

more diverse for the Kansas City region. 

Addresses an increasing demand for a qualified and diverse 

workforce to fill tech jobs in the Kansas Ciry region. 

. ' · .. ··· 

····· 

; : .. ; .. ;< .. 

Key Actions and Expected Beneflt 

Some of the Bank's research focuses on the Actions 

unbanked and access to the U.S. payments 

. Research efforts lead to articles published in Bank journals and system. other publications. For example, an upcoming article in the Bank's 

8oO.JJJ.1oto • St6.S8Llooo 

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Math X Economics 

American Economic 

Association's Summer Economics 

Fellows Program sponsored by 

the Committee on the Status of 

Women in the Economics 

Profession and also administered 

by the Committee on the Status 

of Minority Groups in the 

Economics Profession 

Support Speakers Series 

introduce them to economics and learn about 

potential career paths. Sessions also include 

sma11 2:roup discussions where students are 

minorities in economics 

macroeconomics or monetary policy. 

Research staff supports several diversity and 

inclusion programs as advisory councils, roundtables, 

workshops and reacher/student events. 

Economic Review is on "Access tO Electronic Payments Systems by 

Unbankcd Consumers." 

Benefits 

Allows for better understanding of issues related to the unbanked 

and to influence policymakers. 

50 students participate in the program annually. 

Helps diversify rhe 

research associate 

Actions 

Benefits 

positions. 

research seminars, make 

Advances the participation of women and underrepresented 

minorities in the economics profession. 

Actions 

inclusion events, both 

Benefits 

Supports diversity and inclusion activities across the Bank. 

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spring. 

We usu

Summe

1 0 to 12 

year. 

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Distinguished Members of The Monetary Policy and Trade Subcommittee of the U.S. House 

Financial Services Committee: 

As Chairman and CEO of Old National Ban corp, and a former board director of the Federal Reserve Bank 

of St. Louis, as well as a former member of the Federal Advisory Committee of the Federal Reserve Board, it 

is my distinct privilege to share with you my cl1oughts, and address your guestions, about the role- and 

tremendous value- of directors representing banks of all sizes on our Reserve Bank boards. 

I believe it is critically important that our nation~s bankers continue to serve as directors on out Reserve Bank 

boards. To make it clear why I feel so strongly about this position, I fu:st want to highlight for ilie Committee 

some initiatives and accomplishments of the bank that I lead. This is not an attempt to shine a spotlight on 

Old National; instead, it is intended to illustrate the powerful connection that community banks like ours 

enjoy with the communities we serve. 

With $14.4 billion in assets and a 182-year legacy of service, Old National is a fairly typical community bank. 

We are literally headquartered on Main Street, on the shore of ilie Ohio Rlver in Evansville, Ind. Our clients 

are small and mid-sized business owners1 farmers) young families) retirees. '"TI1ey span multiple sectors, 

industries and geographies, and they trust us to guide them. And like many community banks, we also serve 

as a catalyst within our communities for economic development, working to forge and strengthen 

partnerships among business leaders, community leaders and representatives of state and local government. 

Also typical of banks throughout our great nation, Old National is known for our commitment to the 

communities we serve. In 2015, we supported our communities with more than $5 million in in grants and 

sponsorships, which were prin>arily focused on economic development, financial literacy and support for 

low-to-moderate-income families and individuals. Our nearly 3,000 associates also donated over 100,000 

volunteer hours (every associate enjoys two paid volunteer hours a month) at more tban 2,000 community 

organizations throughout our four-state footprint of Indiana, Kentucky, Michigan and Wisconsin. Old 

National has also heen named one of the Ethisphere Institute's "World's Most Ethical Companies" for five 

consecutive years, and American Banker magazine recently named us as one of the best banks to work for in 

the nation, 

We are also an organization focused on, and committed to, diversity and inclusion. This is evident in our 

Corporate Board of Directors, which includes former Indiana Lt. Governor Becky Skillman as lead director, 

as well as director Kathy White, a former Instructor of Law at West Point and the current Command Judge 

Advocate for the 46th MilitruT Police Command in Ann Arbor, Mich., and Derrick Stewart, CEO of the 

YMCA of Southwestern Indiana. Additionally, a Community and Social Responsibility subcommittee 

governed by our Corporate Board guides our efforts to be a socially responsible, sustainable and highly 

inclusive organization. 

Another strength of our nation's banks, large and small, is providing frnancial educ.1tion and financial literacy 

resources to at-risk members of our communities, especially low-to-moderate .income (LMI) individuals and 

families. In 2015, Old National associates taught 900 frnancial education sessions in our markets, reaching 

more than 17,000 individuals (45,000 since 2013) and prompting the American Bankers Association to 

recOgtl.ize us with two 2015 Community Com1nitment awards. 

Again, I highlight these accomplishments to illustrate the unique and powerful connection that our nation's 

banks share with the communities we setve. Not only do bankers support a diverse range of individuals in 

our role as connnunity catalysts, we're on the front lines evet)' day helping our clients manage and grow their 

(W0033684.1) 
76 


25878.035

businesses. They trust us to understand the dynamics of the market and to help them overcome any 

challenges and concerns. Over tin1e, tills relationship provides us with vital insights about how "Main Street 

Americans~, truly view the economy, and how those views shape d1cir decision-making. 

As bankers, we also have the ability to reach out to our most trusted clients from multiple sectors, 

geographies and industries to seek information that can be used by our nation's Reserve Bank boards to guide 

their thinking on key issues. This strong connection affords us access to multiple voices in our regionsfrom tech industry leaders to shop owners to middle-market managers- who are ready to share the kinds of 

candid thoughts and perspectives that don't always show up in the national data. 

Conversely, the bankers who sit on our nation's Reserve Boards gain incredibly valuable information from 

the board table that they can take back to their communities. It truly is a reciprocal relationship that 

strengthens both the Federal Reserve and our nation's cities and towns. I expet~enced this first-hand as a 

board director of the Federal Reserve Bank of St. Louis from 2008-13. Fueled by the knowledge and insights 

I gained as a Reserve Board director, Old National Bank spearheaded the creation of the first "Bank On" 

program in the Midwest. Launched in 2009 through a partnership with local government, financial 

institutions, community organizations and the St. Louis Fed, Bank Of! Evamvi//e was modeled after the Bank 

Ot1 Jan Frandsco initiative. Featuring LMI-specific products geared toward serving the unique needs of the 

unbanked and underbanked populations, the program was managed by an associate that Old National 

"loaned" to the project. In the nearly eight years since Bank on Evansville was launched, Old National has been 

the catalyst in creating another 16 Bank On programs in our footprint, helping roughly 2,200 unbanked or 

underbanked community members take greater control of their finances. 

During my tenure as a Reserve Board director, I worked with a number of honorable, dedicated bankers, 

including Tommy May, Bryan Jordan and Ernie Chappel. While each of us represented a different market and 

perspective, we shared the common belief that together we could make out region and our nation stronger. 

As a director, I also spoke frequently with leaders of corrununities throughout the Old National footprint to 

gain their feedback about issues that were germane to ow: Regional Board. Over time, many of these leaders 

began seeking me out, unsolicited, to offer their unigue Midwestern perspectives on the issues of the day. 

These discussions were invaluable to me and to our Reserve Bank President to assist him in his role on the. 

Federal Open Market Committee (FOMC) 

As I stated at the beginning of these remarks, 1 believe our nation's bankers should continue to serve as 

directors on our Reserve Bank boards. As representatives of our region, we serve a limited yet crucial role. 

nus includes providing detailed, systematic and real-Ume input about local economic conditions, which 

serves to help shape effective monetary policy. \Y/e also play a vital role in the business side of running a 

Reserve Bank, including management, strategic plans, operations, budgets and supervising internal audit 

functions. These are the crucial areas where the bus1ness expertise and leadership of our nation's bankersand the broad cross-section of voices and constituencies we senre- have proved to be a highly effective 

resource. 

I am aware that concerns have surfaced over whether bank directors on Reserve Boards might somehow 

attempt to control or manipulate decisions for the betterment of their own institutions. I believe this issue is 

effectively addressed, and the potential risks are properly mitigated, tlorough tl1e letter of the law and the 

current policies and procedures of the Federal Reserve System. As this committee knows well, the banking 

industry is highly regulated, and our actions as bankers are carefully examined by multiple regulators. As 

bankeis, we also understand the consequences to our institution if we violate these regulations. These same 

consequences apply to the regulations and policies tl1at govern the Federal Reserve System. The existing 

govet:nance model is very strong, and I applaud the controls currently in place. I can assure you that during 

{W0033684.1} 
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my tenure on the board, I was never placed ln a position where I felt tny integrity or ethical center were in any 

way compromised. Ultimately, exercising banking supe1vision and regulatory authority is the responslbility of 

the Board of Goven1ors, not of our Reserve Bank boards. 

As I stated earlier, our nation's bankers play a limited yet crucial role in our Federal Reserve System. Driven 

by a .reciprocal relationship with the communities we serve, we provide an important voice and a powerful 

resource that help keep our Reserve Boards strong, balanced and effective. I encourage this committee to do 

everything in its power to retain this vital link to the views, perceptions and attitudes of Main Street America. 

Thank you, 

Bob Jones 

Chairman and CEO 

Old National Bancorp 

(W0033684.1} 
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Statement 

Subcommittee on Monetary Policy and Trade of the House Financial Services Committee 

September 7, 2016 

Jeffrey M. Lacker 

President 

Federal Reserve Bank of Richmond 

Rayburn House Office Building 

Washington, D.C. 

Good morning. I am honored to speak to the Subcommittee about the governance structure of the Fed's 

regional Reserve Banks. 1 

To understand the Fed's structure, it is essential to understand the Fed's purpose. Prior to the founding of 

the Fed, the banking system was often unable to adjust the supply of monetary assets flexibly enough in 

response to the changing needs of commerce. The Fed was founded to "furnish an clastic currency," in 

the words of the preamble to the Federal Reserve Act. Clearinghouses-· bank-owned cooperatives in 

larger cities- played an important role in how periodic crises were resolved before the Fed, including the 

issuance of currency substitutes, but were widely viewed as favoring the interests of large money center 

banks. Reserve Banks were modeled after the clearinghouses, but with note issue powers and universal 

eligibility for membership, the aim being to improve upon the role of the clearinghouses in a way that 

served broader public interests. A plan for a centralized institution was rejected out of concern about 

excessive Wall Street influence at the expense of diverse regional interests. Proposals for a governmentcontrolled central bank were rejected as well for fear the federal government would use control of the 

money supply to resort to inflationary deficit financing. At the same time, a measure of public sector 

oversight was viewed as essential, consistent with Progressive Era thinking, so the Act included a Federal 

Reserve Board whose leaders were politically appointed. 

Thus, the final Federal Reserve Act reflected a balance of competing considerations: a federated set of 

institutions to provide for representation of a diverse range of geographic and commercial interests, with a 

hybrid public-private governance structure to provide for public oversight but contain potential misuse of 

monetary authority. 

The governance structure of the Federal Reserve is still effective, in my view, because the considerations 

the founders wrestled with are all still relevant today. The federated structure has benefited policymaking 

by ensuring that a diversity of perspectives on policy and economic conditions arc brought to the table. 

Reserve Banks historically have shown intellectual leadership on topics that initially went against the 

grain of mainstream thinking but later became broadly accepted, and Reserve Bank presidents have a 

record of challenging conventional views. In addition, the federated structure has promoted broad 

regional engagement across the country, deepening the Fed's understanding of the diverse economic 

challenges facing American communities. 

To be sure, our country's understanding of diversity has expanded since 1913. And it is in keeping with 

the spirit of our founding that the Federal Reserve has taken the importance of diversity seriously as we 

have sought to ensure broad representation of views in the formulation of monetary policy. including 

1 
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those associated with disadvantaged communities. I believe our record in this regard, like that of many 

other organizations, shows a combination of substantial progress and areas where more can be done. 

In addition to bringing diverse viewpoints to bear, the Fed's public-private governance helps our 

policymaking focus on its longer-term objectives. At times there is a temptation to provide excessive 

economic stimulus in the short run and leave the subsequent inflationary costs for future policymakers to 

deal with. Evidence from around the world, along with our own history, amply demonstrates that the 

temptation of short-sighted monetary policies is a bipartisan vulnerability, just as the Fed's founders 

feared. For central banks, this implies that meeting-to-meeting monetary policy decisions need to be 

insulated from short-term political pressures driven by electoral considerations. 

But independence with regard to the choice of monetary policy instrument settings must be paired with 

strong accountability for the economic results of policymaking over time. Accountability rests on 

transparent communications, which help Congress and the public evaluate the Fed's performance against 

its mandate. 

The Fed's public-private structure supports monetary policy independence by ensuring a measure of 

apolitical leadership. The Reserve Banks' autonomous balance sheets, protected appropriations status and 

independent capital stocks all play a role as well by limiting high-frequency interference that might 

diminish instrument independence. 

The presence of bankers on Reserve Bank boards is said to represent a conflict of interest since Reserve 

Bank staff supervise banks. But strict rules limit bankers' roles; they simply have no avenue through 

which they can influence supervisory matters. Moreover, best practice for any board is to seek members 

with expertise relevant to the organization's activities. The Fed's large payment processing operations 

make the original rationale for having bankers serve on Reserve Bank boards still valid. In addition, 

bankers are particularly well-positioned to report on economic conditions in their footprints. 

In conclusion, while some claim that the Federal Reserve's governance structure is a historical 

anachronism. the continued relevance of the trade-otis taken into account by the authors of the Federal 

Reserve Act argues for the continued utility of the finely balanced arrangements they crafted. 

Thank you. 

1 My remarks reflect my own views and not those of my colleagues in the Federal Reserve System. 

2 
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Federal Reserve Bank Governance 

September 6, 2016 

Jeffrey M. Lacker 

President 

Federal Reserve Bank of Richmond 

The govemance structure of the Federal Reserve Banks has been the subject of public discussion lately.' 

