chapter  7
10 Pages

The founding of the Federal Reserve System

ByMark Toma

Designing a monetary system Mentally transport yourself to 1913. You have been charged with designing a new monetary system. Before jumping into the details of the task, you and your co-founders must answer the basic question that every institutional architect must answer: Do you create a top-down or a bottom-up system? More concretely, do you create a system whose policy is determined at the discretion of decision-makers at the top of a hierarchy, ideally motivated to do what is best for the economy? Or do you do you establish certain rules of the game where decisions are made bottom-up by individuals pursuing their self-interest? For the discretionary solution, the challenge is to design the system so that good leaders end up at the top. For the self-regulating solution, the challenge is to design rules that confront self-interested individuals with incentives that induce them to take actions that promote the common good.