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“In the end, money and banking are a game of confidence, and our job in the Federal Reserve is to maintain confidence.”
– Richard Fisher, President of the Federal Reserve Bank of Dallas (2005-2015)
Michael Lewis’ Wall Street Classic Liar pokerthe phrase “Dallas stocks” is given as epithet. This means that for the most capable people of the Salomon Brothers, they are not doing the most desirable work.
Young investment bankers in Lewis’ Salomon trainee class lived in fear of being allocated to the Dallas stock division.
In their eyes, the 1,547 incomprehensible 1,547 miles removed from Salomon’s New York City headquarters were the state’s unrelated financial back.
But Dallas was a financial center in itself. And the distance from New York is what made it so important.
Dallas has one of the 12 regional banks in the Federal Reserve, many of which were strategically placed in financial backwaters as a means of decentralizing the US banking system.
The idea was to not only reflect economic diversity, but also to dispense the Fed’s power across the region, not just to isolate monetary policy from intensive political or fiscal impacts.
It may seem like anachronism in today’s world of megabanks and the world of full-powered breeding chairs.
However, the threat of centralized power is neither theoretical nor historical. This is as shown by the President’s recent threat of firing Chairman Powell for not cutting interest rates.
However, last week, the Supreme Court ruled that the president has no authority to remove the Federal Reserve Chairman or other board members of the Federal Reserve System.
Instructively, the same ruling found that the president was more likely I’ll do it They have the authority to fire appointees at federal agencies such as the NLRB and MSPB.
However, the majority are exempt as central banks are “a unique structured semi-private entities following the clear historical traditions of the first and second banks of the United States.”
This has always been a plan.
What makes the structure of the Federal Reserve “unique” is that it’s not just one bank, it’s many banks, and there are several in places like Dallas.
The Federal Reserve was designed as a group of semi-independent regional banks to resist the centralisation of financial power, whether in New York or DC.
Putting some of these banks in an economic background like Dallas was not an accident. This was a way to enhance decentralization into systems.
When Dallas was selected as the local Federal Reserve Bank site in 1914, its population reached 131,278, making it the 58th largest city in the United States.
The lobbying pitch for why Dallas is chosen ahead of the metropolitan city included a proud statement saying, “leading the world in the manufacture of cotton gin machines and the manufacture of harnesses and saddlery.”
If that helped to cause it, you can imagine it because it showed how different Dallas is from New York.
Once established, the Dallas Fed hired 27 staff (average salary of $30 a month). Its main task was to provide intensive check clearing for the region.
The banks also provided currency and coins to the region. To this day, bills in order and in circulation by the Dallas Fed stand out with the letter “K” on the front (K is the 11th alphabet of the 12 regional Fed banks and the 11th letter in Dallas).
And as a result, the Dallas FED also set local interest rates.
Initially, the regional Federal Reserve Banks were so independent that each set their own lending rates for local banks.
Imagine 12 linked banks… all have their own monetary policy!
I imagine it would be fun, but it didn’t last long.
Regional interest rates proved cumbersome and the practice ended in 1935, when the Banking Act of 1935 granted the Washington, D.C. board of directors authority to set a single interest rate across the country.
However, regional banks kept comments on determining interest rates.
All 12 Federal Reserve Presidents attend the FOMC meeting to represent local interests, and a rotating group of four regional presidents (except New York) votes for the FOMC.
In short, because he is the face of the Fed, it often appears that Chairman Powell has set interest rates himself, but he is just one of the 12 votes in the FOMC decision.
Importantly, this semi-dispersed structure limits the president’s ability to bully the Fed.
It is true that seven of the 12 members of the FOMC are presidential appointees, but their staggering, 14-year term of office is explicitly designed to limit the influence of a single president on monetary policy.
This was less relevant than ever.
Last week, the president bullied the House and passed a “big, beautiful bill” that puts Congressional Budget Office’s estimates on the path to adding the United States. $56 trillion of federal debt for the next 30 years.
Perhaps the Senate will place financial liability before the bill becomes law, but it appears that the political will to curb the deficit has evaporated in recent years.
If so, it leaves the Federal Reserve as the last fortress of economic sanity and the final line of defense for the US dollar.
It may not be retained.
Last week’s Supreme Court decision demonstrates the power of the decentralized structure of the Federal Reserve.
However, the Fed will eventually report to Congress. Congress can rewrite laws that grant independent control over monetary policy. And even the most responsible monetary policy may be overwhelmed by today’s increasingly irresponsible fiscal policy.