I'd like to provide some background on why the Fed is structured the way it is and the important purposes 

that structure serves- particularly to the monetary policymaking process that is core to the Fed's 

existence. 2 

How Our Structure Came to Be 

To understand the Fed's structure, it is essential to understand the Fed's purpose. 

The Fed's founders sought to address what they called "the currency problem." This referred to the 

inability of the economy's supply of notes and bank reserves- what today would be called the money 

supply- to expand and contract with the needs of commerce. A number of features of the pre-Fed 

monetary system contributed to the problem: Currency was issued by national banks and was required to 

be backed by U.S. Treasury securities, making note issuance costly and slow. And widespread branching 

restrictions resulted in thousands of small, undiversified banks throughout the country, which meant that a 

substantial portion of banks' reserves were held as interbank deposits. Overall, the financial system was 

vulnerable to shocks and unable to quickly move reserves to where they were needed, resulting in interest 

rate spikes that hampered economic activity on a frequent basis3 Clearinghouses bank-owned 

cooperatives that settled payments in larger cities played an important role in how periodic crises were 

resolved. They could not legally issue currency, but they issued certificates that were circulated by their 

members as an (imperfect) substitute currency when the demand for currency surged4 

The Fed was created to "fum ish an elastic currency," so that the supply of monetary assets would vary 

with the needs of economy. Reserve Banks, in turn, were modeled after clearinghouses. The operation of 

clearinghouses, however, was limited to the cities. The idea of the founders was to mimic and improve 

upon this model to serve broader public interests. They sought to create a system of institutions with 

universal eligibility for membership, so all banks would have access to clearinghouse services. The new 

institutions would have the ability to issue currency and would accept bank deposits to prevent reserves 

from "pyramiding" in large cities5 

A key debate at the founding of the Federal Reserve was how such a system should be govcrned.6 A 

primary concern of the founders was the extent to which the economic characteristics oflarge money 

centers and the rest of the country diverged. The initial legislative proposal was the Aldrich Plan, which 

provided for an clastic currency issued by a single National Reserve Association. That plan was rejected 

out of concern about excessive Wall Street influence at the expense of diverse regional interests. 

Proposals for a government-controlled central bank were viewed as risky for fear that the federal 

government would use control of the money supply to resort to inflationary deficit financing. At the same 

time, a measure of public sector oversight was viewed as essential, consistent with Progressive Era 

thinking. So the Act included a federal authority- the Federal Reserve Board, today called the Board of 

Governors to oversee regional Reserve Banks' operations and policies, and whose leaders were 

politically appointed7 

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Thus, the final Federal Reserve Act reflected a balance of competing considerations: a federated set of 

institutions to provide for representation of a diverse range of geographic and commercial interests, with a 

hybrid public-private governance structure to provide for public oversight but contain potential misuse of 

monetary authority. 

The governance of the individual Reserve Banks was also designed to be a blend of public and private 

elements. Like clearinghouses before them, Reserve Banks are capitalized by their members through the 

purchase of stock rather than capitalized by the government. 8 Reserve Bank stock is unlike traditional 

corporate stock, however, in that it comes with no voting rights and is not transferrable. Each Reserve 

Bank is governed by a nine-member board of directors that is partly public, with three members appointed 

by the Board of Governors, and partly private, with six members elected by member banks. By statute, six 

of the nine directors represent the public, not banks. The Reserve Banks' CEOs- originally called 

governors and today called presidents are appointed by the boards but require the approval of the Board 

of Governors. 

Why is This Structure Still Relevant Today? 

The structure and governance of the Federal Reserve is still effective today because the considerations the 

founders wrestled with are all still relevant. While the nature of our economy and financial markets have 

changed in many ways since the founding of the Federal Reserve, the federated structure still ensures that 

a diversity of perspectives on monetary policy and economic conditions are brought to the table. Each 

Reserve Bank president, supported by an independent staff of economists, conducts his or her own 

analysis. In addition, the presence of geographically dispersed, independently chartered institutions has 

promoted broad regional engagement across the country, deepening the Fed's understanding of the 

diverse economic challenges facing American communities9 

There is evidence that Reserve Bank presidents are more willing than governors to challenge conventional 

views and that this has benefited policymaking. First, presidents have been more likely than governors to 

dissent on Federal Open Market Committee (FOMC) decisions, especially since the Great Moderation. 10 

Second, there are historical episodes in which the scope for diverse views served monetary policy well. In 

the 1960s and 1970s, Reserve Banks led the charge within the Fed on the idea that monetary policy was 

primarily responsible for inflation. The St. Louis Fed was an early proponent of monetarist views, which 

for a time earned it a reputation as a "maverick" bank but later became widely adopted. The Minneapolis 

Fed showed similar early leadership by questioning the idea that there was a stable trade-off between 

inflation and unemployment. These were more than academic debates; within the Fed, they directly 

supported the eventual development and acceptance of policies under Paul Volcker and Alan Greenspan 

that brought high and unpredictable inflation to an end. And in several key instances, Reserve Banks have 

continued to show intellectual leadership on topics that initially went against the grain of mainstream 

thinking but later became broadly accepted.'' 

To be sure, our country's understanding of diversity has expanded since 1913." And it is in keeping with 

the spirit of our founding that the Federal Reserve has taken the importance of diversity seriously as we 

have sought to ensure broad representation of views in the formulation of monetary policy, including 

those associated with disadvantaged communities. I believe our record in this regard, like that of many 

other organizations, shows a combination of substantial progress and areas where more can be done. 

2 
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Governance and Monetary Policy Independence 

In addition to bringing diverse viewpoints to bear, the Fed's public-private structure helps our 

policymaking focus on its longer-term objectives. Monetary policy can stimulate economic activity in the 

short run, but these effects are generally temporary; over time, monetary policy mainly affects inflation. 

At times there is a temptation to provide excessive economic stimulus in the short run and leave the 

inflationary costs, which often are evident only later, for future policymakers to deal with. For central 

banks, this implies that meeting-to-meeting monetary policy decisions need to be insulated from shortterm political pressures driven by electoral considerations. 

This is not just a theoretical argument: Across the history of central banks around the world, when 

monetary policy has been subject to high-frequency political winds, the results have not been good. 13 And 

our own history shows that the temptation of short-sighted monetary policies is a bipartisan vulnerability, 

just as the Fed's founders feared. In the 1960s and 1 970s, for example, the Fed came under pressure from 

the Johnson and Nixon administrations to pursue accommodative policies, setting off a cycle of so-called 

"go-stop" policy, in which rising inflation would ultimately force the Fed to raise rates abruptly, causing a 

recession. 14 

The lesson rrom these episodes is clear: Monetary policy independence is essential to achieving good 

economic outcomes. Undue political influence can and did happen even under our current structure, and 

as a country we should be wary of changes to Fed governance that could make such breaches easier. 

Nations around the world came to similar conclusions in the 1980s and 1990s after long, hard struggles 

to tame inflation- that central banks delivered better results when insulated from short-run political 

pressures. Most accordingly structured their monetary policy decision-making processes to include 

independence. 

Independence has its limits, however. Independence with regard to short-term choices of monetary policy 

instrument settings - that is, policy interest rates must be paired with strong accountability for the 

economic results ofpolicymaking over time. The economics literature has contrasted "instrument 

independence," which we have, with "goal independence," which we do not": Congress sets the Fed's 

monetary policy objectives, and the FOMC chooses a succession of instrument settings in pursuit of them. 

Accountability rests on the Fed's transparent communications, which help Congress and the public 

evaluate the Fed's performance against its mandate. The chair delivers a Monetary Policy Report to 

Congress twice per year and testifies semiammally, and all Fed leaders give occasional testimonies, 

speeches and interviews. The FOMC also provides considerable real-time information on its policy 

decisions: interest rate settings and voting records are immediately available the day of the meeting; the 

chair holds a press conference after every other FOMC meeting; the Fed's balance sheet is published 

weekly; the forecasts of FOMC members are published four times per year; and meeting minutes are 

released three weeks after each meeting (with full transcripts released after five years). 

The Fed's public-private structure plays an important role in supporting monetary policy independence. 

The Fed has independent control of its balance sheet in terms of deciding which assets to buy and accept 

as collateral (within certain constraints provided by the Federal Reserve Act) and when to buy them. We 

also are self-funded and excluded from the federal appropriations process. In this regard. Reserve Bank 

capital, contributed by member banks, serves as an additional pillar of policy (instrument) independence 

by conveying a sense of self-sufficiency to market participants. And while the Fed's operations arc 

audited extensively, monetary policy has a limited exclusion from federal audit by the Government 

Accountability Office. All of these measures serve to limit high-frequency interference that might 

diminish instrument independence. 

3 
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The public elements of the Fed's hybrid structure provide balance and accountability. Governors are 

appointed by the U.S. president and confinned by Senate. The Board, in turn, selects three directors for 

every Reserve Bank board, including the chair, and also must approve the selection of Reserve Bank 

presidents. And when the Board is fully staffed, Board members outnumber presidents on the FOMC. 

Bankers on Boards of Directors 

The presence of bankers on Reserve Bank boards has attracted attention of late. It is said to represent a 

conflict of interest since Reserve Bank staff supervise banks. But strict rules limit bankers' roles. No 

director is involved in, nor provided infonnation about, the supervisory decisions or outcomes for specific 

institutions, and federal criminal statutes against conflicts of interest apply to directors, including those 

banning them from participating in decisions in which they knowingly have a financial interest. Directors 

representing banks are not allowed to participate in the process of selecting new Reserve Bank presidents, 

and the Board of Governors has final approval over such selections. Directors, and indeed Reserve Banks, 

have no formal role in crafting banking regulations; this is the authority of the Board of Governors. In 

short, bankers have no avenue through which they can influence supervisory matters. 

Moreover, best practice for any board is to seek members with expertise relevant to the organization's 

activities. Indeed, this is why it makes sense for members to serve on the boards of joint venture 

associations, such as clearinghouses. Payments processing remains core to Reserve Banks' business: Fed 

systems move $4.5 trillion in payments every single day. Thus, the original rationale for having bankers 

serve on Reserve Bank boards is still valid. Buttressed with the Board of Governors, the Reserve Bank 

boards have direct oversight responsibility for operations on which bankers arguably are experts. In 

addition, bankers have broad contact with consumers and businesses in their footprints, which makes their 

reports on economic conditions particularly useful. 

More broadly, Reserve Bank boards have always been structured to represent diverse views, and their 

diversity has increased over time. For example, though it was natural to have bankers on boards, the 

original Federal Reserve Act mandated that a majority of directors represent the public. The Act also 

required the representation of varied commercial interests, which was expanded in 1977 to include "due 

hut not exclusive consideration to the interests of agriculture, commerce. industry, services, labor and 

consumers.'' Over time, boards have come to include a much broader representation of professions, races 

and genders. 16 

Meanwhile, the role of boards in monetary policy has decreased. Before I 935, the boards essentially set 

monetary policy for their districts: they had far more control than even the Board of Governors. This 

reversed with the Banking Act of 1935, and now the role of Reserve Bank boards in monetary policy is 

strictly advisory: Directors provide crucial insight on local economic conditions, but their 

recommendation on discount rates is nonbinding. 

In other corporate settings, potential conflicts of interest are viewed as manageable, and I believe they arc 

well managed in the Fed's case. To be sure, however, the Fed could do a better job of educating the 

public about its safeguards. 

Conclusion 

I stated at the outset that the proper governance structure of the Fed ought to be driven by a deep 

understanding of the Fed's purpose, 

Many aspects of the Fed and our financial system have changed since the Fed's founding, and some claim 

that the Federal Reserve's governance structure is a historical anachronism. Nevertheless, our core 

4 
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function- providing stable monetary conditions to facilitate economic activity remains unchanged. And 

the continued relevance oftl1e trade-offs taken into account by the authors of the Federal Reserve Act 

argues for the continued utility of the finely balanced arrangements they crafted. 

Thank you. 

I See, for example, Jordan Haedtler, Andrew Levin, and Valerie Wilson, "Mii~JDg the Federal Reserve r:~!ly 

Public," Economic Policy Institute, August 22, 2016; and Narayana Kocherlakota, "The Decentralized Central 

Bank: A Review Essay on 'The Power and Independence of the Federal Reserve."' August 29,2016, Journal of 

Economic Literature, forthcoming, included within Narayana Kocherlakota, "Four Ways to Refonu the Fed," 

Bloomberg View, August 30, 2016. 2 These remarks reflect my own views and not those of my colleagues in the Fed System. I am grateful to Renee 

Haltom and John Weinberg for their assistance in preparing these remarks. 3 Charles W. Calomiris and Stephen H. Haber, Fragile by Design: The Political Origins of Banking Crises and 

Scarce Credit, Princeton, N.J.: Princeton University Press, 2014. 4 For more on this history, see Jeffrey M. Lacker, "A, Look Back at the History ofth'-.Fcleral Reser~," Speech at 

Christopher Newport University, Newport News, Va., August 29,2013. Also see: Milton Friedman and Anna 

Jacobson Schwartz. A Monetary History of the United States: !867-1960, Princeton: Princeton University Press, 

1963; Gary Gorton and Donald Mullineaux, "The Joint Production of Confidence: Endogenous Regulation and 

Nineteenth Century Commercial-Bank Clearinghouses," Journal ofMoney, Credit and Banking, November 1987, 

vol. 19, no. 4, pp. 457-468; Allan H. Meltzer, A History of the Federal Reserve, VoL 1, Chicago: University of 

Chicago Press, 2003; Richard Timberlake, "The Central Banking Role of Clearinghouse Associations," Journal of 

Money, Credit and Banking, February 1984, vol. 16, no. l, pp. 1-15. 5 For background on the objectives of the Fed's founders, see Roger Lowenstein. America's Bank: The Epic 

Struggle to Create the Federal Reserve, New York: Penguin Press, 20 15; Eugene White, The Regulation and Reform 

of the American Banking System, 1900-1929, Princeton: Princeton University Press, 1983; and Elmus Wicker, The 

Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed, Columbus: Ohio State University 

Press, 2005. 6 For detail on these debates, see especially Wicker (2005), and George Selgin, "New York's Bank: The C.:ational 

MonetJIY_commission and the Founding gfthe Fed," Cato Institute Policy Analysis No. 793, June 21,2016. 7 See Wicker (2005), and Helen Fessenden and Gary Richardson, "The ,!:;0st of Fed 'v!embershiJ;>," Federal Reserve 

Bank of Richmond Economic Brief No. 16-02, February 2016. 8 Fessenden and Richardson (February 2016). 9 Marvin Goodfriend, "The Role of a Regional Bank in a Svstcrll.oLCentr:alliaJlliJi," Federal Reserve Bank of 

Richmond Economic Quarterly, Winter 2000, vol. 86, no. l, pp. 7-25; and Kocherlakota (2016). 10 DanielL. Thornton and David C. Wheelock, "Making_ Sense of Dis,sents: A Historv of F0\1C Di;;,~.t;," Federal 

Reserve Bank of St. Louis Review, Third Quarter 2014, vol. 96, no. 3, pp. 213-228. 11 Michael Bordo, "Some Historical Reflections on the Governance of the Federal Reserve," in Central Bank 

Governance & Oversight Reform, edited by John H. Cochrane and John B. Taylor, Stanford, Calif.: Hoover 

Institution Press, 2016. Earlier working paper version available her<;. 12 Helen Fessenden and Gary Richardson, "Whom Do the Federal Reserve Bank Boards .ServeT' Federal Reserve 

Bank of Richmond Economic Brief No. 16-08, August2016. 13 Alberto Alesina and Andrea Stella, 'The Politics of Monetary Poli.£Y,'' in Handbook of Monetary Economics. Vol. 

