csua.org/u/dg6 -> www.federalreserve.gov/boarddocs/speeches/2005/20050427/default.htm
The Federal Reserve Board eagle logo links to home page Remarks by Vice Chairman Roger W Ferguson, Jr. At a European Central Bank Colloquium in Honor of Tommaso Padoa-Schioppa, The European Central Bank, Frankfurt, Germany April 27, 2005 The Evolution of Central Banking in the United States This conference honors the many contributions of Tommaso Padoa-Schioppa. As a staff member at the Banca d'Italia starting nearly four decades ago and as a member of the Executive Board of the European Central Bank (EC B) since 1998, Tommaso has been deeply involved in what central banks do and how they are organized. Tommaso has stated: "In shaping monetary policy operations, the role of t he financial environment is not less important than the charter."
In particular, I will address the question of whethe r a central bank's operations depend in an important way on the architec ture of the financial system and the economy it serves. The charter impo ses a certain framework, but events may require changes to procedures an d, on rare occasions, changes to the charter. To explore this topic, I would like to discuss the evolution of central b anking in the United States, with particular reference to currency, rela tions between the regions and the center, mandates, and communication. A long the way, I will compare our experience with that of the ECB. I will , of course, be speaking for myself and not my colleagues at the Federal Reserve. To start, let me address the title of this session: "A Single Currency and a Team of Thirteen Central Banks." How did the United State s develop a single currency, and what are the parallels that we can draw with the euro? A Single Currency Although the notes of the First and Second Banks of the United States ach ieved relatively wide circulation, not until the 1860s, during our Civil War, did a national paper currency become established. The first step w as an issuance of Treasury currency, commonly known as "greenbacks" beca use of the color of the ink used to print the notes. Shortly thereafter, the Congress authorized the establishment of national banks, which issu ed notes that were backed by holdings of government bonds. National bank notes of different banks were similar in design and widely accepted in transactions, but the system had some flaws--the main one being that the re was no means of quickly adjusting the supply of national bank notes t o changing circumstances. In other words, we had established a national currency system but not a central bank to manage it. This beginning contrasts with the way the euro was established as a singl e currency out of many European currencies. Rather than having no centra l bank, what was to become the euro area had, in fact, twelve national c entral banks, each managing its own currency. Those currencies were brou ght into line with one another, first through the exchange rate mechanis m and later by the permanent fixing of exchange rates. The ECB then was created as a central bank to manage the euro even before a euro paper cu rrency came into existence. The System's treatment of these notes serves as an example of Tommaso's observation that centra l bank operations respond to financial events. Initially, notes issued b y one Reserve Bank could not be reissued into circulation by another Res erve Bank. A person could travel from Boston to New York with notes from the Federal Reserve Bank of Boston in his pocket, spend the notes in Ne w York, and have them accepted. But when the notes made their way to the Federal Reserve Bank of New York, that Bank returned the notes to Bosto n for re-issue. With regard to currency, then, the Federal Reserve Syste m's charter established twelve banks issuing similar, but not identical, currency. Over time, however, financial practice made this distinction unimportant, and the treatment was later discontinued. Today, currency i s treated fungibly by the Reserve Banks, regardless of which Bank issued the note. The notes still carry identifiers that let us track the Reser ve Bank to which the notes were originally assigned, and they are still allocated as liabilities to individual Reserve Banks. But there is no pr actical distinction between the notes of the Reserve Banks. My understanding is that euro banknotes circulate in a similar fashion wi thin the euro area and that any national central bank can re-issue fit e uro banknotes regardless of the original issuer. Although the country th at originated the production order is indicated by the letter prefix to the euro banknotes' serial number, even that designation is becoming les s important as the Eurosystem moves to a pooled system of printing bankn otes. Even though the Eurosystem contains the central banks of sovereign nations, the unified treatment of euro banknotes recognizes the unifyin g force of a single currency. Clearly, then, as one considers currency, the history of the Federal Rese rve supports and reflects the truth of Tommaso's statement. As our econo my evolved from regional to national, our currency moved more completely in that direction. I would argue that the euro reflects a different per spective, with the currency playing a catalytic role in the development of a continental economy as well as reflecting developments in that rega rd. Regions and the Center In 1913, the very idea of a central bank was contentious in the United St ates. The result of the Federal Reserve Act was a compromise, with regio nal Reserve Banks owned by their member commercial banks and a Board in Washington to provide oversight. Although the integration of US financ ial markets was considerable by the time the Federal Reserve Act was pas sed, remaining segmentation made it possible to have different prices fo r Reserve Bank credit in different regions during the System's early yea rs. To be sure, these differences were not huge--basic discount rates di ffered by as much as 1-1/2 percentage points, with differences of 50 to 100 basis points persisting for long periods. In Tommaso's terms, moneta ry policy operations--that is, discount policy--reflected both the regio nal nature of the System's charter and the partial segmentation of the f inancial environment. Further integration of the money market over time shifted the focus of po licy from twelve regional discount policies to a single national policy. In addition, concern about operational efficiencies and about the level of borrowing led to a move from discount rates to open market operation s as the policy instrument of choice. This shift may also have been aide d by the expansion of the government bond market during and after World War I The use of open market operations accelerated the desire for coor dination of policy at the national level, so that one Reserve Bank was n ot draining liquidity at the same time that another was adding liquidity . Again, the financial environment contributed to developments in policy implementation. The balance of policy power shifted from the regions to the center, when the Banking Act of 1935 established the Federal Open Market Committee in its modern form, with the Board having the majority of votes. From the perspective of monetary policy, it was at that point that the Federal Re serve System became a single central bank rather than a confederation of regional central banks. Thus, as Tommaso might suggest, charter changes also played an important role in the structure of policy. In the Eurosystem, the balance between the center and the regions is stil l evolving. The composition of the Governing Council, the Eurosystem's e quivalent to the FOMC, and the administrative roles of the Governing Cou ncil and the Executive Board reflect the relative strength of the nation al central banks. This difference in the relative power of the center, h owever, should not have great significance for the conduct of monetary p olicy. As in the Federal Reserve System, each Eurosystem policymaker is expected to act in the interest of the entire currency area. In the United States, once policy implementation boiled down to managing the consolidated balance sheet of the Federal Reserve Banks, it made sen se to concentra...
|
http://csua.com/feed/