The Puzzle of Central Bank Autonomy
The Federal Reserve System, the nation's central bank, is directed by statute to maintain maximum employment, stable prices, and moderate long-term interest rates. Top decision makers in the Federal Reserve System (the Fed) enjoy long terms of office and have considerable discretion over both policy choices and agency expenditures. This combination of extraordinary discretion and extraordinary control over economic outcomes has generated considerable controversy among observers of American politics and among economists. Some observers of the American political economy lament the formal subordination of representative democracy to the demands of owners of capital (Greider 1987). Conservative economists have persistently complained that political control of the money supply undermines economic stability and performance (Friedman 1962). The development of the contemporary Fed that motivates these criticisms is in many ways an incredible story. As recently as 1949 the Fed was simply an administrative agent for the Department of the Treasury and, as a result, under the strict political control of the president and his cabinet. Thirty years later, the Chairman of the Board of Governors of the Federal Reserve System, Paul Volcker, committed the central bank to a series of monetary policy choices that produced a serious recession. How does a federal agency undergo such a transformation, from subordinate to autonomous, in less than thirty years? Why does the United States' central bank enjoy such a high level of autonomy?