3, edited by Benjamin M. Friedman and Michael Woodford, Netherlands: Elsevier, 2010, pp.lOOl-1054. 14 For more on the political pressures that jeopardized the Fed's independence in the 1960s and 1970s, see Robert P. 

Bremner, Chairman of the Fed: William McChesney Martin Jr., and the Creation of the Modem American Financial 

System, New Haven: Yale University Press, 2004; Robert Hetzel, The Monetary Policy of the Federal Reserve: A 

History, Cambridge: Cambridge University Press. 2008, Chapter 12; and Allan H. Meltzer, A History of the Federal 

Reserve, Vol. 2, Book 1, Chicago: University of Chicago Press, 2009, Chapter 4. 15 Alesina and Stella (2010). 16 Fessenden and Richardson (August 2016). 

5 
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~ EDERAL RESERVE BANK Willi ~F RICHMOND" 

Richmond • Baltimore • Charlotte 

Supplemental Materials 

l. Jet1rev M. Lacker speech on the Fed·s b.istorv and structure. JetTrey M. Lacker, "A Look Back at 

the History of the Federal Reserve," Speech at Christopher Newport University, Newport News, 

Va., August 29, 2013. 

o Full text attached. 

2. Richmond Fed article on the evolution of Reserve Bank boards of directors. Helen Fessenden and 

Gary Richardson. "Whom Do the Federal Reserve Bank Boards Serve?" Federal Reserve Bank of 

Richmond Economic Brie(No. 16-08, August 2016. 

o Full text attached. 

o Abstract: The long-standing governance model of the Federal Reserve Banks. including 

their boards and the directors who serve on them. is under growing criticism. Calls are 

increasing for the boards to sever direct ties to banking and finance and become more 

diverse in their representation. as well as to offer more transparency to the public. As 

history shows, this governance model always has been the subject of political scrutiny. as 

public concepts of diversity and the Fed's functions- have evolved over time. 

3. Richmond Fed article on the Fed's capital structure and dividends to member banks. Helen 

Fessenden and Gary Richardson. "The Cost of Fed Memhership," Federal Reserve Bank of 

Richmond Economic Brie(No. 16-02, February 2016. 

o Abstract: Since the Federal Reserve's founding, it has paid a regular dividend to banks 

that are members of the Federal Reserve System in exchange for those banks holding 

stock in Federal Reserve Banks. Recent transportation legislation reduced these dividends 

and used the savings to help lund the bill. While this move provided a short-term 

financing fix, it also raised a much bigger question of whether banks will want to remain 

members of the Federal Reserve System. 

4. Rif.l.!n1.9llCLted arti<;l<,:...Q!l.(hc 2015 hjgb_lliJ.YJill!. Helen Fessenden, "/\ Bridge Too Far?" Federal 

Reserve Bank of Richmond Econ Focus, Third Quarter 2015. 

o Summary: In a novel move, a new transportation-funding law is sending billions from the 

Fed's surplus account to help pay for roads, bridges. and mass transit. 

5. )ctirev ~·1. Lucker statement on 2015 highwav bill and Fed's capital structure. Jeffrey M. Lacker, 

"The Fed-Bank Relationship Under Scrutiny," Federal Reserve Bank of Richmond Econ Focus. 

Fourth Quarter 2015. 

6. Jef(rev M. Lacker s.tmement on the role of bankers on RescrveBapk boards oL<Jirector§. Jeffrey 

M. Lacker, "The Importance of Bankers on the Richmond Fed's Board," Federal Reserve Bank of 

Richmond Region Focus, Second/Third Quarter 2012. 

1 
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7. Richmond Fed article on the distributional effects of monetary policv. Renee Haltom, "Winners 

and Losers from Monetary Policy," Federal Reserve Bank of Richmond Region Focus, 

Second/Third Quarter 2012. 

o Summary: The Fed seeks to support the economy as a whole, but some redistributional 

effects are unavoidable 

8. The Ri~hmond Fed's Perspective on Monetarv Policy Independence. Our Perspective, Federal 

Reserve Bank of Richmond, May 2016. 

o Summary: A Federal Reserve that is insulated from short-term political pressures but 

accountable to public concerns is more likely to pursue policies that align with its 

congressional mandate to promote stable prices, full employment, and moderate longterm interest rates. 

2 
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"A Look Back at the History of the Federal Reserve" 

August 29, 2013 

Jeffrey M. Lacker 

President 

Federal Reserve Bank of Richmond 

Christopher Newport University 

Newport News, Virginia 

The Federal Reserve, like many other central banks around the world, has been on the hot seat 

ever since the astonishing events of the financial crisis of2008. Views about the Federal Reserve 

span a wide range, from those who would abolish the Federal Reserve outright and return to the 

pre-Fed monetary regime that tied the value of money to the value of gold, to those who applaud 

the institution for heroically preventing a repeat of the Great Depression. In between there are 

those who propose reforms to the legislation governing the Fed, and others who would leave the 

Federal Reserve Act alone but encourage the Fed to learn the right lessons from the crisis. Why 

the divergent views? Public debate has focused on the unprecedented interventions in financial 

markets and with failing financial firms and the unique operational independence the Fed enjoys 

relative to other government entities. 

In our time together, I'll try to help you understand the current controversies surrounding the 

Fed. 1 To really understand these controversies, it helps to understand some of our unique 

characteristics as a central bank. And to do that, I'll argue that it's essential to go back to the 

founding of the Federal Reserve System in 1913 and learn why we were founded and why we 

were structured the way we were. It turns out that those who created the Federal Reserve I 00 

years ago wrestled with the same two critical questions that animate debate today: ( l) our 

independence. that is. the structure of our governance and our accountability to the American 

people, and (2) what sort of assets the Federal Reserve Banks should invest in. These questions 

were hotly debated when the Fed was founded. I believe that the trade-offs and tensions involved 

are essential for an appreciation of the current debates and how central banking is likely to 

evolve as we enter our second century. Views on these questions differed then, just as views 

differ now. In that connection, I should caution that the views I will share with you are my own 

and do not represent the ofiicial views of the Federal Reserve System. 

So let's cast our minds back 100 years to the signing of the Federal Reserve Act by President 

Woodrow Wilson on December 23, 1913. Why did the founders feel the need to create 

something like the Federal Reserve? The short answer they would have given is, "the currency 

problem," by which they meant that the supply of currency did not expand and contract 

appropriately with the needs of the economy. This was evident during seasonal increases in the 

need for money, and during banking panics, when people wanted to withdraw their bank deposits 
88 


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and hold currency instead. When people talked about the Fed's role in coping with financial 

panics, what they had in mind was expanding the currency supply. 

Money and Banking Before the Fed 

But to understand the currency problem, you have to know a little bit about how money and the 

banking system worked back then. It was different from what we're used to today. I should warn 

you that I'll be discussing some obscure workings of the banking system back then, but I think 

you'll sec they're important to the story, so bear with me. 

The most prominent feature of the U.S. banking system a hundred years ago was that it was 

incredibly fragmented. Laws prevented banks from operating branches, and as a result, there 

were a large number of individual banks. Banks generally had just one office, and essentially 

every little town had its own bank. There were nearly 30,000 banks in the United States in 1913. 

Laws limiting branching have gone away, and as a result, there are about 7,000 banks today. 

What did people usc for money? Coins, for one. They used gold coins, like this beautiful double 

eagle. But for small transactions, a gold coin of the right value would be impractically tiny. So 

large-value gold coins were supplemented by smaller-valued coins made out of silver or copper. 

For very large transactions, however, coins were too bulky, and people preferred banknotes. 

Banknotes were paper currency issued by private banks. Here, I have to say a word or two about 

the National Bank Act, a law passed in 1863, during the Civil War.2 It authorized the chartering 

of"national banks" by the federal government- up until that time, banks had been chartered by 

the states, who issued their own paper currency. The 1863 law authorized national banks to issue 

paper notes too, like the ones you see here, and a tax was levied on state bank notes that drove 

them out of circulation. National bank notes had to be backed by holdings of U.S. government 

bonds. This generated an immediate demand for government bonds, and so it helped finance the 

Civil War- or, more precisely, one side of the Civil War. 

The process of issuing national banknotes was somewhat cumbersome. A national bank had to 

purchase the appropriate federal bonds; this was usually arranged through other banks in major 

financial centers. The bonds then had to be deposited with the U.S. Treasury, which then 

authorized the printing of notes by the Bureau of Engraving and Printing, using printing plates 

held by the Treasury. The notes were then shipped to the bank. The difficulty of this process 

plays an important role later in the story.3 

Clearing and Settling Interregional Payments 

The decades between the Civil War and the founding of the Fed saw rapid growth in 

interregional trade within the United States. Transportation networks were improving rapidly, 

and manufacturers were selling goods around the country. Making large payments at a distance 

posed special difficulties, however. Banknotes were poorly suited for the job because they were 

payable on demand to the bearer, and thus required insurance against theft when shipped. A 

convenient alternative was the check. If a check was lost or stolen, but someone presented it for 

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payment, the bank could refuse to pay, so checks are to some degree safer than banknotcs. 

Checks became the payment instrument of choice in interregional trade. 

To understand the founding of the Fed, it helps to grasp some of the details of how checks 

moved around the banking system back then.4 It will help to focus on a concrete example. So 

imagine a general store in Newport News in the 1890s that sells potbellied stoves made by a 

manufacturer in Brooklyn. The store owner writes a check drawn on his bank in Newport News, 

payable to the manufacturer, and mails it. The manufacturer deposits the check in his account at 

his Brooklyn bank. (Keep in mind that there wasn't an iPhone to scan the check into.) 

Now what happens though? How does the Brooklyn bank get paid for the check drawn on the 

bank in Newport News? More generally, how did banks clear and settle checks? Two different 

institutional mechanisms developed to facilitate check clearing. 

One was the clearinghouse.5 Any decent-sized city would have many individual banks, and they 

would band together in order to economize on the costs of presenting checks to each other for 

payment. Instead of each bank sending clerks directly to each of the other banks, they would 

send a pair of clerks to a central location. This engraving depicts the New York Clearinghouse 

some time in the 1850s. (This admittedly is earlier than 1913, but the operations basically looked 

the same, with the possible exception of the top hats and cutaways.) One clerk from each bank 

would move around the outside of the circle of desks, presenting bundles of checks in succession 

to clerks from the other banks. The clerk sitting behind the desk would tally the amount of 

checks presented by the other banks. After the presentation of checks was complete, 

clearinghouse clerks would collate and reconcile all the banks' tally sheets. At the end of the 

process, each bank has either a net obligation due to the clearinghouse, that is to the other banks, 

or else a net obligation due from the clearinghouse. They could either settle up that day, or carry 

over the balance to the next day. 

Clearinghouses were an important feature of the banking system, both before the Fed and for 

many years after. In fact, as I'll discuss later on, the Federal Reserve Banks were modeled after 

the clearinghouses of the time, and several of their features were adopted for the Reserve Banks. 

First, banks that were members of the clearinghouse were often owed funds by the clearinghouse 

that is, by other clearinghouse banks. As a result, member banks had a keen interest in each 

other's financial health. So clearinghouses set standards for membership, required periodic 

financial statements and regularly audited their member banks. In other words, clearinghouses 

performed functions very much like the supervision and regulation now performed by federal 

agencies, including the Federal Reserve. A second key feature of clearinghouses is that they were 

owned by their member banks. A board of directors, chosen by member banks, would set 

clearinghouse policies and rules and oversee the operations of the clearinghouse. Each Reserve 

Bank is overseen by its own board of directors. 

Clearinghouses worked well in cities, where sending couriers to a central location every day was 

convenient, But outside the cities, banks were geographically dispersed. Here's where the second 

institutional mechanism used to clear checks comes in. ft was called "correspondent banking."6 

All the banks outside the cities -they were called "country banks" - established relationships 

with a number of other banks; these were called their "correspondents." If the country bank 

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received a check drawn on a distant bank, it would be sent to a correspondent to collect for them. 

Similarly, if the city correspondent bank received a check drawn on the country bank, they 

would send it to the country bank for payment. This slide shows a page from a publication that 

listed each bank and their correspondents. So if you were a bank in Brooklyn, and one of your 

customers deposited a check drawn on, say, the First National Bank of Newport News, you 

would just look them up in this book and find out who their correspondents were. The 

correspondents are listed at the bottom of their entry -I've outlined them in a red box. You 

could send it to the correspondent and get paid for it. 

One critical feature of this system is that banks kept deposits with their correspondents. So the 

First National Bank of Newport News would have accounts with the banks listed at the bottom of 

its entry. These were called "reserve accounts" or just "reserves," and they played a critical role 

in the banking system. When checks came in to the city bank drawn on the correspondent 

country bank, the city bank would subtract (or debit) the amount from the country bank's 

account. Similarly, when the country bank sent checks for the city bank to collect for them. the 

city bank would add (or credit) the amount to its account. 

If you multiply this picture across the nation, you end up with an intricate web of correspondent 

relationships linking very small country banks to larger banks in nearby cities to banks in the 

very largest financial centers- New York and Chicago. Through this network of relationships, 

people were able to make payments easily to people at great distances across the United States, 

analogous to the way electronic payment systems, like the credit card and ATM networks, link 

banks together in a way that enables payments to flow. The economics are very similar, it turns 

out. 

The "Currency Problem" 

I have given you an overview of the internal workings ofthe banking system in 1913, just before 

the Fed was founded. So what was the problem with this system that motivated the founding of 

the Fed? One word: inelasticity. At times, the supply of currency just did not expand rapidly and 

flexibly enough. Here's an illustration of that idea in a cartoon from 1909. Uncle Sam is pictured 

in the foreground, staring forlornly at a sheaf of wheat. His suspenders they called them 

"galluses" then- are labeled "U.S. currency." His buttons are labeled "financial center." In the 

background, President Teddy Roosevelt explains the problem to a man labeled Congress: 

"You see, those galluses ought to have rubber in them, so that when Uncle Sam stoops to 

move the sheaf there won't be much strain on the buttons." 

To understand what they were talking about, think of the banking system as a whole; the public 

can hold bank deposits or banknotes. At times, people prefer more notes and fewer deposits than 

usual. One of those times was the fall harvest season, when more currency was needed to make 

the payments necessary to move crops to market; picture middlemen needing cash to pay 

farmers, who then use the cash to pay for supplies or repay loans. The holiday season in 

November and December was another time when the demand for currency rose; picture lots of 

people getting cun-ency out of the bank to go shopping. But remember those cumbersome 

requirements associated with issuing new banknotes under the National Bank Act. That meant 

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the banks found it difficult to issue new notes. Country banks would turn to their correspondents 

for notes to meet the demand for withdrawals, which transmitted the strains to the big financial 

centers. The banking system had a hard time accommodating the increase in demand for 

currency. What was needed was a more elastic supply. 

Those of you who have had an economics class are probably thinking, what about the price 

system? Isn't that how economies deal with scarcity? Well, the workings of the price system 

actually were evident back then. The price of money, as you economics students are aware, is the 

rate of interest- that's the opportunity cost of holding noninterest-earning currency, as opposed 

to holding interest-earning assets. Here is a plot (the blue line) of the average interest rate on 

commercial paper in New York (a good representative financial market interest rate in those 

days), shown for various months of the year in the 20 years before the founding of the Fed. You 

can see that from September through December, interest rates were substantially higher, about a 

full percentage point on average, compared to other months of the year. This is fairly direct 

evidence of the inelasticity that people were concerned about. After the founding of the Fed (the 

gold line), the curve is relatively flat, which is evidence that the Fed was able to better 

accommodate the seasonal swings in the demand for currency.7 

The inelasticity problem was also evident during financial panics. These were episodes, 

generally during economic downturns, in which a sizeable number of people attempted to 

withdraw their money from banks. In other words, the public wanted to shift out of deposits into 

currency. These "bank runs" tended to happen in response to rumors of insolvency at one or 

more banks. Again, the cumbersome and time-consuming process for issuing new banknotes 

under the National Bank Act limited the response in the total supply of notes. Interest rates 

would spike up, as banks attempted to secure banknotes to meet the demand for withdrawals. 

Banks turned to a number of expedients when faced with runs. One response when demand for 

notes was particularly acute was to "suspend payments," meaning that banks would refuse to 

allow depositors to withdraw banknotes. At times, clearinghouses would declare suspensions for 

all their member banks. Often deposits weren't entirely frozen, however. Banks would issue 

"cashier checks" or other instruments that acted as substitutes for currency. These substitutes 

were viewed as inconvenient stop-gap measures, however. 

Earlier r mentioned that country banks held deposits at correspondent banks. When their 

customers' withdrawals started rising, country banks would ask their correspondent banks for 

shipments of banknotes, to be paid for with their reserve account balances. During financial 

panics. clearinghouse banks would sometimes refuse those withdrawal requests in order to 

preserve cash for themselves. 

The Panic of 1907 was the last straw; it sparked a concerted national effort to identify 

appropriate reforms to the currency system. Much debate ensued and numerous proposals were 

advanced, culminating in passage and signing of the Federal Reserve Act in December of 1913.8 

What did the Federal Reserve Act do? According to the preamble of the Act, the intent was "to 

furnish an elastic currency." That is, they wanted the aggregate supply of currency to be able to 

expand when the demand for currency rose, as it did during seasonal crop movements and the 

large-scale deposit withdrawals associated with banking panics. You' II also notice that the 

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preamble says "to afford a means of discounting commercial paper." I'll say more about that 

later. 

The Federal Reserve Act 

How would the Federal Reserve furnish an elastic currency? The natural model was the city 

clearinghouses.9 In banking crises, the clearinghouses often issued certificates to be circulated by 

their member banks as a substitute for currency withdrawals. (The clearinghouses were not 

legally entitled to issue bank notes themselves.) Therefore, the Act authorized the establishment 

of a set of banks modeled on the clearinghouses of the day. They called them "federal reserve 

banks," because they would hold the reserves of the banking system, instead of having those 

reserves held in the banks in large cities. Reserve banks would have the power to issue notes, just 

as the national banks did at the time, except that the reserve banks would not be subject to the 

cumbersome requirements of the National Bank Act that made the supply of notes so inelastic. 

Because the reserve banks were modeled after the clearinghouses, it was natural to provide them 

with the other features associated with clearinghouses. Thus the reserve banks were membership 

organizations, owned and operated by their member banks, much like a joint venture. They were 

given authority to examine their members for safety and soundness, just as the clearinghouses 

did. 10 And they were given the power to clear and settle checks for their members as well, a core 

function of the clearinghouses. 11 

Key Issue: Structure, Governance and Accountability 

Perhaps the most visible aspect of the structure of the Federal Reserve was hotly debated: the 

number and location of the reserve banks themselves. One early version of the Federal Reserve 

Act would have created a single reserve bank with branches around the country. This riled 

populists, however, and tapped into the deep-rooted 19th century American aversion to large 

financial institutions and financial center interests. Carter Glass, the congressman from 

Lynchburg, Virginia, who chaired the House Committee on Currency and Banking and helped 

draft the final version of the legislation, insisted on a system of regional reserve banks. 

President Woodrow Wilson, however. a leader of the progressive movement, insisted that 

because the reserve banks had a substantial public purpose, they should be supervised by a 

federal agency. So the Act established what is now called the Board of Governors of the Federal 

Reserve System to oversee the operations and policies of the reserve banks. The Board also has 

the power to appoint three of the nine members of each Reserve Bank's board of directors- the 

other six are elected by member banks, and only three of them can be bankers. Members of the 

Board of Governors are appointed by the president of the United States and confirmed by the 

Senate. The Federal Reserve thus was created with a hybrid public-private governance structure. 

This structure has provided a measure of independence from political pressures that can induce 

an excessively short-run focus. That independence has been valuable, particularly in keeping 

inflation under control. But it comes with a responsibility to be accountable to our democratic 

institutions for the results of the conduct of policy. 

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The Fed's governance structure also was hotly debated during the drafting of the legislation. It 

has been questioned and amended over the years and remains controversial today. For example, 

critics have charged that the role of bankers on Reserve Banks' boards has biased them toward 

the interests of the banking industry, at the expense of the public interest. Others, however, cite 

the valuable operational expertise and economic information that bankers bring to the Fed. The 

financial reform legislation passed in 2010 in response to the financial crisis- the Dodd-Frank 

Act - imposed restrictions limiting the role of bankers in selecting the top officers of the 

Reserve Banks. 12 More broadly, the Federal Reserve has made significant moves toward greater 

transparency into its operations and decision-making over the last 20 years. This photo shows a 

gathering of all the Reserve Bank directors and the Board of Governors in October 1914, 

assembled on the steps of the Treasury in Washington. If the analogous group were assembled 

today, I can assure you of two things: You'd see greater diversity and fewer hats. 

Key Issue: What Assets Should the Federal Reserve Hold? 

Perhaps the most critical question the founders had to decide was what the Reserve Banks should 

hold as assets. The Federal Reserve notes that were authorized by the Act are liabilities of the 

Reserve Banks. The Reserve Banks also accepted deposits from member banks, another liability. 

The original goal of the founding of the Federal Reserve was to ensure that the quantity of the 

Fed's currency and reserve deposit liabilities would expand elastically when needed. This left the 

authors of the Act with some discretion as to what assets the Federal Reserve Banks would hold. 

One asset that was natural to consider was gold, either in the form of coins or bullion. The 

country was on the gold standard at the time, and that required that banknotes be convertible into 

gold on demand. The founders decided to mimic the design of other central hanks and require 

that Reserve Banks hold a certain amount of gold - 40 percent of the value of their notes 

outstanding, and 35 percent of the value of the bank deposits they accepted. This ensured that the 

Reserve Banks' money supply would tend to expand or contract with the movement of gold into 

and out of the country, as required by the rules of the gold standard. 

But beyond gold, what assets should the reserve banks hold? One option was U.S. government 

bonds. The pre-Fed regime that required backing by government bonds was viewed as 

problematic, however, for the reasons I've already described. In addition, money backed only by 

government bonds was associated with inflationary wartime finance and thus viewed as 

potentially destabilizing. That left private-sector assets. There were active markets for private 

bonds, but these were relatively risky at the end of the 19'h century, and stocks were even riskier. 

European central banks at the time, particularly the Bank of England, provided a natural 

alternative model, however. They held financial instruments called "bills of exchange"; similar 

instruments in the United States were called commercial paper. These were short-term (3- to 6-

month maturity) obligations that arose out of the financing of trade. Because they were secured 

by goods in transit and endorsed by banks, they were relatively safe. Conservative eligibility 

requirements and an endorsement by the borrowing bank (a kind of guarantee) helped further 

reduce the risk to the central bank. So the Federal Reserve Banks were given the authority to 

make loans backed by certain types of commercial paper or purchase certain types of such 

commercial paper. This is reflected in the third part of the preamble purpose of the Federal 

Reserve Act: "to afford a means of rediscounting commercial paper." They called it 

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"rediscounting," because the initial loan was essentially the purchase of an obligation at 

discount, which reflected an implied interest rate, and the Fed was discounting it a second time. 

During World War I, the Reserve Banks were granted the power to hold Treasury securities, and 

thereafter they used purchases of Treasury securities in the open market to influence monetary 

conditions. Acquiring Treasury securities in the open market avoided the cumbersome collateralposting procedure required under the national bank rules. It is important to note that the Fed 

creates money whether it buys Treasury securities, buys commercial paper or makes a loan. 

When a Reserve Bank acquires an asset, it credits the reserve account of the bank of the party 

from whom it acquires the asset. When a Reserve Bank makes a loan, it credits the reserve 

account of the party to whom it is making a loan. In either case, the new reserve account 

balances can be withdrawn by the bank, and Federal Reserve notes would be paid out, effectively 

converting the reserve balances into currency. In either case, the supply of currency plus reserves 

has increased. The key lesson here is that, for the purposes of the original goal of the Federal 

Reserve Act- that is, to solve the currency problem that the Fed was founded to solve and stem 

financial panics- it doesn't matter whether the Fed lends or buys Treasury securities. Either 

one expands the supply of currency and reserves that people are clamoring for. 

This highlights an important distinction regarding central bank activities. Some actions change 

the total amount of currency and bank reserves in circulation. These are best referred to as 

"monetary policy." Actions that change the composition of the central bank's asset portfolio, but 

leave the amount of currency and bank reserves unchanged can be thought of as "credit policy," 

since they involve intervening in credit markets by buying one instrument and selling another. 13 

Credit policy has the potential to direct funds to particular sectors or particular private entities, 

either funds they would not otherwise have obtained or on terms they would not otherwise have 

obtained. The "currency problem" that the founders were seeking to solve was a monetary 

problem, not a credit problem. 

This distinction is directly relevant to controversies about the Fed's crisis lending programs, 

because they had little to do with monetary policy, in this sense, and thus little to do with the 

original goal of the Federal Reserve Act to furnish an elastic currency. Several emergency 

lending programs were introduced early in the crisis, prior to September 2008. 14 Lending under 

these programs was all offset by sales of Treasury securities. so the supply of currency plus 

reserves did not increase. Instead, the lending programs reallocated credit, effectively selling 

Treasury securities to the public and using the proceeds to provide funds to private entities on 

terms they would not otherwise have obtained in the marketplace. Similarly, the loan made in 

connection with the failure of Bear Steams in March 2008 was offset through sales of Treasury 

securities. Because the Reserve Banks remit all of their excess earnings to the U.S. Treasury, the 

fiscal implications for the federal budget were exactly as if the Treasury had issued new debt and 

made the loan. 

Later, in the fall of2008, the Fed drove short-term interest rates essentially to zero and stopped 

offsetting emergency lending. Clearly, though, the Fed could have driven interest rates to zero 

without the emergency lending programs by simply buying large quantities of Treasury 

securities. Since the crisis, the Fed has dramatically expanded the size of its asset holdings by 

acquiring longer-term Treasury securities and agency mortgage-backed securities, or MBS. The 

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Fed could have expanded its portfolio an equal amount through purchases of Treasury securities 

only. Compared to that benchmark policy, buying agency MBS channels funds to mortgage 

borrowers, financed through sales of Treasury securities to the public. 

In popular accounts of the crisis, you may have come across references to the Fed as "the lender 

of last resort." This phrase is often used to describe the prescriptions of Henry Thornton, the 

British economist, and Walter Bagehot, a British essayist and journalist. Both men wrote 

influential books on central banking: Thornton at the beginning of the 1800s, and Bagehot in the 

1870s. Their recommendations to the Bank of England have been distilled into the phrase: "Lend 

freely at a high rate on good collateral." 15 This dictum is often invoked to support extensive 

central bank lending in episodes of financial distress. But Thornton and Bagehot wrote when 

lending was the primary mechanism by which the Bank of England increased the stock of money 

in circulation. Their writings make clear that they were not recommending rescues for insolvent 

institutions, and that their prescriptions were about monetary policy, not credit policy. 

The Debate Continues: The Future of Central Banking 

Some modem writers instead interpret the "lender of last resort" idea liberally to justify an 

expansive approach to central banking, in which all available tools, both monetary and credit 

policy. are used to minimize financial system "disruptions." They read central bank charters as 

implying a "financial stability mandate." 16 Although the term "financial stability" was not at all 

common 100 years ago, they construe the founders of the Federal Reserve System as motivated 

by a broad desire to minimize and prevent financial panics, even beyond simply satisfying 

increased demands for Federal Reserve Bank money. The view that financial markets are 

inherently fragile and unstable provides support for this approach. 17 

In contrast, a narrow and more restrained view of central banking emphasizes the critical core 

function of managing the monetary liabilities of the central bank. 18 Experience after the demise 

of the gold standard in the 1970s has demonstrated that a measure of independence is a critical 

ingredient in the success of monetary policy. Aggressive use of a central bank's asset portfolio to 

channel credit to particular economic sectors or entities threatens drag~ing the central bank into 

distributional politics and places that governance arrangement at risk. 1 This more limited 

approach is supported by the view that excessive financial market instability tends to be induced 

by government rescues, and that policymakers should be humble about their ability to identify 

constructive interventions in particular tinancial markets20 

The evolution of the Federal Reserve, and central banking more generally around the world, will 

be driven, I suspect, by how the tension between these two approaches plays out. I just hope that 

future debates are informed by the rich deliberations that accompanied the founding of the 

Federal Reserve. 

: I am grateful to Patricia Wescott tor assistance in preparing these remarks. 

-Milton Friedman and Anna Jacobson Schwartz. "A Monetary History of the United States: 1867-1960," 

Princeton: Princeton University Press. 1963; Allen H. Meltzer, "A History of the Federal Reserve, Volume 1," 

Chicago: University of Chicago Press, 2003; and Bruce Champ, "TI1e National Banking System: A Brief History," 

Federal Reserve Bank of Cleveland Working Paper 0723, December, 2007. 

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3 Bruce Champ, Neil Wallace, and Warren E. Weber, "Resolving the National Bank Note Puzzle," Federal Reserve 

Bank of Minneapolis Quarterly Review, Spring 1992, vol. 16, iss. 2, pp. 13-21. 4 See Jeffrey M. Lacker, Jeffrey D. Walker, and John A. Weinberg, "The Fed's Entry into Check Clearing 

Reconsidered," Federal Reserve Bank of Richmond Economic Quarterly, v. 8512, Spring 1999, pp. 1-31. 5 James G. Cannon, "Clearing-Houses: Their History, Methods and Administration,'' London: Smith, Elder, & Co., 

1900; and James G. Cannon, "Clearing Houses," National Monetary Commission, Government Printing Office: 

Washington, D.C., 1910. 6 See Spahr ( 1926). 7 Jeffrey A. Miron, "Financial Panics, the Seasonali(y of the Nominal1nterest Rate, and the Founding of the Fed," 

American Economic Review, March 1986, vol. 76, no. 1, pp. 125-140. 8 On the creation of the Fed see Elmus Wicker, "The Great Debate on Banking Reform: Nelson Aldrich and the 

Origins of the Fed," Columbus, OH: Ohio State University Press, 2005; and Eugene White, "The Regulation and 

Reform of the American Banking System, 1900-1929," Princeton: Princeton Universi(y Press, 1983. 9 Charles Goodhart, "The Evolution of Central Banks," Cambridge, Ma.: MIT Press, 1988; Richard Timberlake, 

"The Central Banking Role of Clearinghouse Associations,'' Journal of Money, Credit and Banking, February 1984, 

vol. 16, pp. 1-15; Gary Gorton, ''Clearinghouses and the Origin of Central Banking in the United States," Journal of 

Economic History, June 1985, vol. XLV, no. 2, pp. 277-283; and Gary Gorton and Donald Mullineaux, "The Joint 

Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial-Bank Clearinghouses," 

Journal of Money, Credit and Banking, November 1987, vol. 19, pp. 457-468. 10 National banks were already supervised by the Comptroller of the Currency, as they are today, so the reserve 

banks were just given authority to supervise the state banks that joined the Federal Reserve System. 11 See Lacker, Walker and Weinberg (1999). 12 Specifically, section II 07 of the Dodd-Frank Act says that only Class B directors (nonbankers elected by member 

banks) and Class C directors (appointed by the Board of Governors) can elect the president and first vice president 

(chief operating officer) of the reserve bank. 13 This distinction is discussed at length by Marvin Goodfriend and Robert G. King, "Financial _l)~lilliillb 

Monetary Policy, and Central Banking." Federal Reserve Bank of Richmond Economic Review, May/June 1988, 

vol. 74, no. 3, pp. 3-22. 14 These were the Term Auction Facili(y and the Primary Dealer Credit Facility. See 

http://v.ww.federalreserve.gov/monetarypolicylbst.htm for detailed information on the Board of Governors' website 

on all of the Fed's credit and liquidity programs. See http://timeline.stlouisfed.org/ for a financial crisis timelinc. 15 Henry Thornton, "An Enquiry Into the Nature and Effects of the Paper Credit of Great Britain," 1802, Edited and 

with an Introduction by F.A. Von Hayek, New York: Rinehart and Co., 1939. Walter Bagehot, "Lombard Street," 

London: Harry S. King and Co., 1873. For explanation and discussion of Thornton and Bagehot's views on the 

lender of last resort, see Thomas M. Humphrey, "Lender of Last Resort: The Concept in History," Federal Reserve 

Bank of Richmond Economic Review, March/Aprill989, pp. 8-16; and Michael D. Bordo, "The Lender of Last 

Resort: Alternative Views and Historical Experience," Federal Reserve Bank of Richmond Economic Review, 

January/February 1990, pp. 18-29. 16 See Bank for International Settlements, "Central bank governance and financial stability," May 20 II, 

http://www.bis.orgipubl/othp 14.pdf for an overview of financial stabili(y mandates for central banks. 

" See Jeffrey M. Lacker, "Economics and the Federal Reserve After the Crisis." Speech at Franklin and Marshall 

College, Lancaster, PA, February 12,2013, and "Understanding the Interventionist Impulse of the Modem Central 

Bank," Speech at Cato Institute 29th Annual Monetary Con terence, Washington, D.C., November I 6, 20 II. 18 See Jeffrey M. Lackcr, "Perspectives on Monetary and Credit Policy," Speech to the Shadow Open Market 

Committee Symposium, New York, NY, November 20, 2012. 

"Marvin Goodfriend, "The Elusive Promise oflndependent Central Banking." Bank of Japan, Monetary and 

Economic Studies, November 2012, vol. 30, pp. 39-54. 20 See Jeffrey M. Lacker, "Economics and the Federal Reserve After the Crisis." Speech at Franklin and Marshall 

College, Lancaster, PA, February 12, 2013. 

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Economic Brief August 2016, EB16-08 

Whom Do the Federal Reserve Bank Boards Serve? 

By Helen Fessenden and Gary Richardson 

The long-standing governance model ofthe Federal Reserve Banks, including 

their boards and the directors who serve on them, is under growing criticism. 

Calls are increasing for the boards to sever direct ties to banking and finance 

and become more diverse in their representation, as well as to offer more 

transparency to the public. As history shows, this governance model always 

has been the subject of political scrutiny, as public concepts of diversityand the Fed's functions- have evolved over time. 

The governance structure of the Federal Reserve System, including the leadership of the 

twelve Federal Reserve Banks, is increasingly 

drawing fire from a wide array of critics. Liberal 

groups have focused on Reserve Banks' boards 

of directors, which they believe are stacked too 

heavily in favor of private banking interests, 

too opaque, and insufficiently representative of 

women and minorities. The progressive coalition 

Fed Up, for example, calls for a ban on directors 

who have direct ties to banking and finance. 

It also has pushed for public nominations and 

public hearings for Reserve Bank presidents, 

who are currently selected by a subset of their 

Bank's nine-member board of directors (subject 

to approval by the Fed's Board of Governors). 

Coming on the heels of pressure from liberal 

members of Congress, the Democratic Party included language in its 2016 platform to prohibit 

executives of financial institutions from serving 

on Reserve Bank boards. 

The leadership and board structure of the 

Reserve Banks also have conservative critics. 

Mark Calabria of the Cato Institute, for example, 

£816-08- Federal Reserve Bank of Richmond 

recently wrote that the Fed, in general, has a 

"diversity problem" of too many economists from 

elite East Coast schools staffing the most senior 

levels, on the Board as well as at the Reserve 

Banks. "You are guaranteed to have an institution 

that suffers deeply from groupthink, as well as 

being insulated from the everyday experiences 

of most Americans," he wrote, suggesting re· 

forms that included a ten-year residency requirement for candidates seeking to become Reserve 

Bank presidents.' 

By taking aim at the Fed, including its governance model, these disparate groups are finding 

common ground. Many of these critics fail to 

note, however, that the debate over the leadership structure of Reserve Banks is not new. The 

composition of Reserve Bank boards has been 

discussed and disputed throughout the last century. These arguments were especially intense in 

the run-up to the passage of the Federal Reserve 

Act in 1913, in the Great Depression, and during 

the civil rights movement and painful stagflation in the 1970s. The question has resurfaced 

most recently in the wake of the 2008 financial 

Page 1 
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crisis and the Great Recession, amid broader public 

scrutiny of the Fed. In fact, the debate over Fed governance, including Reserve Bank boards, is closely 

bound to the central tensions and grand compromises of American politics- encompassing the fights 

over local versus national government, progressive 

versus populist policies, and Wall Street versus Main 

Street economic interests. These arguments also reflect the tension between the desire for the benefits 

of a national bank and fears of financial monopolies 

and money trusts. The fact that these debates mirror 

such long-standing fissures in the American polity 

makes it all the more important to understand what 

the Reserve Bank boards actually do- and how these 

functions have evolved over time. 

A Balancing Act 

The German-American financier Paul Warburg, one 

of the key architects of the Federal Reserve Act, 

laid out a clear vision of how central bank boards 

should operate after the Panic of 1907 galvanized 

him to analyze America's fractured banking system. 

As he saw it, such a board should be "independent 

of politics" and not "swayed by selfish motives in its 

actions:' At the same time, it had to be "thoroughly 

representative of the various interests and districts 

of the country ... non-political, non-partisan, and 

non-sectional:' And its members had to be equipped 

to deal with "broad questions of policy affecting the 

whole country" while being knowledgeable of local 

and regional economies.' 

The authors of the Federal Reserve Act sought to 

achieve this diverse set of goals by dividing the nine 

directors of each of the twelve Reserve Banks into 

three classes, with each class representing different economic and public interests. Class A directors 

were bankers, elected by member banks to provide 

professional expertise and represent the interests of 

those institutions. Class B directors were also elected 

by member banks, but they did not work for or own 

stock in those banks; instead they represented commercial and community interests outside of banking 

and finance. Finally, Class C directors were chosen by 

the Federal Reserve Board in Washington, D.C., both 

for their expertise in running large, complex corporations and for representing the general public. Class 

C directors could not serve as officers, directors, or 

employees of commercial banks while sitting on the 

board. However, under the framers' initial interpretation of the Act, two of them -those who served as 

the board's chair and vice chair- had to have "tested 

banking experience." In short, in the early years, five 

out of nine board directors had to have ties to banking or a substantial banking background.' Under the 

modern interpretation of the Act, however, it is only 

one Class C director, the chair, who has to meet this 

requirement. 

This structure made sense when the United States 

established the Federal Reserve. To set up this central 

banking system, Congress needed to convince bankers to provide expertise as well as funds. Federal and 

state governments did not spend a penny to establish the Fed. Instead, the Fed's founders convinced 

commercial banks to join the Federal Reserve System, and in doing so, invest tens of millions of dollars 

in the central bank, all paid in gold coin or bullion. 

The Fed used this gold to guarantee the value of the 

dollar, which at that time was on a gold standard.' 

Using the model of a traditional corporate board, 

Congress envisioned directors as officials who would 

"perform the duties usually appertaining to the 

office of directors of banking associations and all 

such duties as prescribed by law," in the words of 

the Act. These duties covered tasks such as ensuring 

adequate staffing, establishing bylaws that employees should follow, and interpreting audit reports. As 

the Act's drafters saw it, then, it made sense to have 

professional bankers on Reserve Bank boards because they had the expertise to manage a bank. But 

just as importantly, Congress mandated that boards 

also have directors from outside the banking world 

to represent the public interest. This is one manner 

in which the Reserve Banks have a hybrid publicprivate governance structure. 

Congress struck another careful compromise when 

it wrote the bill: it crafted the boards' composition 

to balance different regional and economic interests. To ensure regional representation, Congress 

directed that the nation be divided into Federal 

Reserve Districts and within each, a Reserve Bank be 

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established whose directors consisted of residents 

of that region. The Act mandated that the Class A 

and B directors hold jobs within their district. while 

the three Class C directors were required to have 

been residents of the district for at least two years. 

Congress also further split the Class A directors into 

three types to represent member banks by size, 

which ensured that large, medium, and small banks 

had equal representation. And to ensure balance of 

different commercial interests, Congress mandated 

that the Class B directors be "actively engaged in 

their district in commerce, agriculture, or some 

other industrial pursuit:' 

Finally, a key goal of the Fed's founders was establishing a central banking system that kept the value 

of the dollar stable. The Act's authors understood 

that political pressures and private interests might 

push the value of the dollar down or up, and they 

feared both inflation and deflation. Accordingly, 

numerous features of the Federal Reserve System 

such as its regional structure and the requirement 

to back Federal Reserve notes by either short-term 

bank loans or gold- were designed to insulate decisions about discount rates and the volume of notes 

in circulation from undue political and business pressures. Such checks against political influence were 

also incorporated into the Reserve Bank boards- for 

example, their prohibition of senators or representatives in Congress from serving as a director or officer 

of a Reserve Bank. 

"Science" versus "Democracy" 

The origins of the governance model go back to the 

Fed's founding in 1913, when lawmakers were bitterly divided over the central bank's purposes and 

functions. The political momentum for a central bank 

had accelerated after the Panic of 1907, but Congress 

struggled to resolve differences among those who 

wanted a regional, confederated structure and those 

who wanted a powerful central bank. Lawmakers 

from agricultural states pressed their interests, as did 

those who came from states active in mining and 

manufacturing. This was a debate about diversity, but 

one centered on addressing disparate state, commercial, and regional interests. More broadly, these early 

divisions reflected the fundamental schisms of that 

era: "democratic" populism versus "technocratic" progressivism, urban versus rural interests, small versus 

big banks, and regionalism versus federalism. 

How did this effort begin? Central banks were wellestablished in Europe, but among early American 

political leaders, the very idea of central banking 

was deeply controversial, as the demise of the First 

and Second Banks of the United States showed. This 

resistance began to change with a series of banking crises in the Gilded Age, capped by the Panic of 

1907. Leading figures in finance began to work with 

like-minded lawmakers on creating a more stable 

banking system. In 1908, Congress passed the 

Aldrich-Vreeland Act, which established a National 

Monetary Commission to study other central banks 

and recommend a solution. The chairman of the 

commission, Sen. Nelson Aldrich, a Republican from 

Rhode Island, convened a small working group to 

draft the commission's final recommendation, leading to a secret conclave on Georgia's Jekyll Island 

in 1910 that included Warburg and Treasury official 

Abram Piatt Andrew. This effort led to the release 

in 1912 of the Aldrich Plan, the predecessor of the 

Federal Reserve Act. 

The Aldrich Plan envisioned a National Reserve Association that had both "scientific" and "democratic" 

components. The "scientific" elements included 

technocratic proposals the Jekyll Island group 

saw as necessary for a central banking system to 

be effective, such as the authorities to provide an 

elastic currency and serve as a lender of last resort 

in panics. The "democratic" elements, meanwhile, 

were intended to address populist concerns that 

this new national bank would an all-powerful, 

centralized entity. One way to do this was to distribute power across states, sectors, and regional 

interests by establishing local reserve associations. 

These local groups would in turn be organized into 

district associations. Each district would contain a 

branch of the National Reserve Association. Local 

associations would elect their own local boards of 

directors, which in turn would elect members of 

the district and national boards. In the local and 

district boards, bank-elected directors would make 

up the majority of the leadership, and voting rights 

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would be weighted in favor of larger banks. By 

contrast, the central body in Washington, D.C., was 

to be a relatively weak board made up of forty-six 

members, only six of whom the federal government would select. After its release, reception of the 

Aldrich Plan was mixed. Banking groups warmed 

to the plan, but many Democrats viewed it as tilted 

toward Wall Street. Meanwhile, the burgeoning Pro· 

gressive movement was generally hostile to Aldrich 

and wanted a banking reform plan with far greater 

public accountability. 

Early Compromises 

As this debate raged on, the Democrats swept the 

1912 election, sending Woodrow Wilson to the White 

House. Proponents of banking reform expected they 

would have to start from scratch, but in a surprise 

move, Wilson championed their cause. He delegated 

the drafting of the new bill, the Federal Reserve Act, 

to two Democratic allies, Rep. Carter Glass of Vir· 

ginia and Sen. Robert Owen of Oklahoma. A finance 

professor, Henry Parker Willis, provided much of the 

technical expertise in the drafting of the House bill. 

Glass was among those Democrats who wanted a re· 

gional model with power spread out among as many 

as twenty Reserve Banks and no central coordinating 

board at all. Wilson, helped by Owen and more like· 

minded allies in the Senate, sought a central board 

and a greater federal role. 

Ultimately, the Federal Reserve Act represented a 

collection of compromises that tried to bridge these 

divides. But on net, the "democratic" side won some 

substantive provisions. The bill called for a network 

of powerful Reserve Banks (ultimately numbering 

twelve, reduced from the twenty Glass had pro· 

posed) that were largely autonomous. They could set 

their own benchmark lending rates and select which 

banks to lend to, and they held their own gold stock. 

The director classifications were set up to ensure oc· 

cupational "diversity" among directors, while all nine 

had a vote in appointing their Reserve Bank chief 

executive officer, then known as a governor, now 

called the president. Even though the central body 

in Washington, called the Federal Reserve Board, 

appointed the Class C directors, the bill required that 

they live in their Reserve Bank district. 

The "scientific" camp secured some concessions as 

well. Wilson got his Federal Reserve Board, staffed 

by U.S. presidential appointees, with two execu· 

tive branch officials, the Treasury secretary and the 

comptroller of the currency. But the Board's main 

role was that of a loose oversight body, and it lacked 

the power to conduct credit or monetary policy on 

a national basis. In fact, the most dominant national 

official in the early years was the leader of the New 

York Fed, Benjamin Strong, also an important early 

backer of the Aldrich Plan. 

This early arrangement reflected the widespread 

view that the Reserve Banks' primary role was to en· 

sure stable monetary conditions in their districts. The 

governors who led the Banks came from finance and 

business backgrounds, and the chief Bank functions 

were issuing cash and, later, clearing checks. The 

Reserve Banks also served as lenders of last resort 

through their discount windows, and they could 

decide which securities to buy or sell and at which 

price. In short, through their power in conducting 

open-market operations and setting a District-wide 

credit policy, the Reserve Banks had far more con· 

trol than the central board over monetary policy, a 

subject that was little understood at the time. But in 

a speech at Harvard in 1922, Strong noted the impor· 

tance of these authorities. 

"There is ... one function of the Reserve System the 

importance of which cannot be over-emphasized," 

he said. "It is, in fact, the heart of the System upon 

which the operation of every other part depends. I 

refer to the entirely new element which was super· 

imposed upon our banking System in 1914 by the 

establishment of the Reserve Banks, which were 

given the power to influence or to regulate or to 

control the volume of credit. Every other function 

exercised by the Reserve Banks sinks into insignifi· 

cance alongside of the far reaching importance of 

this major function:' 

Strong also underscored the importance of the Fed's 

public function -and its inherent relationship to 

the elected officials of the U.S. government. "The 

Federal Reserve System has always impressed me 

as being essentially a social institution:' he said. "It is 

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25878.060

not a super-government, it is simply the creature of 

Congress, brought into being in response to a public 

demand. It was not created only to serve the banker, 

the manufacturer, nor the merchant, nor the Treasury 

of the United States. It was brought into being to 

serve them all."' 

An Early Testfor the Fed 

The shortcomings of this system became apparent 

in the early years of the Depression. Faced with a 

wave of bank failures, the Reserve Banks were unable 

to unite around one common policy. Some officials 

believed in the "real bills" doctrine, which held that 

the Fed should act procyclically (that is, curtail lending and tighten liquidity during downturns). Others 

sought a countercyclical approach that boosted 

liquidity by cutting the discount rate and lending 

permissively. What this meant was that Reserve Banks 

took different responses in 1929-32 to extending 

credit, expanding the monetary base, and acting as 

lenders of last resort. This led to divergent economic 

outcomes across the nation. In a 2009 paper that 

compared bank failures in southern and northern 

Mississippi, a split-district state, researchers found a 

significantly lower rate of bank failures and a much 

milder recession in the southern half of the state, 

reflecting the Atlanta Fed's aggressive actions as a 

lender of last resort. By contrast, the northern half, 

which was under the St. Louis Fed, saw much less aid 

to banks beset by runs and fared worse.' 

The Fed's inability to use its tools effectively and 

to pursue unified policy to counteract the Depression is now a well-known lesson. But this failure also 

produced the reforms that led to the structure of the 

far more centralized modern Fed. The most important was the 1935 Banking Act, which established 

the modern structure of the Federal Open Market 

Committee (FOMC), taking over the monetary-policy 

and credit-policy powers previously held by Reserve 

Banks. The Federal Reserve Board was renamed the 

Board of Governors of the Federal Reserve System, 

and it received enhanced powers to set bank reserve requirements, the discount rate, and interest 

rates for member-bank deposits.' Furthermore, the 

Treasury secretary and the comptroller of the currency lost their seats on the Board, helping set up 

a wall between the Fed and the executive branch 

that was cemented with the Fed-Treasury Accord of 

1951. A more centralized and effective central bank 

emerged. 

As for the Reserve Banks, they lost their exclusive 

authority to select their own chief executive officers, 

as the Board was given the power to veto appointments as well as renew them every five years. The 

Reserve Banks'CEOs, the"governors;'were demoted 

and renamed "presidents." While still an important 

position, this job now required collaboration over 

national monetary and credit policies with the Board 

of Governors in Washington- for example, by setting 

up a voting rotation for presidents on the FOMC and 

allowing them, voting or not, to participate in all 

policy meetings. Congress also slashed the pay of 

the Reserve Bank board chairmen. In short, after the 

challenges of the Great Depression, Congress altered 

the Fed's governance model, moving away from the 

regional system established in 1913 to become a 

more centralized organization. 

Checks and Balances 

While the FOMC's creation reduced Reserve Bank 

directors' roles in crafting monetary and credit policy, 

they have continued to perform many of the functions that the Fed's founders envisioned. One of their 

most important tasks is to select, supervise, and 

advise their Bank's CEO, whose title, since the 1935 

Banking Act, has been president. In the Fed's early 

decades, the presidents were drawn mostly from 

banking, business, and sometimes law. Starting in 

the 1960s, however, Ph.D. economists began filling 

the ranks of presidents, as Reserve Banks built up 

their own research departments with trained academic economists to assistthe presidents. In 1940, 

for example, nine of the twelve presidents were 

bankers and three were lawyers; none were economists. By 1980, eight of twelve were Ph.D. economists, a ratio that has largely continued to this day8 

Reserve Bank boards of directors also tend to select 

presidents who favor keeping the value of money 

stable, rather than risking inflation or deflation in 

hopes of attaining other policy goals. A 2014 study 

by Daniel Thornton and David Wheelock, both from 

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the St. Louis Fed, documented this pattern. They 

found that since the creation of the FOMC, bank 

presidents dissented from the committee's decision 

180 times in favor of tighter (less inflationary) policy 

and thirty-five times in favor of looser (more inflationary) policies. Members of the Board of Governors, 

in contrast, dissented only sixty-nine times in favor of 

tighter policy and 125 times in favor of looser policy. 

Overall, presidents accounted for 72 percent of all 

dissents in favor of less inflationary policies, while 

governors accounted for 78 percent of all dissents in 

favor of more inflationary policies.' 

Allan Meltzer's research on the causes of inflation in 

the 1970s helps to explain this difference between 

members of the Board of Governors and Reserve 

Bank presidents. In a 2005 essay, he argued that 

"politicians elected for four- or five-year terms put 

much more weight on employment-jobs, jobs, jobs 

-than on a future inflation:' Politicians have tended 

to select members of the Board of Governors whom 

they think have beliefs aligned with their own. And 

politicians have sometimes pressured members of 

the Board of Governors to adopt policies aligned 

with their short-term interests. These pressures 

often have fallen directly on the chair of the Board of 

Governors. For example, in the 1960s and 1970s, Fed 

Chairmen William McChesney Martin Jr. and Arthur 

Burns were pressured to limit anti-inflation efforts 

by Presidents Lyndon Johnson and Richard Nixon, 

respectively. Burns, in particular, felt he had to acquiesce, at least to some extent, so that he could also 

remain an economic advisor to Nixon. By contrast, 

presidents of Reserve Banks may have felt less political pressure because they have reported directly to 

their boards of directors, composed of businessmen 

and community leaders who typically took a longerterm view of the economy's economic health than 

politicians running for reelection.'0 

The Modern Fed 

Although many core features of the Reserve Bank 

governance structure date back to 1913, it has seen 

substantial changes as well. Some of those came 

in the 1970s, at a time when the Fed's reputation, 

more generally, was suffering during the Great 

Inflation. Amid concerns over conflicts of interest 

at certain Banks, Congress conducted a probe in 

1976 that included a review of Reserve Bank board 

minutes, which led to a set of proposed reforms. 

This push contributed to the 1977 Federal Reserve 

Reform Act, best known for establishing the dual 

mandate that the public is familiar with today. But 

it also expanded the scope of a federal conflicts-ofinterest statute to include Reserve Bank employees, 

officers, and directors. This statute makes it a crime 

for a director, officer, or employee of a Federal 

Reserve Bank to participate in a matter in which, 

to his or her knowledge, he or she has a financial 

interest. 11 

Moreover, Reserve Banks have had a long-standing 

practice, which the Board formalized as policy in 

2011, of not providing directors with confidential 

supervisory information. Class A and Class B directors who are affiliated with thrift holding companies 

supervised by the Federal Reserve may not participate in matters such as approving the supervision 

and regulation department budget and the selection, appointment, or compensation of officers with 

responsibility for supervision and regulation. 

The 1977 reform was significant in other ways. It 

amended the Federal Reserve Act's rules about the 

Reserve Banks' boards of directors, requiring that all 

directors be appointed "without discrimination on 

the basis of race, creed, color, sex, or national origin." And notably, it expanded the pool of potential 

directors on boards beyond the sectors outlined in 

the 1913 Act of agriculture, commerce, and industry. 

Under the new provision, the Class 8 and Class C 

directors were to be elected "with due but not exclusive consideration to the interests of agriculture, 

commerce, industry, services, labor, and consumers:' 

A comparison of the entire population of directors 

from 1920 to today, in fact, shows that the percentage with formal banking affiliations has dropped 

from 52 percent to 36 percent, with a more diverse 

occupational mix- nonprofits, academia, medicine, 

and services making up most of the difference. 

(See Figure 1 on the following page.) The academics include presidents, chancellors, and professors at 

major public and private universities. The nonprofit 

representatives include senior executives from the 

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25878.062

United Way, Goodwill, and Habitat for Humanity. 

The Dodd-Frank Act of2010 was the most recent 

reform of Fed governance, as part of a much more 

sweeping overhaul of financial regulation. One of its 

consequences was taking away the power of Class A 

directors {and certain Class B directors) to vote in the 

selection of Reserve Bank presidents on grounds that 

member banks should not have a direct say in selecting an official who influences when and how they 

can receive assistance from their lender of last resort. 

This measure addressed, in part, public anger at the 

New York Fed and its central role in bailing out Bear 

Stearns and American International Group in 2008. 

In the years preceding that crisis, then-President Tim 

Geithner recruited board directors from Lehman 

Brothers (Dick Fuld), JP MorganChase (Jamie Dimon), 

and Goldman Sachs (Steve Friedman). Fuld resigned 

just before Lehman collapsed in September 2008, 

while Friedman resigned from the New York Fed's 

board in 2009 after news broke that he bought Goldman Sachs stock during the crisis (technically while 

in compliance with Fed rules at the time)." 

"The New York Fed president is often viewed as a servant of the financial establishment, in part because 

the optics of the institution's governance are awful; 

wrote Geithner in his memoir, Stress Test. "I made 

some changes to the board that unfortunately made 

those bad optics even worse:'" 

Since the Board of Governors enacted the changes 

in the Dodd-Frank Act, however, Class A directors (as 

well as Class B directors affiliated with thrift holding 

companies) may not participate in most aspects of 

the appointment process of Bank presidents and first 

vice presidents. This means they do not serve on the 

search committees for the president and first vice 

president or take part in the committees' deliberations about the candidates, nor do they vote for a 

president or first vice president, including voting for 

reappointment. 

Figure 1: Composition of Reserve Bank Boards by Occupation 

1920 2015 

• • Sources; For 1920, sources include Reserve Bank annual reports, the U.S. Census of Population accessed via Ancestry.com, and newspapers 

from that time. Current data came from Reserve Bank websites and were categorized by the authors. 

Notes: For 1920, the miscellaneous category includes two politicians, a newspaper editor, and a real estate executive. For 2015, the 

miscellaneous category indudes three medical professionals, nine academics, two representatives of labor, nine leaders of non-profit 

organizations, three real estate executives, and nine leaders in the service industry. 

Page 7 
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25878.063

Meanwhile, the Dodd-Frank reforms have coincided 

with changes that have been less visible to the 

public eye, including a jump in the representation 

of women and minorities on Reserve Bank boards. 

Since 2010, minority representation has increased 

from 16 percent to 24 percent among Reserve Bank 

boards, including branch boards, while the share of 

women has risen from 23 percent to 30 percent. (See 

Figure 2.) As for the Federal Reserve System more 

broadly, in 2015 staff at the executive senior level 

was 18 percent minority and 37 percent female." The 

Dodd-Frank reforms included a provision creating 

an Office of Minority and Women Inclusion across all 

banking agencies, as well as at each Reserve Bank. 

Moreover, the Fed has launched an interdisciplinary 

effort to focus on all initiatives that relate to diversity 

and financial inclusion, from hiring to community 

development to credit access, which Fed Chair Janet 

Yellen noted in congressional testimony in June." 

A common thread among Fed critics is that a reformed Fed, with a more diverse composition and a 

broader balance of interests among its boards, would 

act more boldly to help those who have struggled 

the most economically. This particular debate no 

doubt will continue as the Fed continues to weigh 

plans to tighten interest rates and unwind its balance 

sheet as the economy recovers. Many economists 

argue, however, that monetary policy alone is not 

Figure 2: Rising Percentages of Women and Minorities 

on Reserve Bank Boards in Recent Years 

40 

30 

20 

10 

Women Minorities 

Source: Board of Governors of the Federal Reserve System 

and all white, 

a sufficient or particularly well-designed tool to address inequality, which primarily stems from structural changes relating to globalization, technological 

change, demographics, and labor markets. As former 

Fed Chair Ben Bernanke wrote last year, the effects of 

monetary policy on inequality are"almost certainly 

modest and transient" in contrast to these long-term 

factors. For their part, he added, policymakers should 

look to "other types of policies to address distributional concerns directly, such as fiscal policy (taxes 

and government spending programs) and policies 

aimed at improving workers' skills:· 

"Policies designed to affect the distribution of wealth 

and income are, appropriately, the province of elected officials, not the Fed," he added. "Alternatively, if 

fiscal policymakers took more of the responsibility 

for promoting economic recovery and job creation, 

monetary policy could be less aggressive:'"• 

Helen Fessenden is an economics writer in the 

Research Department at the Federal Reserve Bank 

of Richmond. Gary Richardson served as the Federal 

Reserve System historian from July 2012 to July 2016 

and currently is a professor of economics at the 

University of California, Irvine. 

Endnotes 

1 See Mark Calabria, "Yes the Federal Reserve Has a DJY~.ii!!y_ 

Problem "Slog posting on Alt-M: Ideas for an Alternative Monetary Future, June 23, 2016. 

2 See Paul M. Warburg, The Federal Reserve System: Its Origins 

and Growth, VoL 1, New York: Macmillan Company, 1930. The 

quotes cited here are on pages 22, 50, and 122, respectively. 

' See the 1214 Annual flea..QLtQfJ.fl?ft:SfgmlBs:_sg_ryf.JJ..QQBL pp. 

7-8, which notes that "tested banking experience" should 

apply to the two "Federal Reserve agents~ who were Class C 

directors. 

4 The Federal Reserve required member banks to pay in their 

initial capital over time. Capital that was paid in exceeded 

$54 million in May 1915 and remained over this level through 

the rest of the year.ln December 1915, capital paid in stood 

at $54,915,000. See 1915 Annual Reoort oft he Federal Reserve 

i!QQrQ, p. 46. 

5 See Benjamin Strong, "Address Made before Students of 

Graduate Col!ege"Harvard University, Cambridge, Mass., 

November 23, 1922. 

6 See Gary Richardson and William Troost, "Monetary Intervention Mitigated Banking Panics during the Great Depression: 

Page 8 
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25878.064

Quasi~Experimental Evidence from a Federal Reserve District 

Border, 1929-1933," Journal of Political Economy, December 

2009, vol. 117, no. 6, pp, 1031-1073. A working oaper version 

is available online. 

7 Prior to the Banking Act of 1935, Reserve Banks had to receive 

approval from the Federal Reserve Board to change their 

discount rate, but the Board could not compel Reserve Banks 

to change their rate. The Board received that power from the 

Banking Act of 1935. 

8 See Betty Joyce Nash, "The Changing Face of Monetary Policy" 

Federal Reserve Bank of Richmond Region Focus, Third Quarter 

2010, vol. 14, no. 3, pp. 7-11. 

9 See Daniell. Thornton and David C. Wheelock, ''Making 

Sense of Dissents· A History of FOMC Dissents" Federal Reserve 

Bank of St. Louis Review, Third Quarter 2014, vol. 96, no. 3, 

pp. 213-228. 

](} See Allan H. Meltzer, "Origins of the Great Inflation" Federal 

Reserve Bank of St. Louis Review, March/April2005, vol. 87, 

no. 2, part 2, pp. 145-175. 

n See W~S. Code§ 208. This change in the 1977 Act specifi~ 

ca!ly brought Fed employees, officers, and directors within 

the scope of the existing federal conflicts~of-interest statute, 

which had previously applied only to federal employees. 

' 2 The New York Fed applied for and received a waiver from the 

Board in January 2009 to allow Friedman (a Class C director) 

to stay on the Reserve Bank board after Goldman Sachs was 

converted to a bank holding company in fall2008. Because he 

owned Goldman stock at the time and bought more shares 

during the crisis, Fed rules would otherwise have required 

him to step down. The waiver brought him into compliance, 

but Friedman stepped down from the New York Fed in spring 

2009 anyway. Scott Alvarez, general counsel to the Fed Board 

of Governors, told the Waff Street Journal at the time that 

Friedman was needed during the New York Fed's transition 

and that the conversion of Goldman into a bank holding 

company was "outside his control." See Kate Kelly and Jon 

Hilsenrath, "New York Fed Chairman's Ties to Goldman Raise 

Questions," Wall Street Journal, May 4, 2009. 

13 See Timothy F. Geithner, Stress Test: Reflections on Financial 

Crises, New York: Crown Publishers, 2014, pp. 88-89. 

14 See Board of Governors of the Federal Reserve System, "Report 

15 Hearing on the Semiannual Monetary Policy Report to the 

Congress, 114th Cong. (2016) (testimony of Janet Yellen Chair 

of the Federal Reserve System Board of Governors). 

16 See Ben S, Bernanke, "Monetary Policy and Inequality" Blog 

posting, Brookings Institution, June 1, 2015, 

~EDERAL RESERVE BANK 

~~~~~ ~F RICHMOND. 

Richmond • Baltimore • Charlotte 

This article may be photocopied or reprinted in its 

entirety. Please credit the authors, source, and the 

Federal Reserve Bank of Richmond and include the 

italicized statement below. 

Views expressed in this article are those of the authors 

and not necessarily those of the Federal Reserve Bank 

of Richmond or the Federal Reserve System. 

Page 9 
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Statement of William E. Spriggs 

"Diversity and Balance in Federal Reserve Leadership'' 

Testimony prepared for 

The Subcommittee on Monetary Policy and Trade 

Of 

The House Financial Services Committee 

I 14th Congress, Second Session 

Hearing on 

Federal Reserve Districts: Governance, Monetmy Policy, and Economic Performance 

September 7, 2016 

Thank you to Chair Bill Huizenga and Ranking Member Gwen Moore for this invitation to give 

testimony before your subcommittee today on issues of governance, monetary policy and 

economic performance with respect to the regional banks of the Federal Reserve. 

There has been much questioning of the conduct of monetary policy since the onset of the Great 

Recession and the financial sector collapse of2007-2008. Economists continue to learn a lot 

about the causes of the collapse. Clearly, the role of exploitative mortgage instruments, and not 

the character of the borrowers, in the sub-prime market are a culprit. 1 President Obama 

responded to the need evinced by this to protect consumers, and the financial industry, by 

creating the Consumer Finance Protection Board in the Dodd-Frank Wall Street Reform and 

Consumer Protection Act legislation passed by Congress in July 2010. And, it reflects a sense 

that the financial regulatory agencies failed because they did not give consumer protection 

sufficient attention. 

Economists have tried to understand what the Federal Reserve was thinking before the crisis, 

taking advantage of the transcripts of the meetings of the Federal Open Market Committee 

(FOMC), the monetary policy arm of the Federal Reserve Bank. Focus has been on the Fed's 

1 Laurie Goodman and Wei Li, "New credit availability measure shows product risk, not borrower risk, fueled the 

housing crisis," Urban Institute, 9 December 2014 

http://www.urban.org/urban-wire/new-credit-availability-measure-shows-product-risk-not-borrower-risk-fueledhouslng-crisis 
107 


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recognition of the potential of the risks from a housing bubble. 2 Though equally disturbing was 

inattention to the potential harm to consumers. And, there has been focus on governance 

structure and concerns of regulatory capture, perhaps as benign as the use of common models 

producing ''group think."3 

In my testimony, I will focus on the governance structure as it relates to economic performance 

measures. Let me first say that currently the Federal Reserve's policies have been key in pulling 

the economy out of the worse downturn since the Great Depression, and a strong reason the 

United States is outperforming the rest of the advanced economies recovering from the Great 

Recession. But, the current structure does not guarantee this outcome. Sustaining the recovery 

without the typical accompaniment of fiscal policy is unchartered. So far, Chair Janet Yellen's 

leadership has navigated this very well. 

When the Federal Reserve system was created, interstate banking laws limited the reach ofNew 

York and Wall Street. Banks in the region still sometimes competed with state chartered banks. 

In Illinois, and some other states, there were even limits on branch banking. This tied the 

fortunes of banks in the various regions to the economies of their region. So, it might be argued 

that they could be sensitive to monetary policy that had different impacts on the industries in 

their region than on Wall Street banks. Today's banking industry is very different. The level of 

concentration and the strength of a few national banks is much greater than in 1913. There is 

some evidence that Federal Reserve Regional Bank Presidents, are nonetheless, influenced by 

the unique unemployment rate experienced in their regions when they are members of the 

FOMC4 

There is a clear sense that the current governance structure, giving ownership of the regional 

banks to the banks within their jurisdiction reflects certain notions of interest capture. Most 

notably, regional bank presidents greatly reflect the gender and racial makeup of executives in 

2 Stephen Golub, Ayse Kaya and Michael Reay, "What were they thinking? The Federal Reserve in the run-up to 

the 2008 financial crisis," Review of International Political Economy, 22, Issue 4 (2015): 657·692. 

3 Lawrence G. Baxter, "'Capture' in Financial Regulation: Can We Channel it Toward the Common Good?," Cornell 

Journal of law and Public Policy, 21 (2011): 175-200. 

4 Ellen Meade and D. Nathan Sheets, "Regional Influences on FOMC Voting Patterns," Journal of Money, Credit and 

Banking, 37, No.4 (2005): 661-677 while a different view is shown in Alexander lung and Sophia Latsos, "Do 

Federal Reserve Bank Presidents Have a Regional Bias," European Central Bank, Working Paper Series, No. 1731 

(September, 2014) 

h ttps :1/www. ecb.eu ro pa.e u/pub/pdf I scpwps/ ecbwp 17 31. pdf?6d 19a02 639b 7 e87fbb67ba3lb62f91 eS 
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the banking industry. In its history, no regional bank president has been either a Latino or an 

African American. A recent review of the board members for the regional banks, who in turn 

recruit and nominate the regional bank presidents, showed that 83 percent were white and almost 

75 percent were male. Again, a mirror of the executives in the banking industry. Only three of 

the board members represent labor organizations 5 

At least one reserve bank president felt the absence of diversity when reflecting that the severity 

of the downturn's effect on unemployment in the African American community did not get 

mentioned in the 20 I 0 FOMC transcripts; a year when the African American unemployment rate 

never fell below 15.2%.6 An odd oversight given the way in which subprime mortgage lenders 

targeted the African American community, and hence the collapse of home values, consumption 

and local government revenues would be correlated; giving insight where signs of deepening 

problems or signs of recovery might appear. 

The other potential capture is that regional bank presidents and members of the Federal Reserve 

Board of Governors are overwhelmingly either academic economists or worked for Goldman 

Sachs. Economists in the academy are among the least racially or gender diverse of social 

scientists.7 And, only a small handful of schools produce the economists leading the Fed.s This 

can allow for people who look like and communicate in a common language with the banking 

community. It does not mean capture, in thinking the same thing, but capture in agreeing on 

models, evidence and frameworks. 

However, the process can, on occasion, produce regional bank presidents who are very 

responsive to meeting with the public. President Esther George, for instance, reaches out to meet 

with a diverse set of constituents including those most effected by high rates of unemployment. 

She has also opened up her annual research symposium to allow direct dialogue with those 

5 Connie Raza, "'To Represent the Public': The Federal Reserve's Continued Failure to Represent the American 

People," The Center for Popular Democracy (February 2016) 

https:(/populardemocracy.org/sites/default/files/Fed%20Up.pdf 

6 Narayana Kocherlakota, "MLK Day Reflections on the FOMC" 

https :// sites.google. com/ site/kocherl a kota009 /home/policy/thoughts-on-pol icy/1-18-16 7 Amanda Bayer and Cecilia Rouse, "Diversity in the Economics Profession: A New Attack on an Old Problem," 

Princeton University Industrial Relations Section, Working Paper #597 (July 2016 fe 

htlp:/ldalaspace.prince\on.edu/jspui/handle/88435/dsp01bc386m66h and Gregory Price, "The Problem of the 

21" Century: Economics Faculty and the color line," The Journal of Socio-Economics, 38, No. 2 (2009): 331-343. 

8 Mark Calabria, "Yes, The Federal Reserve has a Diversity Problem," June 23, 2016 http://www.alt-

!!1.9.!:&2QJ&Lllii.fl.2Lves-the-federal-reserve-has-a-diversity-problem/ 
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communities who have not fully recovered. Similarly, some of her fellow presidents, like 

President Jeff Lacker have followed suit to go outside the walls of the bank to meet directly with 

labor leaders in their region. But, regrettably, while some regional bank presidents have 

followed this lead, others have not. And, so while the system can produce presidents who seek 

dialogue with the public, it must be said that this level of outreach is new and it is not 

guaranteed. So, it is still too possible for regional presidents to be insular; moving in a closed 

circle. 

Economists believe that the pre-amble to the Humphrey-Hawkins Full Employment Act, which 

reads: 

.. To translate into practical reality the right of all Americans who are able, willing, and 

seeking to work to full opportunity for useful paid employment at fair rates of 

compensation; to assert the responsibility of the Federal Government to use all 

practicable programs and policies to promote full employment, production, and real 

income, balanced growth, adequate productivity growth, proper attention to national 

priorities, and reasonable price stability;" 

is a dual mandate that means the Federal Reserve should equally pursue full employment 

and maintain price stability. That is not what Congressman Hawkins believes was the 

intent. When he proposed the Act in 1977, the African American unemployment rate 

averaged 14.0% and reducing that was his focus. 

A few years later, Paul Volcker as chair of the Federal Reserve Board of Governors took the 

maintenance of price stability as a mandate to engineer a massive and deliberate recession to 

lower inflationary expectations; unemployment spiked to levels not seen since the Great 

Depression, and for the entire 1980s, the African American unemployment rate would not 

fall below I 1 .0%. Economists call the subsequent period after economic recovery began in 

1984 as the Great Moderation. It corresponds to a period that would be advantageous to 

Wall Street and reinforce the theories of some economists on the role of monetary policy. 
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Since 1984, inflation has averaged 2.7%9

, and the variance in price movements was greatly 

reduced compared to before 1978. From 1948 to 1978, inflation averaged 3.6%, but with 

much wilder fluctuations. 

In practical terms, from 1948 to 1978, when the Fed and fiscal policy makers were more 

sensitive to unemployment, the average monthly unemployment rate was 5.1 %. During the 

Great Moderation it has averaged 6.1 %. To understand the difference, since 1984, 

American workers have only spent 25% of the time with the monthly unemployment rate 

below the 5.1% average level of the pre-1978 era; this is despite a significant increase in 

educational attainment by all Americans, and a huge decrease in the variation in educational 

attainment. 

lt would be more accurate to say that the Fed pursues price stability, and tries to maximize 

employment consistent with that goal. That is not the same thing as pursuing full 

employment as the right of all Americans while maintaining reasonable price stability. 

The Fed has one main policy tool, the ability to push short term interest rates up, or down. 

But, one tool with two policy objectives means the two goals must be weighted, since they 

potentially conflict. In 2007 and 2008, when the Fed was faced with a potentially 

destabilizing housing bubble, a third legislated mandate, the prudent management of the 

financial sector, added a third and very conflicting additional policy objective. 

Getting the unemployment rate below 5.0% is critical to producing a labor market where 

workers can sustain wage gains, and labor market dynamics can let more productive workers 

quit lower paying jobs and move to more productive employment. This was one of the 

elements that helped hourly compensation for workers to increase along with productivity 

before 1974. For labor economists, that is a marker of the allocative efficiency of free labor 

market, and so is an indicator of full employment. However, since that period, a wedge has 

grown between compensation and productivity. And, the healthy churning of the labor 

market, with workers shifting to higher productive finns has been diminishing. 10 

9 Monthly CPI seasonally adjusted percent change from previous 12 months. The standard deviation was 3.12 

from 1948 to 1978, and from January 1984 to August 2016 it is 1.35. 

10 Steven Davis and John Haltiwanger, "Labor Market Fluidity and Economic Performance," National Bureau of 

Economic Research, NBER Working Paper No. 20479 (September 2014) http://www.nber.org/papers/w20479 
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Because of overt labor market discrimination prior to the passage of the Civil Rights Act in 

J 964, the forces of competition from full employment were greatly limited in lowering 

discrimination in the labor market But, research has found that particularly for young 

workers who benefited from lower discriminatory barriers, between 1964 and !980, there 

was convergence in labor market experiences for young African American and white men. 

The convergence was most marked for college graduates, where wage gaps were almost 

non-existent. But, beginning in the 1980s, and the prolonged period of extreme 

unemployment rates for African Americans in an economy with high unemployment, gaps 

in labor market outcomes grew; most noticeably for college educated workers who had such 

small gaps at the beginning of the decade. 11 When unemployment was allowed to fall near 

4% in the late 1990s, research showed this helped start a reversal and gaps between young 

African American and white men started to shrink. 12 

Currently, the unemployment experience for better-educated African Americans is worse 

than the unemployment rates for less educated whites. This is true, even when controlling 

for cognitive test score differences. 13 But, as the labor market tightens, there are fewer 

unemployed compared to the number of job openings, and those unemployment disparities 

grow smaller. And in fact, the work of competitive forces to lower discrimination is an 

explicit finding in the Humphrey-Hawkins Full Employment Act (Section 2 (b )(4)). 

So, at full employment we would expect strong wage growth and lower levels of 

discrimination. consistent again with what labor economists would believe to be the 

allocative efficiencies of a free labor market. But, this definition of full employment, and 

the one of every able-bodied person finding a job at decent pay as described in the 

Humphrey-Hawkins Act are not the operating definition used by the Fed. 

Again, with few tools but many goals, giving the proper weight to price stability and to 

unemployment means that policy makers must assign weights to the value of each goal. 

11 John Bound and Richard Freeman, "What Went Wrong? The Erosion of Relative Earnings and EmploymeTatnt 

Among Young Black Men in the 1980s," The Quarterly Journal of Economics, 107, No. 1 (1992): 201-232 

12 Richard Freeman and William Rodgers, Ill, "Area Economic Conditions and the Labor Market Outcomes of Young 

Men in the 1990s Expansion," National Bureau of Economic Research, NBER Working Paper No. 7073 (April1999) 

http://www.nber.org/papers/w7073 

13 Donna Rothstein, "An analysis of long·term unemployment," Monthly Labor Review, July 2016 
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That is why diversity in who serves on the FOMC is so important. Regional diversity is not 

sufficient to represent the different interests of the public in how the economy functions. 

Many institutional factors and history intervene such that the economy does not impact 

everyone the same. And, having different voices at the table is key in making policies that 

generally benefit the public. 

So far, the Fed's structure has failed to provide that diversity. If the Fed had noticed in the 

latter half of 2007 that Latino and African American unemployment rates were rising, it 

might have understood a significant problem was on the horizon. Because the mortgage 

industry had targeted those communities with pernicious loan instruments with massive prepayment penalties, then the rise in unemployment would have been a warning that a large 

round of foreclosures was about to take place. 

A similar challenge is present today. Tfthe Latino or African American unemployment rates 

start to rise, the current pattern of sub-prime auto loans that have been targeted at those 

communities could mean that a rash of auto repossessions will occur, dumping a large 

number of automobiles on a market where auto sales have peaked. While that is unlikely to 

bring on the financial collapse of2007, it could lead to a downturn in one of the shining 

sectors of this recovery. 

As long as banks are owners of the regional bank system, and have an inordinate vote in 

selecting the board, it is hard to see how the regional bank system is likely to provide the 

diversity in leadership needed to have a wide range of interests at the table when the FOMC 

meets. And, again, this is not just bad for one community. The failure of the Fed in 

understanding the coming crisis of2007 hurt the entire economy. Even regional bank 

presidents from areas where the sub-prime foreclosure crisis was most severe failed to see 

the sub-prime market problem as an issue-not to the complex financial relationships that 

ruined the economy, but to the real economy phenomena that has devastated the finances of 

local governments and wiped out the wealth holdings of a generation of African American 

households. 

In fairness, the Fed was not alone. The global financial system collapsed. And, in other 

countries central bankers are selected and governed differently; some with a single mandate 

of price stability, others with no presence of banking industry on their boards. Generally, it 
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is agreed, the central bank of the United States did a far superior job of reacting to the crisis 

than did the European Central Bank or many other industrialized nations' systems. And, it 

is generally agreed that the sizable fiscal stimulus under President Obama in 2009 led to the 

current strength of the United States compared to the slower growth of the rest of the 

advanced economies. 

The current consensus among economists, is that there is still a need for fiscal stimulus in 

the advanced economies. The International Monetary Fund, in making its recommendations 

for a healthier American economy, lists the need for increased investment in public 

infrastructure. 14 Similarly, the Organization for Economic Cooperation and Development 

has noted that the advanced economies are stuck in a low growth equilibrium because of a 

failure to use low interest rates and current fiscal space to push their economies out of this 

trap. Failing to make the investments, in fact, will lead to higher debt-to-GOP ratios, 

because GOP growth is being retarded by austerity policies. 15 Economists, from Nobel 

Laureates Christopher Sims, who addressed the Kansas City Federal Reserve Banks research 

symposium this past August, to Paul Krugman and Joseph Stiglitz all concur that what is 

needed at this point is a debt-financed fiscal policy to restore inflation to its target level and 

get employment levels to a normal level. 

In fact, the fiscal response to this downturn is unique. In the 1980s and again at the start of 

this century, under President Reagan and President George W. Bush, Congress passed 

significant fiscal expansion that greatly increased the deficit to help push the economy out of 

recession. In doing that, Congress and the President were holding up their end of the 

requirements of the Humphrey-Hawkins Full Employment Act. The Act has clear 

requirements for fiscal authorities to report on what specific steps they plan to ensure full 

employment. 

14 International Monetary Fund, 2016 Article IV Consultation with the United States of America: Concluding 

Statement of the IMF Mission (June 22, 2016) 

https://www.imf.org/en/News/Articles/2015/09/28/04/52/mcs062216 

15 Catherine Mann, "Policymakers: Act now to break out of the low-growth trap and deliver on our promises," 

(June 1, 2016) https://oecdecoscope.wordpress.com/2016/06/01/policymakers-act·now·to-break-out-of·the-lowgr:owth-trap-and-deliver-on-our-promises/ 
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So, though the Congress and President are elected by the public, there is no assurance that 

policies trying to achieve full employment will hold. But, public participation does allow 

for a diverse set of voices in the process. And, so while Congress has failed to pass a fiscal 

stimulus since 2009, it is clear that some members of Congress and that the President in his 

budget has pushed many times to provide the same type of fiscal response seen in 1981 and 

2001. 

But, going forward, with the Fed, it is not guaranteed that many voices will be at the table. 

And, as the world grows more complex, the outcome of short term interest rate movements 

can have many consequences. Other central banks with responsibilities for balance of 

payments and currency react to the Fed policy choices that may affect the value of the 

dollar, or the demand for commodities or the price of com. And, those central bank actions 

can affect the real wages of workers in their country, and the relative wages of Americans to 

those workers. Will all the voices of the public who may be effected by Fed policy get their 

say? And, would a broader set of interests and viewpoints enrich the Fed decision making 

process to avert hann in the real economy? 

I believe that a narrow focus on price stability, with the intent of keeping inflation within a 

narrow range, has its value, but needs to be considered with a host of other factors which can 

have varying risks associated with them. A bank-controlled system is unlikely to look at the 

world from a borrower's perspective enough to properly assess those risks. I also believe 

that it is not possible to assess the role of the Fed in economic policy in isolation, since the 

Humphrey-Hawkins Act, and economists would generally agree, that the role of fiscal 

authorities is as important. 

I think there is room for serious discussion of whether the current structure of bank 

ownership of the regional banks gets in the way of the FOMC having the necessary diversity 

to make well informed decisions that can weigh all the various interests in the American 

economy. While the current leadership of the Fed under Chair Janet Yellen is amenable to 

increasing that diversity, I think her efforts could be aided by a change in structure; and the 

American public would benefit in the future if diversity was assured by the structural design. 

0